One of the major concerns for US investors looking at Chinese companies were the so-called VIE-structures, moving the company to non-Chinese jurisdictions. The major success of Alibaba´s IPO has wiped away those concerns, says accounting professor Paul Gillis, and we might see a more subtle change, he writes on his weblog.
Alibaba’s record IPO overcame concerns about Chinese stocks. Investors had been badly burned by Chinese stocks in the past few years, but they were en-thusiastic about Alibaba. There was considerable discussion of the risks of Chin-ese stocks, and in particular the variable interest entity (VIE) structure used by Alibaba and many other overseas listed Chinese stocks. These risks remain, al-though Alibaba’s offering might have changed the picture.
At the top of the list of concerns about Alibaba was the variable interest entity structure. I just searched Google news for variable interest entity and found 881 results. When I first wrote about VIEs in March 2011 nobody was talking about VIEs. It seems difficult to find anyone who is not aware of the structure today. The Alibaba IPO called considerable attention to the structure, including a report from a congressional commission and a letter from Senator Casey to the SEC. Certainly Chinese officials heard an earful about VIEs.
I think all this attention may help to bring a resolution to the VIE situation. I believe that the chance of Chinese regulators banning the VIE structure has fal-len below remote. Instead, I expect they will eventually move to modify for-eign investment rules to make the VIE structure obsolete. Changing the foreign in-vestment rules to allow direct foreign investment in Chinese companies in e-commerce could allow companies like Alibaba to get rid of both their VIE and their Cayman Island structures, to the great benefit of shareholders.
I expect that China may want to ensure that internet companies remain under the control of Chinese citizens, and Alibaba control structure that keeps Jack Ma in charge may be exactly what the doctor ordered. Allowing companies like Alibaba to directly list abroad without Cayman Island companies and VIEs might also allow Alibaba to seek a secondary stock listing on the Chinese stock ex-changes. Because of China’s strict exchange controls, most Chinese investors could not participate in the IPO of Alibaba.
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