Report: Popular China M&A vehicle under fire

Fund managers transacting in China may face new roadblocks if China’s Securities Regulatory Commission (CSRC) has its way.

The securities watchdog is asking China’s State Council, or China's cabinet, to take action against a popular corporate structure used by foreign investors known as Variable Interest Entities (VIEs), according to a Reuters report. One Hong Kong-based lawyer confirmed to PEM existence of a CSRC memo requesting the action, though qualifying he had not seen the memo directly.

CSRC did not respond to repeated calls for comment by press time.

VIEs are used to work around Chinese regulations which bar foreign investors from owning domestic assets in sensitive sectors such as telecoms. VIEs use a series of commercial agreements through an offshore holding company to effectively take control of a domestic enterprise without owning the business outright. Because the offshore company establishes a Wholly Foreign Owned Enterprise (WFOE) to contract with the Chinese enterprise, their use also allows foreign investors to escape a security review in their M&A transactions.

Concerns were first raised over VIEs earlier this month when the government released new rules designed to rein in complicated investment structures used by foreign investors to evade China’s security review process. However the rules, issued by the Ministry of Commerce, which handles the process, did not directly address VIEs.