China is increasing its scrutiny of offshore listings in certain industries
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The Chinese government will require domestic firms in sectors that are off-limits to foreign direct investment, such as Internet news and publishing, to obtain regulatory approval before listing their shares outside of the mainland.On Monday, the National Development and Reform Commission (NDRC) announced the new clearance rules in a statement that also included an updated annual “Foreign Investment Negative List,” which outlines business sectors where foreign direct investment is prohibited or restricted.
The new rules, which come as China tightens its scrutiny of offshore share sales, apply that list for the first time to companies issuing shares overseas.The NDRC said that Chinese companies in sectors that are not open to foreign investment “should seek clearance from relevant Chinese regulatory bodies if they seek share sales and listing in overseas markets,” closing a regulatory gap.
Furthermore, “foreign investors must not participate in the operation and management of the companies,” and their holdings must be limited to 30%, in accordance with the rules governing locally-listed companies.
The most recent Negative List includes prohibited industries such as compulsory education, news organizations, and rare earth minerals. Furthermore, foreign investment in industries such as publishing, nuclear power plants, and telecommunications is restricted. Many Chinese companies use a structure known as a variable interest entity (VIE) to float overseas, avoiding foreign investment restrictions in industries such as media and education.
The NDRC statement comes just days after China’s securities regulator published draft rules requiring companies seeking offshore listings to file paperwork to ensure compliance with Chinese laws and regulations. VIE-structured companies will still be able to list under the new filing system as long as they are compliant. “The NDRC statement goes hand in hand with the filing system,” and will likely restrict the use of VIEs, said Zhan Kai, a lawyer at East & Concord Partners.