China weighs unprecedented punishment for Didi after US IPO

(Bloomberg) — According to people familiar with the case, Chinese regulators are considering severe, perhaps unprecedented penalties for Didi Global Inc. after its controversial IPO last month.

Regulators view the driving giant’s decision to go public despite being pushed back by China’s Cyberspace administration as a challenge to Beijing’s authority, the people said, asking not to be named as the matter is private. Officials from the CAC, the Ministry of Public Security, the Ministry of State Security, the Ministry of Natural Resources, along with tax, transportation and antitrust regulators, began an on-site investigation at the company’s offices, the cyberspace watchdog said in a statement. a statement. .

Regulators are weighing a range of possible penalties, including a fine, suspension of certain operations or the introduction of a state investor, the people said. Also possible is a forced delisting or withdrawal of Didi’s US shares, although it is unclear how such an option would play out.

The deliberations are in a preparatory phase and the outcome is far from certain. Beijing is likely to impose tougher sanctions on Didi than on Alibaba Group Holding Ltd., which swallowed a record $2.8 billion fine after a months-long antitrust investigation and agreed to take steps to protect merchants and customers, the people said.

“It’s hard to guess what the penalty will be, but I’m sure it will be significant,” said Minxin Pei, a professor of government at Claremont McKenna College in California.

Didi shares fell 11% to $10.20 at the New York close. The IPO bid price was $14.

Didi, the CAC, the China Securities Regulatory Commission and the Ministry of Industry and Information Technology did not respond to requests for comment.

Didi’s initial public offering seemed a great success, raising $4.4 billion after several difficult years. It turned co-founder Cheng Wei into a billionaire and rewarded longtime backers SoftBank Group Corp., Tiger Global Management and Temasek Holdings Pte.

But the CAC arrived on the scene just days later, announcing a cybersecurity assessment over the company’s data practices, and subsequently banned the Didi app from the country’s app stores. The stock quickly fell below the bid price.

Chinese regulators largely supported the idea of ​​an IPO, but they expressed concern about Didi’s data security practices since at least April, the people said. In an example of concern, Didi had released statistics on taxi rides by government officials, one of the people said, although it’s not clear whether that particular issue has been raised with the company.

Regulators urged Didi to ensure the security of his data before going ahead with the IPO or moving the location to Hong Kong or mainland China, where risks of disclosure would be lower, the people said. Regulators have not explicitly banned the company from listing in the US, but they were sure Didi understood the official instructions, they said.

When asked why Didi didn’t act on suggestions from regulators, one person involved in the meetings referred to a proverb that you can’t wake someone who pretends to be asleep.

The CAC itself has come under scrutiny over Didi’s IPO, with a top party official questioning why the agency hadn’t blocked the company’s offer, one of the people said.

Some regulatory officials said privately that they think Didi may have rushed his IPO before China unveiled a new web security law, which could hurt its valuation, one of the people said. Just days after the offer, China proposed new rules that almost all companies seeking to list abroad would have to undergo a CAC cybersecurity assessment.

“Beijing wants the internet industry to understand that cybersecurity and data security are now one of the top government priorities, and that individual companies’ profits can be sacrificed when cybersecurity and data security are exposed to risk,” said Feng Chucheng, an analyst at consulting firm Plenum. in Beijing.

Xi Jinping’s government is trying to strike a delicate balance between curbing the power of China’s tech giants without seriously harming a critical sector that has supported economic growth. The crackdown started last year when Beijing Jack Ma’s Ant Group Co. forced to call off the largest IPO ever.

That was followed by antitrust investigations into giants from food delivery pioneer Meituan to Alibaba, also founded by Ma. Beijing has said it wants to prevent powerful tech companies from abusing their power and crushing innovative upstarts.

Didi began discussing IPO plans with his bankers at Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co. late last year, according to those directly involved. The company weighed in on whether to go public in Hong Kong or the US, aiming for a valuation of as much as $100 billion.

In March, they had annexed the United States because the listing rules were more responsive and the company expected better appreciation from investors familiar with its US counterpart, Uber Technologies Inc. The Hong Kong stock exchange also questioned Didi’s compliance with Chinese regulations. It was not licensed to operate in certain cities, and many of its drivers did not have household registration, or hukou, for the cities they lived in, part of the municipal requirements for providing on-demand ride-hailing services there.

The process was unusually chaotic in June as Didi and his bankers raced to the finish line, those involved said. As the company prepared to make its first public filing with the Securities & Exchange Commission, its own bankers weren’t sure when the documents would land. The application finally reached the morning of June 11 at 3:45 a.m. Chinese time.

Didi’s government relations team held discussions with the CAC and its regulators, and management relayed the contents of those discussions to its bankers, the people said. Didi knew the CAC was concerned about his data practices, but executives didn’t think the agency had banned them from going further, the people said.

Cheng, President Jean Liu, investors and their bankers faced the choice of being cautious or going ahead with an offer that would fill the company’s coffers and enrich them all. On June 28, they gave the green light.

Didi told his bankers it could go public on the condition that the company would keep a very low profile, one of the people said, adding that the company’s bookrunners were told there would be no press release announcing the IPO. to announce. Didi didn’t even reveal to his own employees until the last minute that the New York IPO was a milestone for the still young company. By midnight on June 30, the company posted an announcement on an internal forum, another person said.

On Thursday, July 1, Didi’s shares were up about 16%, indicating strong investor demand. On Friday, Didi’s management began to relax and celebrate.

That evening, after 7 p.m. Chinese time, the CAC posted a notice on its website: The agency would launch an investigation into Didi to ensure national security and protect the public interest.

Later that evening, Didi issued a public statement stating that it would cooperate fully with the government’s assessment.

(Updates with Didi shares in the sixth paragraph)

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