Going Public: New Rules Allow Listing of FIEs
December 31, 2001 | BY
clpstaff &clp articles &Traditionally, foreign investment enterprises (FIEs) could only raise capital by means of bank loans and private equity placements. This restrictive capital-raising situation for foreign investment enterprises has now come to an end.
On November 8 2001, the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) and the China Securities Regulatory Commission (CSRC) jointly issued Foreign Investment Issues Relating to Listed Companies Several Opinions (关于上市公司涉及外商投资有关问题的若干意见) (the Opinions). After being allowed to operate in China for the past 22 years, FIEs are now permitted for the first time to raise capital through public equity offerings.
The Opinions were issued for two specific purposes: to promote the healthy development of domestic stock markets, and to regulate the public offering and listing of FIEs. The issuance of the Opinions illustrates China's continued efforts in implementing the principle of national treatment for FIEs under WTO rules, i.e., allowing foreign enterprises the same business opportunities as domestic enterprises. In this sense, it was not by coincidence that the Opinions were issued just three days before China signed WTO documents in Doha on November 11 2001.
Corporate Conversion
Under the PRC Company Law (中华人民共和国公司法) of 1993 (the Company Law), a company must be registered as a company limited by shares (股份有限公司) before it can issue shares to the public and seek listing of its shares on the PRC stock exchanges. For the listing of a FIE, the FIE must be converted into a foreign-funded company limited by shares (外商投资股份有限公司). The conversion procedures are set out in the Certain Questions on the Establishment of Foreign Investment Companies Limited by Shares Tentative Provisions (the Tentative Provisions) issued by MOFTEC in 1995. Section I of the Opinions reiterates that the conversion of a FIE into a foreign-funded company limited by shares must follow the procedures laid down in the Tentative Provisions. It is beyond the scope of this article to discuss the specific conversion procedures. Suffice it to say that the Provisional Regulations require that a FIE must show profitability for three consecutive years before conversion (Regulation 15 of the Tentative Provisions).
It is worth noting that the power of approving the establishment and conversion of a FIE into a foreign-funded company limited by shares is vested in MOFTEC at the national level (Section I of the Opinions). Local branches of MOFTEC have no such power of approval, though in practice the local branches will vet the approval documents required pursuant to the Tentative Provisions and submit the documents to MOFTEC for approval.
Special Listing Requirements
Just like domestic enterprises, the listing of FIEs must meet the requirements of the Company Law, the PRC, Securities Law and the listing requirements specified by CSRC. In addition, the Opinions set out special listing requirements that any foreign-funded company limited by shares must meet. Section II of the Opinions require that a foreign-funded company limited by shares must satisfy the following special listing requirements:
a) The foreign-funded company limited by shares has passed the foreign investment enterprise joint annual examinations for three consecutive years prior to the application for listing (Section II (I) (1) of the Opinions).
b) The business scope of the foreign-funded company limited by shares must comply with the Directing of Foreign Investment Tentative Provisions and the Foreign Investment Industrial Guidance Catalogue (the Investment Catalogue) (Section II (I) (2) of the Opinions).
The Investment Catalogue is being revised taking into account China's commitments for its accession to the WTO. It is expected that the revised catalogue when published, will open more industries to foreign direct investment.
c) Foreign shareholding shall not be reduced below 10% of the total share capital after the listing (Section II (I) (3) of the Opinions).
As a matter of fact, there exist a large number of joint ventures in which the foreign party's capital contribution to the registered capital is (in the case of EJVs) just at or slightly above 25% and (in the case of CJVs) below 25%. These EJVs and CJVs may want to go public in due course. If listed, the foreign party's shareholding will consequently be diluted below 25%. It was in recognition of these facts that the minimum foreign party's shareholding after listing was set at 10%. The end result is that joint ventures with 25% foreign equity or below are permitted to go public if other conditions are met, but the minimum foreign shareholding shall not be reduced below 10% of the total share capital after the listing. The effect on a FIE is that the maximum number of shares it issues cannot have the result of diluting the foreign shareholding below 10%.
The Questions Relevant to Foreign
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