Didi Global stock (DIDI) is delisting from the US. Will others follow?

Posted: 8 December 2021 4:40 pm

Regulatory pressure from China and the US could lead other China-based companies to leave US markets. So what happens to your stock?

Five months after a successful IPO of the Chinese ride-sharing giant Didi Global, the company announced it will delist from the New York Stock Exchange (NYSE). Other US-listed Chinese companies saw their shares drop as much as 15% in a day following the news. But are other companies really likely to delist?

China regulations, not US rules

The main reason Didi delisted is that China’s Cybersecurity Review Office launched a probe into the company just two days after its IPO. The stated goal was to protect national security and the public interest by preventing valuable information from being collected by US authorities. What’s more, the Chinese regulator suspended new user registrations on the app in China, which had already amassed more than 500 million users.
The backdrop is that Chinese authorities seem uncomfortable with companies listing overseas and may apply pressure to keep them close to home. Didi will relist on the Hong Kong exchange.

The SEC’s role

The US Securities and Exchange Commission (SEC) will also soon require foreign companies listed in the US to fully open up their books for inspection. Companies that fail to comply will be delisted. Also, the SEC has paused listing new Chinese companies that use the variable interest entity, or VIE, structure.
These entities give investors a stake in an offshore shell company with a contractual relationship with the Chinese company, not the actual company. Most Chinese companies listed in the US use the VIE structure.
Opposed to all this are Chinese regulators. They cite concern with the data their companies collect and want to prevent it from falling into the US authorities’ hands, whether the company uses the VIE structure or not.

Other companies may follow

Caught in the crosshairs of US and Chinese regulators, other Chinese companies may fall under pressure to delist. Not all companies have the same risk of delisting, but investors fear that sizable stocks, including Alibaba (BABA), Pinduoduo (PDD), JD.com (JD) and Nio (NIO), may make the move. With 248 Chinese companies listed on US exchanges, the chances are some may be required to delist and some will decide to move. But for now, no one can tell which ones.
Does this mean investors should be quick to sell their Chinese stocks? Not necessarily. For the SEC’s rules to be triggered, a company would have to withhold accounting documents for three years. So a potential forced delisting process couldn’t begin until 2025. However, pressure from the Chinese side may force companies to delist sooner than that.

So what happens to investors holding these stocks?

Keep in mind, investors in these stocks don’t lose their holdings if the listing changes.
If a company delists from a US exchange, there are two likely scenarios:

  1. The broker will close your trade at the last market price, and you’ll get cash in return.
  2. You will receive shares of the stock but in another exchange. For example, those who own Didi stock will likely get the same number of shares on the Hong Kong stock exchange.

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