Legal Issues of FIE Listing in China Mainland Stock Market

----- Duan & Duan / Alex Yang

With further development of the “reform and open-up” policies in China, more and more investors around the world are eyeing on China' s unique advantage of resources and geography for foreign direct investment. Accordingly, there are much more and bigger FIE (Foreign Invested Enterprise) set up in China, and most of them prefer to list their companies in China, as a common mode and channel for their local expansion and financing. In this Article, we will discuss about some major legal issues relating to the listing of FIE in China-based stock markets.

•  Meaning of the listing of FIE

1. As for a FIE, the issuance of shares and stock exchange in the market would bring benefits in the following aspects:

(1) Benefit the listed company's financing for its manufacture and construction. Generally, under the condition of market economy, there are two channels to be adopted for a company's financing: one is financing in debt, the other is stock financing, and the stock financing should be deemed to be the best mode of financing under the condition of the ever-tightened financial monetary policy.

(2) Benefit strengthening the business administration. After listing, the company's business operation would be under the supervision of the shareholders and the social masses. The social masses' participation in the business operation will impel the company to improve their managerial skill.

(3) Help to build the company's corporate image, improve its market share, and promote its market competitiveness.

(4) Help to scatter the company's operation risk. After the company's shares are listed, the control power of the company will be separated, but at the same time, the operation risk of the company shall be scattered and reduced.

•  As for the economic development of China, the listing of FIE has the following positive effects:

(1) FIE listing in China can promote the course of localization for FIE, the localization extents of operation, manufacture, technology and human recourse will be improved, and the paces of promoting the international advanced technology and transfer of managerial skills will be speeded up.

(2) FIE listing in China will be helpful to the further development of China securities business, and promote the perfection and internationalization of the functions of the securities market of China.

(3) FIE listing in China can improve the investment environment of China.

(4) Listing of FIE in Shanghai Stock Exchange also helps to promote Shanghai' s image as an international finance center.

•  Main laws and regulations concerning the listing of FIE

1. In the early days of the foundation of China securities business, based on the principle guided by the “reform and opening-up” policies and absorbing the foreign capitals, many Sino-foreign Equity Joint Ventures entered into China securities market successfully. Subsequently, accompanied with the overheating of economy, various phenomena disturbing the economic orders appeared, accordingly, General Office of the State Council forwarded the <Instruction Request Concerning Suspending the Transfer of State-owned Shares and Legal Person Shares in Listed Companies to Foreign Investors> (hereinafter referred to as “1995 Instruction Request”) issued by The Securities Committee of the State Council on Sep 23, 1995. This regulation prohibits the foreign investors from accepting the State-owned Shares and Legal Person Shares in listed companies by contract and controlling listed companies, thereby, the methods of FIE entering into China securities market were restricted. There was a definite stipulation in 1995 Instruction Request: before the regulations relevant to State-owned Shares and Legal Person Shares in listed companies were issued, any institutions shall not transfer State-owned Shares and Legal Person Shares in listed companies to foreign investors.

2. For the purpose of meeting China economic development and opening-up to the outside world, the Ministry of Foreign Trade, the People's Bank of China and other administrations of China issued the <Opinion Relating to Further Encouraging Foreign Investment Currently> in Aug 1999. The Item 4 of article 2 in this regulation stipulates that the eligible foreign-funded companies can apply for issuing the Share A or Share B. The execution of this regulation achieved the change of the government's attitude towards the listing of FIE from “restriction” to “opening” to a certain extent.

3. In order to promote the healthy development of the domestic stock markets and to regulate the listing of, the issuance of shares and the entry into stock markets by FIE, the Ministry of Foreign Trade and Economic Cooperation and the China Securities Regulatory Commission issued the <Foreign Investment Issues Relating to Listed Companies Several Opinions> on Nov 8, 2001 (hereinafter called “Several Opinions”). This Several Opinions provided regulations on many relevant issues including: the establishment of, listing of and issuance of shares by foreign-founded companies limited by shares, the trade of unlisted foreign investment shares on the B shares market, the acceptance of the transfer of non-traded shares from a domestically listed company to a FIE, and the management method regarding the foreign capital proportion of a foreign-founded company limited by shares' falling below 25% of total share capital after the company is listed in China and issues shares. The promulgation of Several Opinions provides the principle bases from a legal perspective and regulations for the several issues relating to the listing of FIE.

4. In order to introduce advanced foreign management experience, technology and funds, to accelerate the pace of adjustment of the economic structure, to improve the corporate governance structure of listed company, and to increase international competitiveness, the China Securities Regulatory Commission, the ministry of Finance and the State Economic and Trade Commission issued the < Circular of the Issues Relevant to the Transfer of State-owned Shares and Legal Person Shares in Listed Company to Foreign Investors > (hereinafter called “Circular”) on Nov 1, 2002. The Circular furnishes many regulations on the concrete principles and operation procedures relating to the transfer of State-owned shares and legal person shares in listed company to foreign investors, in this sense, we can say that the promulgation of Circular has the practical guiding function on the domestic listing of FIE.

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