Models for foreign listing of domestic enterprises, regulation of outbound funds

With the increasingly stricter legal regulations on A-share initial public offerings of domestic enterprises in China, the new policies put out for “new economy companies”, “biotech and pharmaceutical enterprises” and “weighted voting rights” by Hong Kong Exchanges and Clearing Limited (HKEx) and the China Securities Regulatory Commission (CSRC) policy announcement on a pilot project for full tradability of H-share listed companies, domestic enterprises have been frenetically training their sights on foreign markets.

The principal structures for the foreign listings of Chinese domestic enterprises are the “H-share model”, “large-red-chip” and “small-red-chip” models (including both direct shareholding and indirect shareholding models, i.e., VIE structures). Under the H-share model, a domestic enterprise is reorganized as a company limited by shares and, after securing CSRC approval, it may directly offer H-shares and list abroad. After listing, the shares in the hands of the foreign public shareholders of a domestic non-pilot enterprise may be traded openly in the market.

The “large-red-chip” model refers to a domestic enterprise’s realization of a foreign listing through the establishment of an overseas-listed entity. Under this model, the domestic enterprise is required to secure CSRC approval before listing and the domestic assets resulting from domestic investments and held by the overseas listed entity must be for a full three years.

Willow Wei is a counsel at Dentons