The 'VIE' structure helping Chinese firms float abroad

The China Securities Regulatory Commission (CSRC) said last Friday that companies operating with a so-called variable interest entity (VIE) structure seeking to list abroad will need approval from the watchdog before the deal goes ahead.

Companies will be required to register their plans with the regulator to ensure they comply with Chinese laws. Bankers and lawyers said the new rules were likely to ease the regulatory uncertainty that have roiled financial markets in 2021 and stalled offshore listings.

How does structure work? 

Under this structure, a Chinese company sets up an offshore entity for overseas listing purposes that allows foreign investors to buy into the stock.

The arrangement was designed to help skirt Chinese rules restricting foreign investment in a number of sensitive industries such as media and telecommunications.

Most offshore-listed Chinese tech firms, including Alibaba Group and JD.com , use this structure, which gives them more flexibility to raise capital, while also bypassing the scrutiny and lengthy IPO vetting process that companies incorporated in China have to go through.

"This structure is designed for companies in industries where China will issue an operating license only to local Chinese companies such as the internet, education, data centers and media industry," Jefferies analysts wrote earlier this year.

How will new rules work?

There has largely been no regulatory framework in China for listings of VIE-structured companies until now.

The CSRC's new draft rules published last week will include VIE-structured companies in its proposed filing mechanism for offshore listings, removing uncertainty whether such companies would be banned from offshore listings entirely.

The deals will require effective regulatory approval which CSRC said could take up to 20 working days if adequate materials were submitted. Authorities have not yet said when the new rules will take effect.

China's government can order a company to dispose of its assets or businesses if its offshore listing jeopardizes national security, under the proposed new rules.

In its announcement, the CSRC said Chinese regulators respected the choices made by companies on listing locations and that the rules would not be retroactively applied - which means companies currently listed abroad will not be affected.