In the paperwork Didi filed before its initial public offering, the Chinese ride-hailing platform warned investors that regulators in Beijing were being negligent.
After China’s internet regulator, antitrust watchdog and tax authority convened it and more than 30 other internet companies for a meeting in April, Didi said, the company inspected audited its operations and “discovered a number of areas that could be considered problematic from a compliance perspective. Although government officials have conducted spot checks, Didi said it cannot assure investors that it will avoid penalties.
Those warnings hardly hint at the sudden crackdown that cut short Didi’s upcoming party.
Shares of Didi lost a fifth of their value on Tuesday and fell again in early New York trading on Wednesday. The company was trading 16% below its IPO price compared to a week earlier.
This drop was created by a series of swift actions taken by government agencies in Beijing, where top policymakers announced this week that they would aim to increase surveillance. Chinese companies, like Didi, list their shares on exchanges abroad.
Just days after Didi’s IPO, China’s internet regulator asked the company to stop registering new users so it could conduct a cybersecurity review. Next, the agency requested that Didi’s app be removed from mobile stores because of concerns about data collection.
Then, on Wednesday, China’s antitrust regulator slapped Didi and other tech companies including Alibaba with modest fines for failing to report merger transactions to the agency in advance. (Didi flagged the possibility of such a penalty in its IPO disclosures.)
A representative for Didi declined to comment. The company said it was not aware of regulators’ plans for a cybersecurity review or a new download ban before it was made publicly available.
But Jason Hsu, chief investment officer of Rayliant, an asset manager that invests in Chinese stocks, said Chinese regulators often have discussions with companies about regulatory actions that they take. they are about to do.
“So one would assume that prior to the IPO, Didi knew about a possible formal investigation,” Mr. Hsu said.
The company’s listing was completed at breakneck speed. It filed preliminary paperwork on June 10. Two weeks later, it revealed a projected price for its shares. Its shares were trading less than a week later.
Failure to disclose prior awareness of market-changing regulatory decisions could leave Didi and the banks that arranged the initial public offering – Goldman Sachs, Morgan Stanley and JPMorgan Chase – vulnerable investor lawsuits and legal issues in the United States.
Representatives for the banks and the US Securities and Exchange Commission declined to comment. Didi, represented in the United States by Skadden, Arps, Slate, Meagher & Flom, was not immediately available for comment.
But data protection and cybersecurity are hardly the only fronts Chinese officials can turn around Didi. That means the company, its investors, and its underwriters could face even more unpleasant surprises.
Daily business summary
China’s antitrust authority has scrutinized the country’s internet industry with unprecedented vigor in recent months, accusing giant corporations of abusing their size and market power. . In April, it fined Alibaba $2.8 billion, whose shares are also listed in the United States, for blocking merchants on its marketplaces from selling on other online platforms.
At a more local level, Didi has been arguing for years with municipal authorities in China over permits and licenses to operate. The company admitted in its IPO filing that many of its drivers in China did not have the licenses they needed to provide ride-hailing services. For example, Beijing and Shanghai require taxi drivers to be local residents, but both cities make it very difficult for residents to register as local residents to control population growth.
And a large number of cars on its platform may not have the necessary vehicle licenses, Didi said in its IPO document. Cars used for online ride-hailing services in China must meet certain safety criteria in order to be granted such a license.
The announcement by China’s top policymakers this week that they will seek to tighten regulation on overseas-listed Chinese companies makes the very real possibility that regulators Other Chinese may decide to take action against Didi. A government policy document released on Tuesday said stronger capital market regulation should be combined with broader efforts to maintain national security and social stability, a sign shows that Beijing is now taking such issues seriously.
Wendy Ng, who studies Chinese competition law at the University of Melbourne, said China’s various government agencies often need to consult each other, even if they don’t necessarily coordinate fully. in investigating big companies like Didi, Wendy Ng, who studies Chinese competition law at the University of Melbourne. Sometimes, other agencies can push back if they believe the case is weak or their governing body is being compromised.
“But in this environment, where it seems that flooding, at least for the moment, has opened up to give regulators the green light to rein in digital platforms, there is it seems unlikely that other regulators could resist,” said Prof Ng.
For example, if China’s internet regulator determines that Didi failed to protect user data, it could lead to an investigation by the antitrust watchdog into whether the company has doing so to eliminate his competitors or not, Professor Ng said.
“This is exactly what antitrust regulators are talking about around the world: whether a breach of privacy can be evidence of an abuse of dominance,” she said.
The United States is trying to tighten its own rules for foreign companies listing on American exchanges. Washington lawmakers who have called for US regulators to have more power over Chinese companies are pointing to the Didi mess in support of their cause.
“Even as stocks rebound, US investors still have no insight into the company’s financial strength because the Chinese Communist Party blocks US regulators from reviewing the books.” , Senator Marco Rubio, Republican of Florida, said in a statement to The New York Times. “That puts the investments of American retirees at risk and pours into Beijing in dire need of US dollars.”
Mr. Rubio and Senator Bob Casey, a Democrat of Pennsylvania, introduced a bill in May that would prevent Chinese companies from listing shares in the United States if they are not subject to the full authority of the American regulator. supervise the auditors.
Matthew Goldstein contribution reports, and Albee Zhang Contributing research.