Speculation is currently rife regarding the future of VIEs in China, and it seems at first glance as if there are two camps emerging, the tech companies saying the government supports the structure, and the lawyers saying more and stricter regulation is coming.
In the first camp we meet Xie Wen, former head of Yahoo! in China who says that for from banning VIEs the government is in support of them.
Xie said in his Sina Weibo today that Wang Qishan, China’s vice minister, has noted in official documents that the government should admit the legitimacy of the VIEs company structure and take it under current regulation. He also said the Ministry of Commerce (MOC) has issued a regulation basing on Wang’s attitude.
The second camp is reported in Reuters saying more and tighter regulations are coming, this is based on reports from four law firms, who have seen a letter from the CSRC to China’s State Council asking for more regulation.
The move by the CSRC is apparently driven in response to the raft of fraud cases seen recently at Chinese companies listed in North America, many of which used the VIE structure. The CSRC has repeatedly stated that it often has no jurisdiction over these companies, which tend to be incorporated offshore, but the wider impact of the scandals on investor sentiment to China is putting them under pressure to act.
So, who’s right and who is wrong?
While all players on this market are likely to have their own agendas, and perhaps most importantly both of these articles are in fact hearsay only, are the two views really incompatible? I don’t think they are.
The fact of the matter is that while we talk about VIE structures as a group the differences between the structures and the companies in this group can be very vast.
If the government is going to legitimise VIE structures as Xie Wen suggests I doubt this would encompass all current structures. More likely they will legitimise the properly set up ones in certain restricted industries (perhaps accomplished by having a process for approving them). But as for the VIEs which have been set up to avoid M&A regulations and SAFE approvals, the thing that the CSRC is likely to take issue with, I doubt they would be included in such a drive.
Either way, with this level of uncertainty regarding the future availability of a listing to exit investments I wouldn’t be surprised to see a surge of VIE companies pushing through IPOs or RTOs regardless of market conditions in the near future.