In the news: CSRC crackdown, VIE structure and Chengdu's rise
June 07, 2013 | BY
clpstaff &clp articles &The CSRC has punished two brokerage firms for fraud and the question of whether the VIE structure is valid has reappeared. Chengdu is now home to 31 more Fortune 500 companies, securing its place as China's new foreign investment destination
CSRC penalises brokerages for fraud
The country's top regulator the China Securities and Regulatory Commission (CSRC) has penalised Minsheng Securities and Nanjing Securities for failed due diligence during initial public offerings (IPOs). Minsheng was fined Rmb2 million ($326,000) for Shanxi Tianneng Technology's IPO in 2011 and Nanjing received a warning for Guangdong Xindadi Biotechnology's IPO last year. According to the CSRC, both securities outfits provided falsified information in their offering documents.
This is a welcome move from the CSRC. Market participants are familiar with China's backlog of IPOs since the regulator froze all listings last year. Since then, the number of companies waiting to list has dropped by 200, as many fear their accounting standards are not up to scratch. The move is also good news for Xiao Gang, who took over from Guo Shuqing, as chairman of the CSRC in March of this year. The Regulator has committed to removing fraud and standardising practices – could this be the start of more crackdowns to come?
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VIE argument resurfaces
The New York Times Deal Book ran a piece this week on the variable-interest entity structure (VIE). Foreign investors can use VIEs as a workaround structure to access restricted or prohibited industries under the country's Foreign Investment Industrial Guidance Catalogue (外 商投资产业指导目录). The basic structure includes at least one domestic company, owned and controlled by PRC owners, an offshore holding company and a wholly foreign-owned enterprise (WFOE).
The NYT recalled Hong Kong billionaire Nina Wang's 12 year court battle over ownership in the China Minsheng Banking Corporation. The Supreme People's Court ruled against Wang's company and the judgment stated the agreements in place had intended to circumvent China's restrictions on foreign investment.
It is hard to say whether VIEs are still a valid investment structure or not. The Chinese government knows these structures exist and has, in the past, turned a blind eye to them. Assuming there are no issues between the parties involved then VIEs are still an option. However, when disagreements arise and the courts get involved, this is when the validity of VIEs comes into question and the agreements do not hold up. For investors, everything depends on whether they really trust the people they are doing business with.
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How to invest in prohibited or restricted industries
Boost for Chengdu as foreign investment hotspot
China Daily reported that 31 more Fortune 500 companies have established a presence in Chengdu ahead of the 2013 Fortune Global Forum. Multinationals like Roche, Danone and Schneider Electric have set up their regional headquarters in Chengdu. Officials said the city now hosts 238 of the Fortune 500 companies.
The move shows that Chengdu's appeal in attracting foreign investment continues. The city has placed great emphasis on infrastructure and logistics, an area where competing cities in China's interior are lagging behind. In addition, the city has been using IP to attract foreign investment as it tries to set itself apart from the rest of the country as being able to offer heightened IP protection.
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