Forex issues on overseas listing of fujian enterprises

 

 

Overseas listing of mainly non-state-owned entities has become a highlight in the capital operation of Fujian's enterprises. At the end of 2002, 36 enterprises have been financed via listing overseas, primarily in Hong Kong. These enterprises have raised over HK$12 billion worth of funding, with 38% raised for Initial Public Offerings (IPOs) and 62% raised for refinancing.

 

Overseas listing, as a new form of foreign fund utilization, has promoted the development of Fujian's export-oriented economy, facilitated the improvement of corporate governance structure, and enhanced the global image of Fujian enterprises.

 

On the other hand, overseas listing posed new challenges to forex administration. The process of restructuring for listings may result in losses of domestic assets. Indirect listing forces the injection of domestic assets into the overseas to-be-listed parent firms. The overseas to-be-listed parent firms may, through merger and acquisition, obtain equities of domestic enterprises at low prices due to the inadequate laws and regulations on merger and acquisitions by foreign funds during the past years. The overseas listed companies then can spend the so-called "one yuan" price (meaning a nominal price far below the value of the net assets) in taking over assets of domestic private enterprises, since the market lacks asset assessing and evaluating regulations. In addition, listed companies, through their global operation, may transfer domestic yields or profits abroad by means of revenue allocation agreement at home and abroad. Listed companies may also make transfer pricing of trade and services among affiliated enterprises. Therefore, they can, to a certain extent, realize cross-border free dispatching of funds within the company, thus dampening the effectiveness of capital account management.

 

A couple of problems need to be solved in the aspect of exchange. First, private enterprises have difficulty in purchasing forex to pay for listing commissions due to the identity discrepancy in forex purchaser (domestic enterprises) and commission payer (listed oversea companies).

Second, through assets transfer, private enterprises become "foreign-funded enterprises" held by overseas listed companies, or overseas shareholders.  This method of raising funds domestically by two parties is subject to a regulation that stipulates that both long and medium-term external debts as well as short term foreign debts must not surpass gaps between total investment and registered capital.  This hinders the inflow of raised capital.

 

Third, differences in fiscal years also cause problems. Companies indirectly listed overseas mainly make their profits domestically. However, the fiscal year for overseas listed companies starts form June this year and ends in June next year, while that for domestic firms is based on the calendar year. When domestic enterprises remit the dividend of last fiscal year to their listed companies, they must get approval from the financial authorities, since part of this dividend is the first half-year dividend of this fiscal year (also known as "pre-distributed profits" according to regulations of the Ministry of Finance). As a result, banks often hound domestic enterprises as they may fail to provide necessary documents such as approval from the financial departments, half-year auditing reports, and any taxation certificates. In addition, the lack of forex instruments for risk prevention and investment in the country also constitutes a major cause for the large amount of funds maintained abroad by listed companies.

 

To promote the sound development of overseas listing, forex administration should pay equal attention to supervision and services.  Administrative departments should encourage and support private enterprise indirect overseas listings, take it into the forex registration and administration system for overseas investment, and adjust policies to facilitate listed companies' cross-border fund operations.  Such measures should be specifically targeted areas of fund inflows raised via listing, the remittance of commissions, exchange principles for profit distribution, and innovations in forex financial instruments.