DiDi raised $4.4bn, with a valuation of $68bn, in its New York IPO in June this year. Chinese regulators opposed the foreign exchange listing, saying it could expose DiDi’s data. Beijing immediately launched a cybersecurity review on the company following its IPO.
The Cyberspace Administration of China is responsible for data security in the country. In 2021 they said they were investigating the firm to protect “national security and the public interest”. Within days, China’s internet regulators pulled down DiDi’s app, claiming it illegally collected user’s personal data.
Pressure from the U.S.
Pressure from the U.S. side is also present. The US Securities and Exchange Commission (SEC) finalized rules for the US Holding Foreign Companies Accountable Act on the 2nd of December.
The Act will force foreign companies to delist from US exchanges if they fail to turn over audit results for three straight years. It also requires companies to declare whether they are owned or controlled by any foreign government.
DiDi’s reply to the situation is to delist from the New York Stock Exchange (NYSE) and relist in the Hong Kong Exchange (HKEX). The company took to Weibo, China’s Twitter-like microblogging site, stating that “the company will immediately start delisting on the New York stock exchange”. And, that they will “start preparations for listing in Hong Kong”.
“This is the only way that Didi can survive, and this is maybe a good thing for the investors in the U.S. market. There are other issues related to Didi in addition to the data security.
Didi also embedded financial services on their platform. They withheld the payment to the drivers, charged higher fees for drivers, made loans with high interest rates etc.” states Shanghai Jiaotong university finance professor Nan Li.
“Chinese American Depositary Receipts (ADR) face increasing regulatory challenges from both U.S. and Chinese authorities. For most companies, it will be like walking on eggshells trying to please both sides. Delisting will only make things simpler,” said Wang Qi, chief executive of fund manager MegaTrust Investment (HK).
Progress on the Delisting Process
Didi aims to complete the HKEX listing as soon as in the next three months, and delist from NYSE by June 2022.
The delisting process is not simple. There are requirements set by the U.S. Securities and Exchange Commission (SEC). Didi will need to carry on filing disclosures even after it has delisted from NYSE. That is, as long as it has 300 U.S. shareholders.
A foreign company could also de-register with the SEC if its U.S. average daily trading volume is 5%. Or alternatively, less than the worldwide daily volume. However, Didi will need a further 6 month to pass to qualify for this route.
The Effects of the Delisting Announcement
DiDi Global Inc. shares have lost almost 60% of their value by December since their IPO. The largest stakeholders, Softbank (21.5%), Uber (12.8%), and Tencent (6.8%) have their prices tumbling along as well.
DiDi said that its American Depository Shares (ADS) will be “convertible into freely tradable shares of the company on another internationally recognized stock exchange at the election of ADS holders”.
This would allow investors to swap the depositary receipts for Hong Kong-listed shares. This, however, is only if they are able to complete the secondary listing in Hong Kong before the NYSE delist.
Relisting in Hong Kong would be challenging, particularly in a three-month timeframe. Given Didi’s history of compliance problems with unlicensed vehicles and part-time drivers, this challenge is even more pronounced.
Only 20%-30% of DiDi’s core ride-hailing business in China is fully compliant with regulations, which requires three permits including ride-hailing services provision, vehicle licensing, and drivers’ licences.
“I don’t think Didi qualifies to be listed anywhere before it … sets up effective protocols to manage and ensure the drivers’ responsibility and benefits,” said Nan Li, Associate Professor of Finance at Shanghai Jiao Tong University.
Effects on Other NYSE Listed Chinese Companies
DiDi’s delist in the US has induced worries of a deeper economic decoupling between China and the US. The increasing regulatory pressures from both countries could force more Chinese ADRs to delist from the US.
Around US$1.5 trillion of the market value of Chinese ADRs and tech companies have evaporated since a peak in mid-February. This is equivalent to 10% of China’s 2020 GDP.
Out of the 253 Chinese firms listed on the NYSE, only 27 of them (10.7%) satisfy market capitalisation and revenue requirements for a secondary listing in the HKEX. Despite the fact that, Hong Kong loosened such rules in 2018.