The foreign owners of foreign-invested enterprises (FIEs, excluding wholly foreign-owned companies for the purpose of this article) are eager to reap the advantages of the increasingly prosperous capital markets in China to raise funds in renminbi and enhance their exposure to the Chinese market. Quite a number of these foreign investors struggle with the idea that the capital market in China dislikes so-called foreign gold miners, and thus FIEs are hindered from listing on the A-share market. This opinion may be quite wrong.
As a matter of fact, quite a few FIEs have achieved their listing goals on the A-share market, and more are seeking the same. According to WIND information, there were approximately 100 FIEs among 2,494 listed companies in China as of November 13 2012. The number of FIEs being listed on the Shanghai and Shenzhen stock exchanges has continuously increased in the past five years.
Among those successfully listed FIEs, the ultimate owners through the foreign holding structure vary: they are not only current or former PRC residents, but also purely foreign individuals or legal entities.
Chinese laws and the securities watchdog, the China Securities Regulatory Commission (CSRC), do not set out any restriction, expressed or implied, on an equity joint venture listing on the A-share market; the shares of a qualified FIE can be listed on a stock exchange in China (either the Shanghai Stock Exchange or Shenzhen Stock Exchange; the latter also has a small and medium-sized enterprise board and a growth enterprise board). The listing qualification criteria are clearly listed in the PRC Securities Law and other regulations and listings rules, and are commonly applicable to all issuers no matter whether they are purely domestic companies or legal entities with foreign investment. These criteria may be divided into three categories – business, financial and legal – and mainly focus on profit-making track record, sustainability and legal compliance.
In contrast with the most well-recognised markets, China adopts an initial public offering (IPO) review/approval rather than a registration system, which means the issuer cannot offer or list shares without the written approval of the CSRC. The rules are almost the same regardless of whether the issuer is a purely domestic company or an FIE, so there is no need to be too panicked about the review/approval process.
It is worth noting, however, that considering the public policy and state security factors and unfamiliarity with the foreign legal environment, the CSRC implements stricter requirements for an FIE with respect to the due diligence process and disclosure.
For example, the shareholding structure, main business operations, legal requirements of investment in the FIE imposed by its applicable jurisdiction, financials, transactions/fund exchanges with the FIE and other relevant information about the foreign owner of the FIE will be disclosed in the prospectus and a legal opinion issued by a lawyer qualified in the applicable jurisdiction will be required to evidence the foreign owner is a going concern with good standing.
In addition, the CSRC takes stricter views on such material aspects as competition and use of proceeds.
For example, when establishing the FIE, to deal with the competition issue between the foreign owner and the FIE, the foreign owner will usually agree with the Chinese partner in the joint venture contract that it will only sell identical or similar products overseas and never allow importation of these products into China. But this is not acceptable to the CSRC because it thinks the foreign owner will be unable to prohibit importation. In extreme cases, to kill the competition issue, the CSRC will require the foreign owner to inject all its businesses overseas related to that of the issuer into the issuer itself or its subsidiaries.
Furthermore, the details of the projects into which the issuer will put the IPO proceeds must be disclosed in the prospectus together with the feasibility analysis and profit forecast of these projects. It is not usually permitted for the proceeds to be used to repay bank loans.
Despite these different practices, the trend is now so well established that the authors believe the listing of FIEs on the A-share market will become more frequent in the future. This will probably lead to opportunities for legal counsel who are familiar with the A-share market listing practices as well as the corporate matters of the FIEs.
Wang Yi and Lily Qiu