In latest tightening of rules, Chinese regulator National Development and Reform Commission (NDRC) said that domestic companies from sector off-limits to foreign direct investment (FDI) would have to seek permission before listing shares outside mainland. The new rules would apply to internet news companies and others in sectors in which FDI is restricted or prohibitted.
The NDRC announced the new rules on Monday in a statement. The statement also included an updated annual “Foreign Investment Negative List” that outlines business sectors where foreign direct investment is banned or restricted.
The new rules now apply that list to companies issuing shares overseas for the first time, and come as China is tightening scrutiny over offshore share sales.
Chinese companies in sectors prohibited for foreign investment “should get clearance from relevant Chinese regulatory bodies, if they seek share sales and list in overseas markets,” the NDRC said, plugging a regulatory loophole.
In addition, “foreign investors must not participate in the operation and management of the companies” and their holdings are to be capped at 30%, in line with the rules regulating locally-listed companies.
The latest Negative List includes prohibited sectors such as compulsory education institutions, news organizations and rare earth minerals.
Additionally, overseas investment in industries ranging from publishing, nuclear power stations and telecom is restricted.
Many Chinese companies use a so-called variable interest entity (VIE) structure to float overseas, skirting the foreign investment restrictions in areas such as media and education. read more
The NDRC statement comes just days after China’s securities regulator published draft rules requiring filings by companies seeking offshore listings to ensure they comply with Chinese laws and regulations. read more
Under the new filing system, VIE-structured companies will still be allowed to list 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. Kai was quoted by Reuters
However, China’s Ministry of Commerce framed the new rules as a gesture of policy relaxation.
“China is exploring ways to allow companies in sectors off-limits to foreign investment to list overseas under certain conditions, expanding investment channels for foreign investors,” the ministry said in a separate statement.
(With inputs from agencies)