Didi Delisting What It Means

Amid continued diplomatic tensions with China, lawmakers in Washington have moved to target Chinese companies listed in the U.S. Under a new law passed last year, foreign companies could be kicked off American stock exchanges if their auditors do not comply with requests for information from U.S. regulators. The Holding Foreign Companies Accountable Act was passed last year after Chinese authorities repeatedly turned down requests from U.S. regulators to inspect the audits of Chinese firms that list and trade in the United States. China has pushed back against such requests and argued that giving U.S. regulators access to such audits could pose a national security risk to China. In August, the Wall Street Journal reported that Beijing was itself working on new regulations that would ban several Chinese companies that handle sensitive user data from listing abroad. Didi's delisting comes at the behest of Chinese regulators, who had long expressed concern that going public in the U.S. could risk exposing its vast troves of data to foreign powers.

Despite regulatory unease, the firm pushed ahead with its IPO in June, a move that Beijing regarded as a challenge to its authority, Bloomberg News has reported. The government reacted swiftly, announcing a cybersecurity probe into the firm days after its debut and taking its services off domestic app stores. Since then, authorities have weighed unprecedented penalties for the company, including a forced delisting.

People with knowledge of the matter said last week that Beijing has directed management to come up with a plan to withdraw from the NYSE. Didi's move could mark the first in a wave of Chinese delistings from the U.S. Securities and Exchange Commission on Thursday announced its final plan for putting in place a new law that mandates foreign companies open their books to U.S. scrutiny or risk being kicked off the NYSE and Nasdaq within three years. Chinese regulators opposed the U.S. listing, saying it could expose Didi's vast troves of data to foreign powers. The firm pressed ahead with the June IPO anyway, in a move that Beijing saw as a challenge to its authority. Days after the listing, the government announced a cybersecurity probe into the firm and forced its services off domestic app stores.

Instead of a simple privatization from New York, Didi is opting to seek a listing on the Hong Kong Stock Exchange first. The move will ensure that its American depositary shares will be "convertible into freely tradable shares of the Company on another internationally recognized stock exchange," according to its statement. The firm is planning to file for the Hong Kong listing around March, people with knowledge of the matter told Bloomberg News on Friday, asking not to be identified as the plans haven't been made public.

The entire process could take three to six months to complete, First Shanghai Securities analyst Linus Yip said. China's growing regulatory reach should also raise alarms for global investors. Until now no Chinese enforcement body has sought to control Chinese listings in foreign markets. But new rules give the CAC authority to vet most overseas Chinese tech IPOs.

Yet Chinese media have reported that regulators are planning to revamp rules on VIEs, indicating tighter control over foreign listings. Many have held out hope for an eventual agreement between American and Chinese regulators that would revive a once-booming cross-border listing business. Not long ago American exchanges were the leading destination for the IPOs of Chinese tech groups such as e-commerce giant Alibaba and online services group NetEase.

Didi has not commented on why it plans to leave the New York Stock Exchange for Hong Kong but the group has been under intense regulatory pressure from the Chinese government since its IPO, ostensibly over data-security concerns. Several news agencies have reported that the Cyberspace Administration of China , an increasingly powerful regulatory body, has pushed the company to delist. Since ordinary Americans "would not connect lower returns on their pension funds to delisting of Chinese firms, US politicians are unlikely to face a backlash. And that fact could make delistings more likely." However, the Public Company Accounting Oversight Board has proposed a framework for implementing a new law - the Holding Foreign Companies Accountable Act - passed in December.

Companies that fail to comply with American auditing standards for three years in a row can be delisted from US exchanges. Beijing currently does not allow the PCAOB to examine the audits of Chinese firms whose shares trade in America, citing national security concerns. The consequences of delisting can be significant since stock shares not traded on one of the major stock exchanges are more difficult for investors to research and harder to purchase. This means the company is unable to issue new shares to the market to establish new financial initiatives. EW BLOCKBUSTER public share sales have been as tortured as Didi Global's.

The firm's share price remained above its initial public offering price for just three trading days and has since fallen by more than 40%. Now the company, which was once valued at $70bn and backed by Japanese investment firm SoftBank, says it will delist from American exchanges altogether and relist in Hong Kong. The ride-hailing giant's board has authorized the company to file for a delisting of its American depositary shares from the New York Stock Exchange, it said in a statement Thursday. It will pursue a listing in Hong Kong and ensure that the U.S. stock will be convertible into freely tradable shares on another internationally recognized stock exchange. Didi said it aims to list on the Hong Kong Stock Exchange and ensure that its American depositary shares can be swapped for "freely tradable shares of the Company on another internationally recognized stock exchange," according to a statement. The firm is planning to file for the Hong Kong listing around March, people with knowledge of the matter told Bloomberg News.

The entire process could take three to six months, First Shanghai Securities analyst Linus Yip said. The US Securities and Exchange Commission has been calling on Chinese firms listed in the US to be more transparent with their books. Yesterday, the SEC said that Chinese companies need to reveal whether they are owned or controlled by a Chinese government entity, which could hastenthe "decoupling" of Chinese stocks and the US markets. China has not given the SEC access to local audits of firms listed in the US due to national security concerns, which has long been seen as a major risk to US investor interests. Didi debuted on the New York Stock Exchange in June this year after raising around $4.4 billion from its IPO.

At the time of its listing, the company was valued at $68 billion—a number that briefly shot up even higher. But the company's stock began to tumble in July after regulators in China opened an investigation into the company's cybersecurity practices. The Cyberspace Administration of China ordered mobile app stores in the country to remove 25 apps operated by Didi and barred the company from signing up new customers. Authorities in Beijing were reportedly angered by the fact that Didi pressed forward with its U.S. IPO despite being asked to put in on hold while a review of its data security practices was being conducted. While the investigation into Didi is still ongoing, Reuters reports that the company is expecting it to be wrapped up by the end of the year and is preparing to relaunch its apps in the country.

Didi didn't give any rationale for the delisting, which it said has received support from its board and would later require a shareholder vote. The company ran into trouble with Beijing almost immediately after its $4.4 billion initial public offering. The IPO blindsided Chinese regulators, who launched a data-security review, pulled Didi products from Chinese app stores and began a broader overhaul of the framework for international listings by Chinese companies.

Chinese ride-sharing giant DiDi has been caught in Chinese regulators' crosshairs since it launched its starcrossed $4.4 billion U.S. DiDi finally announced last Friday its plans to delist from the New York Stock Exchange and relist in Hong Kong. The company's departure from the U.S. could make it the test case in a transition to a tougher data security oversight regime that could shape how Chinese tech giants conduct their businesses in the future. The American government, which sees China as the greatest economic, political and military rival, has been putting pressure of its own on Chinese ties.

It has forced some state-controlled Chinese companies in delist their U.S. shares. Securities and Exchange Commission adopted rules that would require reluctant Chinese companies listed in the United States to further open their books to American accounting firms or get kicked off its stock exchanges. They can sell earlier if they wish to; Didi shares ended down 22.1% on Friday as many investors chose to cash out.

On December 3rd, DiDi, the world's largest ride-hailing app, announced it would delist from New York Stock Exchange and move its listing to Hong Kong, heeding the calls from the Chinese authorities. DiDi, with its 600 million users , is by far the world's largest ride-hailing app and calls itself 'the world's largest depository data. As such, it has been subject to several onerous investigations in China since its initial public stock offering , which had put the company under the purview of US financial authorities. Inevitably, such jurisdictional overlap is sensitive for Chinese security agencies, who deem any access to DiDi's location data a matter of national security.

Similarly, most US hedge funds, mutual funds, and rich individuals will still be able to invest in Chinese firms listed in Hong Kong, and even – albeit less conveniently and straightforwardly – those listed in mainland China. True, delisting profitable and fast-growing Chinese companies may reduce returns for many middle-class US households whose pension funds are restricted to investing only in US-listed securities, and US stock exchanges will lose business. As ordinary Americans would not connect lower returns on their pension funds to delisting of Chinese firms, US politicians are unlikely to face a backlash. A local retail investor is warning about the risks of buying shares in Chinese companies listed on US stock exchanges following the delisting of a major firm. Stocks are also delisted when a company decides to return to being a private rather than publicly held company.

What is unusual is for a company, such as Didi, to delist from one exchange and relist on another . It is more common for a company to list its shares on multiple stock exchanges around the world, making its stock available for trading in both New York and Hong Kong, for example. Simultaneously, Beijing has been pushing Chinese companies to list domestically. The company announced the decision yesterday (Dec. 2), and said it will ensure its American depositary shares can be converted into "freely tradable shares" on another international stock exchange. It also said it has started pursuing a listing on the Hong Kong Stock Exchange. The firm didn't give a reason for the delisting, or a time frame for the Hong Kong listing.

Investors should consider Didi's exit a death knell for Chinese IPOs in America. Those listings have already been threatened by American regulations that require all listed companies to provide access to internal auditing documents or face eventual delisting. Chinese officials have refused to allow access, often deeming this material "state secrets". Regulators said in July they would step up scrutiny of tech companies with shares traded abroad and their information security and cross-border data flows. Didi's share price fell 25% after regulators launched an investigation into its handling of customer data following its June 30 stock market debut.

The penalties imposed on Didi – widely interpreted as a warning to other Chinese companies against listing in the US without government approval – partly reflect three concerns among Chinese policymakers. The authorities are worried that sensitive digital data, including the location of important addresses in China, may fall into the hands of the US intelligence or defense communities. They also do not want Chinese technology firms to become too large and powerful, and fear that Big Tech companies' forays into financial markets may undermine financial stability. Often, involuntary delistings are indicative of a company's poor financial health or poor corporate governance. For example, in April 2016, five months after receiving a notice from the NYSE, the clothing retailer Aéropostale Inc. was delisted for noncompliance. In May 2016, the company filed for bankruptcy and began trading over-the-counter.

In the United States, delisted securities may be traded over-the-counter except when they are delisted to become a private company or because of liquidation. When a delisting occurs, it typically results in shareholders losing all of their investment in a particular stock unless they sell their shares before the delisting occurs. However, if a company is delisted and investors do not tender their shares, some stocks can be traded on the over-the-counter market.

Didi is aiming for a Hong Kong listing as soon as the first quarter of 2022, people familiar with the matter said. In doing so, it would join a series of U.S.-traded Chinese companies, including Alibaba, that have obtained so-called homecoming listings since late 2019. This, however, puts the Hong Kong stock exchange and securities regulator in a bind, as Didi currently doesn't meet the city's listing requirements.

Officials at China's Securities Regulatory Commission have resisted the U.S. Securities and Exchange Commission's information disclosure requirements, which could reveal potentially sensitive market information. Didi went ahead with the listing and within a week, the Cyberspace Administration of China, China's top internet regulator, ordered the main Didi app to be taken down pending a cybersecurity review. Days later, the CAC ordered the removal from app stores of an additional 25 apps owned by Didi Global Inc.

But regulators also have gone after ride-hailing firms, video game makers for-school operators, online delivery apps, Macau casinos and online brokers. On Dec. 14, Beijing levied fines vs. social media firm Weibo for publishing illegal content. China has signaled that it'll take a dim view of new overseas listings, especially for internet and data-centric companies. Many big U.S.-listed Chinese companies already have secondary listings in Hong Kong.

But after seeing so many Chinese companies choosing New York, the Hong Kong Stock Exchange decided to allow US-style multiple share classes for technology and life-sciences firms. More Chinese firms have since listed in Hong Kong, or have a dual listing there and in New York. Tencent, China's biggest social-media company, was first traded in Hong Kong before adding a secondary listing in New York, and currently commands a higher price-to-earnings multiple than Facebook, its closest US counterpart. The stock market consists of exchanges or OTC markets in which shares and other financial securities of publicly held companies are issued and traded. The delisting of a security can be voluntary or involuntary and usually results when a company ceases operations, declares bankruptcy, merges, does not meet listing requirements, or seeks to become private.

Washington has also been tightening standards for Chinese companies wishing to list in the U.S. Securities and Exchange Commission adopted rules that would require Chinese companies listed in the United States to open their books to American accounting firms or risk being kicked off its stock exchanges. Since 2019, more than a dozen Chinese companies – including tech giants like Alibaba Group Holdings – have begun to explore listings outside the U.S. Beijing, for its part, has grumbled aloud about Chinese companies giving the U.S. regulatory authorities unfettered access to their books, saying that's a threat to the mainland's national security. The Didi delisting comes as U.S. regulators move to tighten the rules around foreign companies planning to list stocks on American exchanges.

There are over 150 Chinese firms traded in the US market, including internet behemoths such as Alibaba, Baidu, JD.com and Pinduoduo, which also hold large amounts of user information. These firms require a deep understanding of the country's cybersecurity and data security laws and regulations, averting possible securities risks, Dong said. In its Dec 3 announcement, Didi said its US shares would be "convertible into freely tradable shares of the company on another internationally recognized stock exchange" after a shareholder vote sometime in the future, without providing details. There has been a rising tide of delistings among Chinese companies traded in the US amid growing bilateral tensions and toughening regulatory scrutiny from both sides. For most companies to delist from major exchanges, privatization would be offered by controlling shareholders to buy back shares from investors at a premium. According to market rules, the company can submit a voluntary delisting application to the New York exchange as soon as Dec 13 and withdraw its shares from the market 10 days later.

"After conscientious research, the company will start delisting operations on the New York Stock Exchange immediately and commence preparations to list in Hong Kong," Didi said on its social media account. A separate statement said U.S. shares would be converted into "freely tradable shares" on another "internationally recognized" exchange. Sources told Reuters last month that Chinese regulators had pressed Didi's top executives to devise a plan to delist from the NYSE due to concerns about data security.

The delisting is in line with an executive order signed by Trump after losing his bid for reelection. It bans Americans from investing in Chinese companies owned or controlled by the Chinese military and security services. To avoid being delisted, some companies will undergo a reverse split of their stock shares. This has the effect of combining several shares into one and multiplying the share price. For example, if a company executes a 1 for 10 reverse split, it could raise their share price from 50 cents per share to five dollars per share, in which case it would no longer be at risk of delisting. Some companies choose to become privately traded when they identify, through a cost-benefit analysis, that the costs of being publicly listed exceed the benefits.

Requests to delist often occur when companies are purchased by private equity firms and will be reorganized by new shareholders. Also, when listed companies merge and trade as a new entity, the formerly separate companies voluntarily request delisting. Companies must meet specific guidelines, called "listing standards," before they can be listed on an exchange.

Each exchange, such as the New York Stock Exchange , establishes its own set of rules and regulations for listings. Companies that fail to meet the minimum standards set by an exchange will be involuntarily delisted. For example, a company with a share price under $1 per share for a period of months may find itself at risk of being delisted. Sources told Reuters last month that Chinese regulators had pressed Didi's top executives to devise a plan to delist from the New York Stock Exchange due to concerns about data security. The company didn't say, for example, how precisely it planned to delist its shares from New York. One way might be to secure a listing elsewhere – which may be why the company said it plans to list in Hong Kong.