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China on Tuesday suspended Ant Group’s listing for $ 37 billion (roughly Rs. 2.77 billion rupees), thwarting the world’s largest stock market debut with just a few days to go, in a dramatic blow. for the fintech firm founded by billionaire Jack Ma.
The Shanghai Stock Exchange said it had suspended the company’s initial public offering (IPO) in its technology-focused STAR market, prompting Ant to also freeze the Hong Kong leg of its double listing scheduled for Thursday. .
This followed a meeting with China’s financial regulators on Monday during which Ma and his top executives were told Ant’s lucrative online loan business would face stricter scrutiny, sources told Reuters.
The Shanghai Stock Exchange described Ant’s meeting with financial regulators as a “major event” which, coupled with a stricter regulatory environment, may cause Ant to be disqualified from listing.
In China, analysts interpreted the move as a slap in the face for Ma, who wanted Ant to be treated as a technology company rather than a highly regulated financial institution.
“The Communist Party has shown the tycoons who’s boss. Jack Ma might be the richest man in the world, but that means nothing. This has gone from the deal of the century to the impact of the century,” Francis Lun CEO of GEO Securities said.
To reactivate its listing, Ant is trying to establish whether it needs to disclose more information to the Shanghai exchange about its relationship with regulators, or whether the exchange expects it to solve all its problems with regulators, which would take much longer, one person. with knowledge of the said matter.
At an event last month attended by Chinese regulators, Ma said the financial and regulatory system stifled innovation and must reform to boost growth. He also compared the Basel Committee of Global Banking Regulators to “a club for the elderly.”
Ant believes the public criticism put Ma in the crosshairs of regulators, the person said.
The suspension had an impact on all markets. Alibaba Group Holding, which owns about a third of Ant, fell 9 percent in early US operations, wiping out nearly $ 76 billion (roughly Rs. 5.69,122 crore) from its value, more than double that the amount Ant planned to raise.
“This is a curve ball that has been thrown at us … I don’t know what to say,” said a banker who works at the IPO.
Sharper scrutiny
With its unique business model and the absence of rivals in China or elsewhere, analysts say Ant has primarily thrived as a technology platform away from banking sector regulations, despite its variety of financial products.
But Beijing has been uncomfortable with banks increasingly using microlenders or third-party technology platforms like Ant to underwrite loans amid fears of rising defaults and deteriorating asset quality in an economy hit by a shock. pandemic.
Reuters reported last month that regulators had examined banks that were overusing Ant’s technology platform to underwrite consumer loans as part of a push to curb risks in the country’s financial sector.
Tighter regulatory focus on Ant’s revenue stream and rapidly growing consumer loan business had become a key concern for investors in the IPO, despite the company’s appeal as a fintech player.
Ant originates demand from retail consumers and small businesses and passes it on to about 100 banks for underwriting, earning commissions from lenders with minimal risk to its own balance sheet.
Ant’s consumer loan balance was CNY 1.7 trillion (approximately Rs 18.93.364 crore) at the end of June, or 21 percent of all short-term consumer loans issued by Chinese financial institutions that They accept deposits. Only 2 percent of the loans it had facilitated were on its balance sheet, its IPO prospect showed.
“It is the right move to regulate what is essentially a financial institution like its peers. And it is wrong not to do that in the past, and the mistake is being corrected. It will have a negative impact on prices,” said Zhong Daqi, founding partner. Guangzhou Zeyuan Investment.
Under the draft rules released Monday by China’s central bank and banking regulator, small online lenders must provide at least 30 percent of any loan they jointly finance with banks.
A Hong Kong banker close to other Chinese fintech firms said those firms thought the new rules were tailor-made for Ant. The banker said Ant might have to divide its businesses and make separate payments, microloans and wealth management units. .
Sorry for the inconvenience
Ant was scheduled to go public in Hong Kong and Shanghai on Thursday after raising around $ 37 billion (roughly Rs. 2.77 billion rupees), including the so-called national stage greenshoe option, in a record IPO that had attracted leading global investment. firms.
It was also a sensational draw for family investors in China and Hong Kong who bid a record $ 3 trillion (roughly Rs. 2.24.61 billion rupees), equivalent to Britain’s annual economic output, while for Hong Kong Leg retail investors borrowed heavily from banks to buy shares.
An official at a Chinese state-backed investment firm, which is also an existing investor in Ant, wondered whether it would be “politically correct” to make new investments in the company given its regulatory clash.
Starting as a payment processor in 2004, Ant quickly built an empire by offering users short-term loans credited in minutes, as well as selling insurance and investment products.
China’s state-backed Economic Daily said in a comment that the suspension of the IPO showed the determination of regulators to protect investors’ interests and that the most pressing matter was for Ant to carry out “rectifications.” .
“Ant may be falling victim to his own size and success,” said Alex Sirakov, a senior associate at the consulting firm Kapronasia.
Ant apologized to investors for any inconvenience, adding that it would give more details on the suspension of its Hong Kong listing and redemption requests as soon as possible.
“We will properly handle follow-up matters in accordance with the applicable regulations of the two stock exchanges.”
Alibaba said it would support Ant to adapt and adopt the evolving regulatory framework.
CICC and China Securities, co-sponsors of Ant’s OPI STAR, did not immediately respond to requests for comment.
US banks JPMorgan and Citigroup declined to comment, while Morgan Stanley did not immediately respond to a request for comment. The three western banks are co-sponsors of the Ant IPO in Hong Kong together with the CICC.
© Thomson Reuters 2020
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