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Craig Coben, former global head of equity capital markets at Bank of America and current managing director at Seda Experts, a financial services expert witness firm.
In February, bankers celebrated when China announced new rules for overseas IPOs, hoping to revive the flow of IPOs into the Hong Kong and New York markets after a 20-month freeze. However, these rules were not going to make it easy. Companies now require approval from the Chinese Security Regulatory Commission and other regulators before listing abroad. Consequently, Chinese companies have faced bureaucratic challenges, and none have gone public overseas under the new regime. Nevertheless, banks have a roadmap to list Chinese companies on overseas exchanges, albeit with more obstacles to overcome.
Recent news reveals that the CSRC instructed lawyers to downplay China-related risk factors in share offering prospectuses. This guidance may complicate global banks’ ability to underwrite overseas share offerings, a previously lucrative business. According to Reuters, Beijing has requested that law firms avoid including negative descriptions of China’s policies, business and legal environment in listing prospectuses. Chinese law firms serving as IPO advisers have been instructed to remove standard risk disclosures related to China’s economic, political, and social conditions, government policies and regulations, and trade tensions with the United States.
The CSRC’s guidance is a response to an attempted workaround by lawyers, who created a standard list of risk factors to comply with both Chinese and overseas rules. However, the top CCP leadership noticed this and ordered the CSRC to intervene and stop this practice. While the CSRC’s position may have some appeal, it is primarily aimed at controlling the narrative and asserting Chinese rules over Western norms. This has put international investment banks in a difficult position.
The challenge lies in navigating between the CSRC’s instructions and the SEC’s call for more specific and prominent disclosure regarding material risks related to the Chinese government’s role in the operations of China-based companies. This makes underwriting share offerings for Chinese companies in the US challenging for international banks and exposes them to potential legal liabilities if risk factors are watered down. Even considering a Hong Kong listing poses risks and challenges for international banks, as they strive for consistent IPO standards worldwide based on American/Western practices and regulation. The recent CSRC guidance has significantly affected global banks’ Asian investment banking revenues, which heavily relied on Chinese share offerings on overseas exchanges.
The stakes are high for global banks, and the recent CSRC guidance has made their business in this sector much harder. It is important for them to carefully navigate the conflicting requirements of Chinese and American officials and ensure they maintain their reputation while underwriting IPOs for Chinese companies abroad.
Further reading:
– China has its eye on overseas listings (FTAV)
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