Alibaba IPO a caveat for regulators

After its initial public offering (IPO) on New York Stock Exchange, Alibaba is expected to become the third-biggest Internet company listed in the United States in terms of market value. Although Alibaba's IPO is expected to fetch between $154 billion to $169 billion and could turn out to be the largest of its kind in US history, many Chinese might be asking a question: Why did Alibaba founder Jack Ma seek to list on the NYSE rather than seeking A-shares on the Chinese mainland?

The soaring Alibaba [By Zhai Haijun/China.org.cn]

A lot of Chinese could also be asking: Why other Chinese Internet giants such as Tencent, Baidu and JD.com have chosen to list overseas despite making it big due to domestic customers? Have they been unfair to their clients, the domestic stock market and the national economy?

Yes and no. Since Alibaba is registered in the Cayman Islands as a foreign company, China's current stock market policies are not in favor of its listing on the country's bourse. To get listed in China, Alibaba has to redesign its preparatory plan to accommodate the auditing standards of the country - a very costly affair - apart from paying huge amounts in taxes. Plus, it will have to spend a considerable amount to transfer its overseas rights and interests to China to fulfill the numerous legal requirements to abolish and terminate previous agreements.

Like many Chinese Internet companies, Alibaba relies on a legal structure known as a variable interest entity (or VIE), which allows it to bypass the Chinese government's restrictions on foreign ownership of businesses in certain sectors, including information technology. So, it would have been very difficult - legally as well as financially - for Alibaba to "re-register" in China, which is mandatory for any company seeking listing on Shanghai or Shenzhen stock exchange.

Besides, to retain the decision-making powers in Alibaba, Ma and other top executives could look to only New York to launch the IPO. For the moment, Ma and his partners, who are authorized to nominate most of Alibaba's board members, own only 10 percent of the company's shares - 7 percent of which belongs to Ma. With the Hong Kong Stock Exchange refusing to allow a company with dual-class structure to be listed, Alibaba had no choice but to go to the NYSE. Also, the US stock market - because of its strict regulations, sound supervision and the system of class action - is more conducive to Alibaba's further growth.