Exclusive: China company structure under threat

Sun Sep 18, 2011 11:16am EDT
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By Stephen Aldred and Don Durfee

HONG KONG/BEIJING (Reuters) - China's securities regulator is asking the government to clamp down on the controversial corporate structure used by companies such as Sina (SINA.O: Quote) and Baidu (BIDU.O: Quote) to list overseas, and employed in thousands of other investments by foreigners into domestic Chinese companies, four legal sources told Reuters.

Lawyers at four different firms in China and Hong Kong said they have seen an internal report, dated August 17, said to come from the China Securities Regulatory Commission (CSRC) which asks China's State Council, or cabinet, to take action against the structures known as Variable Interest Entities (VIEs).

The CSRC did not respond to a Reuters request to confirm whether or not the report is genuine. But lawyers say they are taking it seriously and that if the government were to accept the CSRC's view it could jeopardize the way in which Chinese companies list overseas or receive foreign investment.

In particular, any change could hurt China's booming private equity market, with relies heavily on VIE structures.

"If this structure is prohibited, you're going to see a shrinkage on a massive scale in terms of the number of potential foreign investors in China. It will send shockwaves through the financial industries sector," said one lawyer at a foreign law firm in China who has seen the report but asked not to be identified given the sensitive nature of the document.

The lawyers say the CSRC is pushing for the Ministry of Commerce to take the lead in regulating the schemes, with all new variable interest entities requiring ministry approval before being set up. However, they are not expected to force existing VIEs to dismantle.

The document is not on CSRC letterhead and does not clearly indicate where it was directed, said the sources. But all the sources had heard it was produced by the financial regulator and delivered to the State Council.

New rules from the Ministry of Commerce that took effect on September 1 bar foreign investors from using arcane investment structures to evade China's security review process, but didn't directly address VIEs. The CSRC report, if genuine, suggests the matter is more serious since regulators are indeed pushing to restrict the structure.   Continued...

<p>An employee walks past the Baidu company signage outside its headquarters in Beijing, July 26, 2011. REUTERS/Soo Hoo Zheyang</p>