Control issues

23 Jan 2015 By Robyn Mak Follow @mak_robyn

Regulators plan to close a loophole that allows companies like Alibaba to skirt foreign ownership rules. Investors will benefit from clarity on so-called VIE structures, commonly used by tech companies. But the new law may give founders and top executives even more influence.

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China’s Ministry of Commerce published a draft of a new foreign investment law on Jan. 19 that would treat foreign investors the same as domestic ones. The exception would be investments in certain sectors in a “negative list” to be released at a later date.

Foreign investors in the negative list will be required to apply for an “entry license” and be subject to certain restrictions. Under current rules, many kinds of internet and media operations are off limits to foreign investors.

Under the proposed laws, regulators would look at the nationality of whoever controls the company, regardless of actual ownership. If a foreign investment entity is ultimately controlled by a Chinese investor, then it can apply to be treated as a domestic investor.

Companies such as e-commerce group Alibaba and search engine operator Baidu control their Chinese operations using contractual arrangements rather than equity ownership, in a structure known as a variable interest entity (VIE), commonly used to attract offshore capital into sectors closed to foreign ownership.

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