CSRC: Red-Chip Enterprises Dismantling VIE Structure Is Normal Regulatory Requirement

According to Bloomberg, Beijing has recently strengthened regulatory scrutiny of red-chip companies listing in Hong Kong.

Sources familiar with the matter say that regulators have recently advised several prospective listing companies to dismantle their red-chip structures and seek Hong Kong listings using domestic entities. If they insist on using a red-chip structure, they need to explain and demonstrate its necessity. According to regulations, companies related to China must complete the overseas listing filing procedures with the China Securities Regulatory Commission (CSRC) before listing in Hong Kong. One insider also noted that this arrangement aims to prevent capital outflows.

The CSRC responded to Bloomberg, stating that some red-chip companies have recently received notices to dismantle their structures, which is a normal regulatory requirement. “The CSRC has always actively supported companies in complying with laws and regulations to list in Hong Kong and other overseas markets, leveraging both markets and resources for financing and development. Some red-chip companies have low shareholding transparency and higher compliance risks, which are of concern to both domestic and foreign regulators and supervisory authorities.”

A red-chip structure is a common model for Chinese companies, including state-owned and private enterprises, to list in Hong Kong. It involves issuing entities that are offshore holding companies with main operations or assets in mainland China. This model not only facilitates the listing approval process but also provides more flexible exit mechanisms for early investors. From technology and internet companies to new consumer brands and biopharmaceuticals, red-chip structures have played a significant role in the wave of Chinese companies going overseas.

The CSRC also stated that, according to the “Provisional Measures for the Administration of Securities Issuance and Listing by Domestic Enterprises Abroad,” implemented on March 31, 2023, regulators and supervisory authorities generally focus on the necessity and compliance of establishing red-chip structures, especially after the new regulations.

Sources say that the new regulatory trend has already begun to impact prospective listing companies, investment banks, intermediaries, and overseas investors. They note that dismantling a red-chip structure means transferring control of the domestic operating entity back to mainland China, which can incur significant costs.

For investors, dismantling red-chip structures may reduce flexibility in equity holdings and divestments. Insiders indicate that foreign venture capital firms and private equity funds investing in companies registered in mainland China will face more complex exit routes, as transferring funds out of the domestic entity requires compliance with strict foreign exchange regulations and involves longer lock-up periods.

Hong Kong’s IPO volume hit a four-year high last year and remains strong this year, prompting local regulators to tighten oversight, including enhanced review of listing document quality, approval of sponsor licenses, and crackdowns on insider trading. Additionally, Hong Kong plans to expand its “public naming” mechanism for hasty listing applications, including disclosing legal advisors and auditors, to further strengthen intermediary discipline and improve overall IPO quality.

According to HKEX data, as of the end of January, over 400 companies are in the IPO application queue. KPMG forecasts that fundraising in the Hong Kong market could reach $45 billion, a six-year high.