Listing Rights Extended for Foreign Investment Enterprises
July 02, 2001 | BY
clpstaff &clp articlesThe PRC government has taken an important step in opening its capital markets. Foreign-funded companies limited by shares can now launch their own public offerings.
The PRC government has taken an important step in opening its capital markets. Foreign-funded companies limited by shares can now launch their own public offerings.
When the Chinese stock markets were established in the early 1990s, they were principally used to raise capital for State-owned enterprises. Only a small portion of the quota for initial public offerings (IPOs) was allocated to privately held Chinese entities. While there was no specific prohibition against public offerings by foreign investment enterprises (FIEs) on the Chinese stock markets, there was no real way for these enterprises to do an IPO as the listing rules were designed for domestically invested enterprises. With the exception of a few foreign investors who purchased large interests in listed domestic companies, the Chinese stock markets have, to date, been limited to Chinese-sponsored companies.
The new rules will permit companies limited by shares with foreign investment (Stock FIEs) to submit an application for public listing to the China Securities Regulatory Commission (CSRC) after obtaining the written consent of the Ministry of Foreign Trade and Economic Cooperation (MOFTEC). The application must comply with the requirements of the Questions Relevant to Foreign-funded companies Limited by Shares Circular (关于外商投资股份公司有关问题的通知) issued on May 17 2001.
The establishment of Stock FIEs and the conversion of limited liability companies into Stock FIEs must comply with the requirements of the Provisional Regulations on Several Issues Concerning the Establishment of Foreign Funded Joint Stock Limited Companies and must be approved by MOFTEC.
Stock FIEs applying to list must be in compliance with the policies for foreign investment in their industry and must have been established or reorganized in accordance with applicable regulations and procedures.
After the offering has been completed, at least 25% of the share capital must consist of non-floating shares ¨C shares other than A shares or B shares ¨C owned by foreign investors.
B Share Sales Permitted
The new regulation permits foreign investors in Stock FIEs to sell their shares through public offerings of B shares in the PRC.
After the issuance of the B shares, at least 25% of the total capital stock must consist of non-floating shares owned by foreign investors.
Key Points:
• Stock FIEs may now apply to MOFTEC and CSRC to list A Shares and B Shares on
China's stock exchanges;
• Stock FIEs may now apply to list shares held by foreign investors as B Shares,
potentially providing a new exit strategy for venture capital and other foreign direct
investors in China;
• Unlisted shares, owned by foreign investor investment companies in Stock FIEs may
not be included in B Share public sales "for the moment".
The shares sold by foreign investors in the offering must have been outstanding for more than one year.
The purchasers of the B shares must be able to perform the obligations and responsibilities set out in the issuer's articles of association, of the pre-listing holders of the shares.
For the Moment
The rules permitting foreign investors in Stock FIEs to sell some of their shares to the public do not extend to investment companies owned by foreign investors. Interestingly, this limitation was introduced by the phrase "for the moment", suggesting that such companies will eventually be allowed to sell shares in PRC public offerings.
The rules permitting foreign direct investors to achieve liquidity by PRC public offerings are limited to B share offerings. The larger and attractive A share market, with its more robust valuations, is still off limits for this type of offering. This may change as the A share and B share markets continue to converge. Moreover, the requirement that foreigners continue to hold unlisted shares may limit the benefit of this exit strategy.
A Step in the Right Direction
The new rules seem to mark an important step in opening Chinese capital markets to companies funded through foreign investments. Listings by Stock FIEs are subject to approval by MOFTEC and the CSRC, which will have an important say in how significant these changes ultimately are.
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