"With the new rule, the listing process on overseas capital markets is filled with more uncertainties. It could seem that a mistake made anywhere along the way may lead to a failed offshore IPO," says Rocky Lee, a Beijing-based corporate partner at DLA Piper , one of the world's largest international law firms.

Rule No 10 also threw many international law firms, brokerages, and stock exchanges into great uncertainty when developing business in China.

Red chip controversy

The Chinese government launched the rule to restrict foreign investment to acquire domestic leading enterprises via hostile takeover on one side, and on the other side, to prevent massive tax income outflow out of the country.

Indeed, the red-chip listing model on offshore capital markets has created a series of problems in the past. Not to mention the millions of tax outflow, it also provides a channel for many corrupt officials to transfer the largely embezzled State-owned assets overseas.

There are also increasing lawsuits around the red-chip model. A well-known case is the Bodisen Biotech Inc case. The company is listed on the American Stock and Options Exchange and the London Stock Exchange (LSE).

Over 2,000 Chinese shareholders raised a protest against the Shaanxi-based Bodisen in its red chip listing model as the "restructuring" of the company into an SPV shell has caused the company's 2000 original shareholders to lose the right to trade their shares on stock exchanges.

The company was later accused by American investors, who alleged that Bodisen and certain of its officers, along with its brokerage New York Global Group, violated federal securities laws by failing to present its true financial condition and artificially inflating the price of the company's securities for their own personal gain.

After the true financial condition of the company was revealed, Bodisen shares plummeted. Its shares fell almost 70 percent from a high of US$10.84 on November 10, 2006, to an intra-day low of US$3.93 on November 16, 2006.

A direct overseas listing?

Since the red chip model raised controversy, an industry insider close to the LSE says that as an alternative, the bourse is considering allowing locally incorporated companies to directly list in London, copying the H-share listing model in Hong Kong.

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