Securities Regulator Sets the Stage for Tech Titans’ Domestic Listing
China’s securities regulator went live with a series of highly anticipated guidelines for the China depositary receipt (CDR) pilot program, setting the scene for the country’s foreign-listed tech titans to trade shares at home.
The China Securities Regulatory Commission (CSRC) on late Wednesday released several documents (link in Chinese) detailing rules governing issues such as the listing and trading of CDRs; the criteria that companies have to meet to participate in the trial program; information disclosure; due diligence by the underwriters; investor protections; and the setup and operation of a board of experts from the high-tech industries that will help the regulators vet applications for the offering of the securities. They clarified that the receipts and the underlying shares they represent will not be convertible for the time being.
Chinese tech companies such as Alibaba Group Holding Ltd., Tencent Holdings Ltd. and Baidu Inc. have thrived on foreign exchanges as they were barred from listing at home due to domestic regulations such as requirements on profitability and restrictions on weighted voting rights retained via dual-class shares — conditions that founders of tech and family-owned companies favor as a way of retaining control.
But the Chinese government now wants to make its best-known brands accessible for domestic investors while bringing closer to home a sector crucial for upgrading the economy. The domestic offerings will also see investors’ funds be channeled away from potentially destabilizing wealth management products that authorities are cracking down on, and toward the government’s strategic aims.
The publication of the rules marks the readiness of the CDR pilot program, and Caixin learned from multiple sources that smartphone-maker Xiaomi Inc. could file its application to issue CDR with the CSRC as soon as Thursday and release the prospectus on Friday at the earliest.
Modeled after U.S.-listed American depositary receipts for foreign equities, the CDR program will allow Chinese companies traded in New York, Hong Kong or elsewhere to transfer part of their shares to banks to circumvent barriers for them to launch initial public offerings at home.
Apart from loosening requirement on profitability, the rules published Wednesday also allowed companies with a so-called “variable interest entity” (VIE) structure to participate in the CDR trial program. Many overseas-listed Chinese companies use VIE to access offshore capital while bypassing domestic restrictions on foreign ownership of firms in the internet industry. Previously, they had to dismantle the VIE structure to be approved to float on the domestic bourses. But now the CDR rules allow companies to maintain the arrangement as long as they make full disclosure, which should reduce the high accounting and taxation costs such companies would otherwise face.
Dual-class shares will also be tolerated if full disclosure is made, but the number of such shares and the voting rights they represent may not be raised in most cases once the CDR is issued, according to the rules.
The rules also confirmed earlier market expectations that the CDRs of foreign-listed Chinese companies will not be freely convertible with the underlying overseas-traded shares. Some analysts had predicted such a policy, citing government concerns over financial market stability. However, the inconvertibility could lead to valuation gaps between the underlying shares and the CDRs to become larger and more volatile as market-makers are faced with foreign-exchange controls. And as this scenario would make CDRs less attractive to investors, market-makers would also have to bear the risks of lower trading and liquidity.
In line with what was listed in a document issued in March by the State Council, China’s cabinet, the CSRC rules on Wednesday said overseas-listed Chinese companies applying for a listing through a CDR must have a market capitalization of more than 200 billion yuan ($31.4 billion). First-time-listing companies must have an annual operating income greater than 3 billion yuan and a market valuation of at least 20 billion yuan to be qualified to participate in the trial program, or meet requirements on market share, the number of patents obtained, the size of research and development staffers or other issues.
The new rules above all target companies with the potential to advance China’s strategic objective of developing advanced technologies, particularly in big data, cloud computing, artificial intelligence, integrated circuits and biotech. The rules contain a crucial loophole to this end that gives the regulator the discretion to exempt companies that contribute innovations of “national strategic significance” from the requirements.
In a separate statement (link in Chinese), the regulator said that it will “strictly control the number of companies to participate in the trial and the value of funds they may raise,” a move likely intended to ensure the CDRs do not have a destabilizing influence on the stock market. The statement also implied that the pricing of CDRs could rely on the book building process by institutional investors, although the details remain unclear.
Six large Chinese money managers have been preparing to set up equity funds to raise as much as 300 billion yuan to invest in the first batch of CDR offerings, Caixin reported Tuesday.
Contact reporter Ke Dawei (firstname.lastname@example.org)
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