China official confirms VIE under regulatory review

The China Securities Regulatory Commission (CSRC) chairman has reportedly confirmed the government’s investigation into regulating the controversial corporate structure known as the Variable Interest Entity (VIE). 

At a conference last week, Chairman Guo Shuqing said the CSRC is looking into regulation of the VIE structure, according to a Wall Street Journal report. However, he did not elaborate on the issue. 

CSRC could not be reached for comment by press time. 

The VIE structure has been used primarily to circumvent China’s ban on foreign investment in certain sectors such as the internet and telecommunications. The structure contains contract agreements that allow foreign investors to control companies operating in China without actually owning them. Internet companies such as Sina and Baidu use these control agreements to give investors in holding companies listed offshore contractual rights to the domestic licenses and the earnings from them. 

In September, concerns arose when an 11-page memo requesting China’s State Council to take action against the VIEs was circulated in the industry. Although the memo was not on official letterhead, many speculated it was drafted within the CSRC, according to two China-based lawyers who read the memo. 

The document detailed what the VIE is and how it is used to circumvent foreign investment restrictions, according to one of the lawyers who spoke to PE Asia. It also listed all of the Chinese companies that have gone IPO offshore using a VIE structure. 

But most important, the document contained a proposal to the State Council to ask both the Ministry of Commerce and CSRC to create a new approval regime. Under the proposal, the VIE structure could no longer be used if a company is cleared to do an offshore IPO.  

The purpose of the memo was more about encouraging these Chinese companies to list onshore rather than restricting foreign investment, according to the lawyer, as some of the requirements for A-share listing would be loosened under the proposal. 

“They’re basically saying, ‘This is Chinese business, why can’t China be the market?’”