This article first appeared in The Edge Malaysia Weekly on August 2, 2021 - August 8, 2021
China’s recent crackdown on its tutoring industry has shone a spotlight on the variable interest entity (VIE) structure, which is not legally recognised in the nation. It involves a complex set of financial agreements that enable global investors to overcome the foreign ownership issue in some industries. Big corporations such as Alibaba Group Holding, JD.com and Didi Global have used VIEs for their overseas listings as well.
Investors who hold a stake in a VIE may not necessarily have voting rights, with their interest instead based on contractual arrangements. For example, through the VIE structure, an investor can have an interest in businesses that have restrictions on foreign investments.
Getting rid of the VIE structure is not a bad thing as it makes the shareholding transparent and legitimises the structure.
It also helps alleviate corporate governance concern and protects investors’ interests.
Perhaps we should consider practising the same in Malaysia. On the local bourse, names like Japan-based Mitsubishi UFJ Financial Group and Switzerland-based Credit Suisse Group AG always appear on the shareholding list, but there is no clue as to whether they are the ultimate shareholders or purely holding the shares on behalf of their clients.
As a result, there is no clear picture of the shareholding structure, which is important information for investors to make informed decisions. You will never know who are the substantial shareholders in a company.
Things get worse when these nominee accounts are used by certain parties to manipulate the stocks and undertake pump-and-dump schemes. The same group of people may use the loophole to push up or sell down the shares.
As their identity is not revealed, the regulators may not able to take prompt action to clamp down on these trading activities.
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