MIIT: E-commerce Chinese stocks can return to A-shares directly without dismantling VIE

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On June 19, the Ministry of Industry and Information Technology issued the "Notice of the Ministry of Industry and Information Technology on Lifting the Foreign Equity Restriction of Online Data Processing and Transaction Processing Business (Business E-commerce)". It mentioned: "Our ministry has decided to lift the foreign equity restriction of online data processing and transaction processing business (business e-commerce) nationwide on the basis of the pilot in the China (Shanghai) Pilot Free Trade Zone, and the foreign shareholding ratio can be up to 100%."

​​Although the details have not been released, this is still the first major policy change faced by all parties in the recent trend of dismantling VIEs. This means that business e-commerce companies with VIE structures can be directly converted into Sino-foreign joint ventures, without the need for foreign shareholders to withdraw as discussed earlier, and for local funds to take over, and then become a pure domestic enterprise and then be listed on the A-share market.

Cheng Jiamao, a partner of Dacheng Law Firm, pointed out: "Internet companies will be classified when they are registered. E-commerce companies such as JD.com and Vipshop will no longer be subject to foreign equity restrictions; portal websites such as Sina and Sohu, and video websites such as Youku Tudou are classified as cultural and entertainment companies and will continue to use previous laws and regulations; companies such as Didi Dache will see how they are classified."

VIE structure, also known as "agreement control". Take JD.com as an example. JD.com has an entity holding an ICP (telecommunications and information service business license) for daily operations (hereinafter referred to as the ICP entity). Before it went public, it established a company in Cayman and other places. This Cayman company controlled the ICP entity by agreement, and the income and profits of the ICP entity also belonged to the Cayman company. The Cayman company went public directly. JD.com's American shareholders hold shares in the Cayman company.

Cheng Jiamao analyzed that after the details are released, many companies operating e-commerce will consider dismantling the VIE structure. "Because contractual control is not absolutely reliable. In the past, VIE structure companies listed overseas would disclose the potential risks of this structure in their prospectuses. One important reason why foreign investors could accept it in the past was the restrictions of Chinese law; generally, there are no such restrictions anymore, and foreign investors prefer to directly hold Chinese companies rather than control them through contracts. And it is very simple for most VIE structure companies to dismantle the VIE structure. They only need to let JD.com's current foreign shareholders directly become shareholders of JD.com's ICP entity, and then JD.com will become a Sino-foreign joint venture. Of course, it is not ruled out that some companies will not dismantle the VIE structure because it is too troublesome, and as long as foreign investors accept it, VIE is fine. The structure is ultimately a contractual arrangement for commercial purposes. "

Qiming Venture Partners Managing Partner Gan Jianping pointed out: "In the future, the Cayman company layer can be abolished, and JD's ICP entity will become a Sino-foreign joint venture. Instead of the ICP entity having to become a purely domestic-funded enterprise to be listed in China, as mentioned in the previous paragraph, foreign shareholders will withdraw RMB to take over these extra things. This Sino-foreign joint venture can be listed overseas or in China. The only restriction for Internet companies to be listed in China is that currently, to be listed on the A-share main board, the company is required to have a three-year history of profitability; to be listed on the Growth Enterprise Market, it is required to have two consecutive years of profitability. "

Such policy changes have a great impact on the current craze of dismantling VIE. If companies like Didi Dache and eDaijia can also be identified as operating e-commerce companies, then there will be only a handful of Internet companies subject to foreign equity restrictions.

Gan Jianping analyzed: "If this is the case, then Chinese and foreign funds are completely on the same starting line. Previously, when a US dollar fund invested in a project, it often faced the phenomenon that the US dollar did not enter the country so quickly, so some entrepreneurial companies preferred to raise RMB; but since the spirit of the law is to encourage and guide foreign investment in e-commerce development, it should be easier for the US dollar to enter the country in the future than it is now, and I hope so. Then, in the future, the US dollar fund and the RMB fund, whoever can find a good company to invest in it, will be able to grow rapidly. Under such a competitive landscape, it will be the best and most efficient company that gets the most funds and can quickly grow itself."

In addition, since it will become a trend for operating e-commerce companies to dismantle the VIE structure, in the future, most of these Internet companies do not need to worry about the relationship between the company's legal structure and the listing location. Before listing, when considering the listing location, more consideration is given to which market gives a higher valuation or gives the company a greater added value. Gan Jianping believes that in this way, the founders and shareholders of good companies can get the greatest rewards, and then the country will achieve the goal of guiding funds to enter industrial investment for good companies.

The following is the original text of the Notice: Notice of

the Ministry of Industry and Information Technology on Lifting the Foreign Equity Ratio Restriction for Online Data Processing and Transaction Processing Business (Business E-commerce)

MIIT Notice [2015] No. 196

In order to implement the spirit of the Third Plenary Session of the 18th CPC Central Committee, support the development of e-commerce in China, encourage and guide foreign investment to actively participate, and further stimulate market competition, our ministry has decided to lift the foreign equity ratio restriction for online data processing and transaction processing business (business e-commerce) nationwide on the basis of the pilot program in the China (Shanghai) Pilot Free Trade Zone, and the foreign shareholding ratio can be up to 100%.


Foreign-invested enterprises must operate in accordance with laws and regulations. When applying for online data processing and transaction processing business (business e-commerce) licenses, the foreign equity ratio requirements shall be implemented in accordance with this notice, and other licensing conditions and corresponding approval procedures shall be implemented in accordance with the relevant provisions of the "Regulations on the Administration of Foreign-Invested Telecommunications Enterprises" (State Council Order No. 534).

Communications administration bureaus of all provinces, autonomous regions and municipalities directly under the central government should strengthen guidance and supervision of foreign-invested enterprises, intensify supervision during and after the event, effectively safeguard the legitimate rights and interests of users, create a fair competition environment, promote the sustainable and healthy development of e-commerce, and make it an important platform for mass entrepreneurship and innovation.

This notice shall be implemented from the date of issuance.

Ministry of Industry and Information Technology

June 19, 2015

Source: 21st Century Business Herald

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