First, the purpose of indirect overseas listing regulation should be accurately positioned, which serves as the prerequisite for optimizing the regulatory framework and enhancing the regulatory regimes. On the one hand, in order to implement the policies of stabilizing and expanding the use of foreign capital, indirect overseas listing regulatory framework should develop towards higher level of publicity and transparency, aiming at clear application scope, reasonable regulatory regimes, clear regulatory standards and appropriate adoption of market principles. Given the fact that domestic stock exchanges currently have no overall competitive advantages, however, China will inevitably concern about the loss of listing resources and the overseas loss of interest in domestic assets. Obviously, the competent authorities under the PRC State Council, such as the MOFCOM, the CSRC and the SAFE, can by no means solve the above conflicts, without the political wisdom contributed by decision makers at higher level. On the other hand, as to the domestic enterprises indirectly listed abroad, the listed entities have locations in different countries or regions for their incorporation, listing, and business operation. In such a case, China is neither the home country of the listed entity nor the country where it is listed, and China’s company law and securities law may not apply to the practice of overseas listing conducted by an overseas company. Therefore, indirect overseas listing regulation can take the initiative of neither protecting the interest of overseas investors, nor standardizing the organization and behaviors of overseas listed companies. Nevertheless, the cross-border nature of indirect overseas listing determines that the process of building a red-chip structure will inevitably involve international transfer of interest in domestic assets which constitutes the basis of the red-chip companies’ continuing operation. Determined by this, indirect overseas listing regulation should take oversight of domestic companies’ operation and protection of the reputation and the overall image of overseas listed Chinese companies as its ultimate purposes.
Second, there should be an integrated planning for the regulatory framework, which is the basis for reasonable allocation of regulatory powers and coordination of the regulatory regimes. As there is no need to maintain different regulatory treatment between the grand red-chip and small red-chip listing, the regulatory regimes with regard to them should be consolidated. Moreover, the difference between direct and indirect overseas listing is better reflected on the legal forms, while they are the same in terms of economic essence. This is why the H-share companies and the red-chip companies are both known to the foreign investors as China-based companies. As a result, it is necessary to further consolidate the regulatory frameworks regarding direct and indirect overseas listing by enacting an administrative regulation at the PRC State Council level based on the Special Provisions on Direct Overseas Listing(1994), the Grand Red-chip Circular and the Provisions on Mergers and Acquisition (2006) to establish a uniform regulatory system governing both of these two modes of overseas listing; then based on the above administrative regulation, the CSRC should independently or together with other competent authorities under the PRC State Council issue regulatory documents including administrative rules, so as to implement the specific regulatory standards. The significance of the above measures is that they are conducive to the downright implementation of Article 238 of the PRC Securities Law (2005 Revision), which requires direct and indirect overseas listing both need to be approved by the CSRC in accordance with the stipulations of the PRC State Council. By this means, the PRC State Council stipulations will for the first time engage in the area of indirect overseas listing, and the direct overseas listing system can also be improved. More importantly, integrating and designing regulatory regimes under the above framework can help fully reflect and implement the policy guidance that encourages direct overseas listing and restricts indirect overseas listing.[90] Moreover, establishing a uniform regulatory framework is helpful for improving legislation efficiency, simplifying the regulatory system, eliminating the space for regulatory arbitrage, and facilitating the understanding and use of regulations by the market.
Third, the regulatory power should be reasonably allocated to harmonize and improve the regulatory regimes. In the first place, in order to implement the policy guidance mentioned above, avoid the "mismatch" between the overseas listed companies’ business, assets and operation activities and the regulation conducted by China and the target market, and alleviate the pressure from small red-chip listing on China''s domestic regulation, direct overseas listing regulatory regimes should be revised in time, including but not limited to easing the listing conditions, removing restrictions on equity incentive proposals, clearing the channels for overseas equity investment to exit, and simplifying administrative approval and vetting procedures. These measures will definitely be conducive to creating an attractive regulatory environment for direct overseas listing. [91] In addition, the conditions for indirect overseas listing, especially small red-chip listing, to be applicable must be made clear. According to the above policy guidance, the domestic enterprises planning to be listed in the form of grand red-chips or small red-chips, as well as the domestic enterprises controlled by overseas resident natural or legal persons but primarily engaging business in the PRC Mainland should mainly choose the means of direct overseas listing, while indirect overseas listing is mainly applicable to “true” overseas companies involving domestic equity and only conducting a small amount of business in the PRC Mainland. As such, it is worth a try to set a few regulatory standards based on the ratios of a company’s domestic revenue to global revenue, its domestic assets aggregate to global assets, as well as domestic operating profits to global operating profits, and require only the domestic enterprises with the above ratios lower than these standards be allowed to apply for indirect overseas listing. What is more, allocation of indirect overseas listing regulatory power should be optimized. For example, it is doable to properly lower the degree of the CSRC regulatory enforcement with regard to injection of domestic assets to an overseas Chinese-invested company or the matters related to the listing of an overseas Chinese holding company (e.g. changing administrative approval in advance to record keeping afterwards) on the basis of retaining the current regulatory links, and concentrate the regulation of mergers and acquisitions by foreign capital involved in indirect overseas listing to the MOFCOM, to eliminate the overlap of regulatory power resulting from the Grand Red-chip Circular and the Provisions on Mergers and Acquisition (2006) between the CSRC and the MOFCOM. More importantly, it is essential to strengthen the regulation of market intermediaries, improve the mechanism of cross-border listing regulatory cooperation, establish reasonable and feasible arrangement of cross-border regulation, and clarify the legal responsibilities of the Chinese and foreign market intermediaries, so that the intermediaries are put under both the market constraints and the external regulation.
Lastly, the transparency of regulatory standards and regulatory practices should be enhanced. On the one hand, the coordination between regulatory normative documents should be strengthened, so as to establish clear regulatory lines including overseas investment administration, round-tripping investment, overseas listing and foreign exchange administration in accordance with the regulatory power allocation post-adjustment, and define the specific regulatory standards based on these four regulatory lines. On the other hand, the level of regulations should be raised so that main regulatory requirements are established by the administrative regulation enacted by the PRC State Council, and the practice of establishing universally binding regulatory standards in the documents formulated by internal departments of related competent authorities under the PRC State Council should be avoided. By raising the level of regulations, the stability of the regulatory system can also improve, so as to reduce hasty changes in the regulatory standards. Furthermore, the verification standards and time limit for each administrative approval should be clarified, so as to establish fair administrative approval procedures, and the result of administrative approvals should be made public in a timely manner.
CONCLUSION
It demands the cooperation between China and the U.S. to enhance the regulatiory mechanism for the cross-border listing activities. As to the China side, it has been nearly twenty years since its indirect overseas listing regulatory framework was created from scratch, and each regulatory regime has its special implications endowed by the particular historical period that gave birth to it or validated its continuation. The Grand Red-chip Circular, the Small Red-chip Circular and the Provisions on Mergers and Acquisition (2006) all proved China’s efforts and exploration in indirect overseas listing regulation. Looking forward, the evolution of this regulatory framework will continue, but in a direction unclear yet, that is, either consolidating the regulatory frameworks for direct and indirect overseas listing or just amending and improving the direct overseas listing regulatory framework, while maintaining the status quo in next few years also serves as an alternative. Nevertheless, the crisis of the international capital market’s deteriorating trust on China-based companies is only an external pressure, whereas the intrinsic motivation to enhance overseas listing regulatory framework lies in China’s desire to promote its capital market’s competitiveness in a global context. Moreover, China’s capital market is facing an international environment more complex than ever before. This determines that China will be more prudent when considering improving its indirect overseas listing regulatory framework under influences from multiple layers of policies. China has realized that strengthened regulations of the domestic enterprises’ indirect overseas listing can neither share or reduce the duty of the U.S. authorities nor replace the due diligence responsibilities of the intermediaries servicing the cross-border issuers. Therefore, there should be a clear target and idea for indirect overseas listing regulation for the purpose of refining the regulatory framework and creating well-designed regulatory regimes, while an effective mechanism for cross-border inspection and accountability should also be established. China will accumulate more experience in and master more techniques of cross-border listing regulation, which is also extremely helpful for the buildup of Shanghai international board.
Table 1: Number of Overseas IPO by Chinese Companies and Total Amount of Raised Capital
Year |
Direct Overseas Listing |
Indirect Overseas Listing |
Grand Red-chip |
Small Red-chip |
Number of Overseas IPO |
Total Amount of Raised Capital ($mm) |
Number of Overseas IPO |
Total Amount of Raised Capital ($mm) |
Number of Overseas IPO |
Total Amount of Raised Capital ($mm) |
1996 and previous years |
26 |
4,874.00 |
30 |
63.36 |
0 |
0 |
1997 |
17 |
4,685.00 |
8 |
11.89 |
0 |
0 |
1998 |
1 |
457.00 |
1 |
16.00 |
3 |
182.01 |
1999 |
3 |
569.00 |
3 |
235.00 |
7 |
196.12 |
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