On Feb. 17, the China Securities Regulatory Commission (CSRC) introduced “trial measures of overseas securities offering and listing by domestic companies” (境內企業境外發行證券和上市管理試行辦法) along with five supporting guidelines, as Chinese authorities try to align the institutional requirements and regulatory systems for all overseas offerings and listings by Chinese companies operating internationally.
The trial measures took effect on March 31, requiring Chinese companies’ overseas securities offerings and merger and acquisition activities to comply with the filing procedures. However, the new regulations have a significant effect on China-based Taiwanese firms with listings in Taiwan, Hong Kong or elsewhere outside of China. Any contraventions of the trial measures would be subject to administrative action, including corrections, regulatory talks and warning letters, the commission said.
The regulations were initially thought to affect 45 KY companies — overseas Taiwanese businesses with a primary listing on either the Taiwan Stock Exchange or the Taipei Exchange — but the Financial Supervisory Commission last week said that the changes would also affect 85 Taiwan-listed companies. This raised concerns about those listed companies’ operational plans, ranging from initial public offerings, secondary public offerings and spinoff listings to acquisitions of domestic assets, share swaps and share transfers, as well as the issuance of new shares, convertible securities and preference shares.
The CSRC’s definition of “domestic companies” applies not just to firms established in China, but also to those with more than 50 percent of any audited financial indicators — operating revenue, profits, total assets or net assets — in China during the most recent accounting year. If a company’s major business activities or operations are conducted in China, or if the majority of its senior management live in China or are Chinese, then the CSRC deems it a Chinese company.
China’s new regulations might have been intended to target big Chinese corporations such as Alibaba Group Holding Ltd following a bruising two-year regulatory crackdown. Unfortunately, China-based Taiwanese businesses have fallen under this purview, and investors need to pay attention when investing in those firms, as their performance could be clouded by potential regulatory opposition to their business plans.
Statistics released by the Financial Supervisory Commission show that 1,210 Taiwanese-listed companies had invested in China as of the end of last year, accounting for 71.94 percent of the total listed companies. A survey conducted by the Chinese National Federation of Industries showed that nearly 90 percent of Taiwanese firms have no intention of moving their manufacturing facilities away from China, but a sizeable number would consider increasing investment in other places to cope with risks linked to the US-China trade dispute and geopolitical tensions.
How would investors know that the proportion of revenue and profit of a listed company that is generated in China exceeds 50 percent? The Financial Supervisory Commission or the Taiwan Stock Exchange should make the information public. For example, iPhone assembler Hon Hai Precision Industry Co made a net profit of NT$141.5 billion (US$ 4.6 billion) last year, with its Chinese subsidiaries contributing NT$173.9 billion in profit, which means the CSRC would consider it a Chinese company.
Assessments on details of the effects for stakeholders are being conducted and the finalized regulations are expected to be unveiled later this year, but Taiwan’s financial regulators need to ensure that Taiwan-listed firms disclose price-sensitive China-related information as soon as possible and mandate companies to disclose information for the sake of corporate transparency and investor protection.
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