BIG IDEA | ‘The Chinese government could declare “all these VIE contracts are actually a disguised form of foreign ownership, which is not allowed by the rules, so they are all void and your Didi and Alibaba shares are worthless.” ’

'While virtually every major Chinese internet company has used the structure, it’s become increasingly worrisome for Beijing as it tightens its grip on technology firms that have infiltrated every corner of Chinese life and control reams of consumer data.’

‘Authorities so far have little legal recourse to prevent sensitive overseas listings, as with the recent Didi Global Inc. IPO, which went ahead despite requests for a delay from regulators.’

‘The China Securities Regulatory Commission is leading efforts to revise rules on overseas listings that have been in effect since 1994 and make no reference to companies registered in places like the Cayman Islands, said the people, asking not to be identified discussing a private matter.’

• ‘Once amended, the rules would require firms structured using the so-called Variable Interest Entity model to seek approval before going public in Hong Kong or the U.S., the people said.’

‘The proposed change is the first indication of how Beijing plans to implement a crackdown on overseas listings flagged by the country’s State Council on last week.’

• ‘Closer oversight would plug a gap that’s been used for two decades by technology giants from Alibaba Group Holding Ltd. to Tencent Holdings Ltd. to attract foreign capital and list offshore, potentially thwarting the ambitions of firms like ByteDance Ltd. contemplating going public outside the mainland.’

‘The additional oversight could bestow a level of legitimacy on the VIE structure that’s been a perennial worry for global investors given the shaky legal ground on which it stands.’

• ‘If the Chinese government decides “VIEs are okay, but you have to get our permission to list them abroad,” that's not a worst-case scenario even if it never grants permission.’

‘That’s not the worst outcome. The worst outcome would be if the ones already listed abroad were just, you know, voided.’

• ‘The Chinese government could declare “all these VIE contracts are actually a disguised form of foreign ownership, which is not allowed by the rules, so they are all void and your Didi and Alibaba shares are worthless.” ’
• ‘That would … I mean, these VIE contracts are a disguised form of foreign ownership, and a fairly thin disguise. (It’s not like Chinese government authorities are unaware that foreign investors own shares in Alibaba; it’s just that they seem to accept this level of technical compliance with the rules.)’

‘If the PRC government otherwise finds that VIEs are in violation of any existing or future PRC laws or regulations or lack the necessary permits or licenses to operate their business, the relevant governmental authorities would have broad discretion in dealing with such violation, including, without limitation:’

• ‘Revoking the business licenses and/or operating licenses of the PRC entities; and’
• ‘Requiring them to restructure their ownership structure or operations, including terminating the contractual arrangements with our VIEs and deregistering the equity pledges of our VIEs, which in turn would affect their ability to consolidate, derive economic interests from, or exert effective control over our VIEs and their subsidiaries.
• ‘This is a real risk!’