Alibaba IPO demonstrates need for listing reform

Domestic investors lose opportunity to share in e-commerce giant's profits

A year of hype surrounding what's likely to become the biggest IPO in history will end later this week when e-commerce giant Alibaba formally lists on the New York Stock Exchange. The IPO will give most global investors access to Alibaba's shares and a chance to profit from one of the world's largest and fastest-growing e-commerce markets.

But one group that will be largely barred from buying the company's shares are investors from Alibaba's home market, since most Chinese lack access to shares traded offshore. Alibaba's decision to list overseas is typical among private tech firms on the Chinese mainland, many of which find it easier to go public overseas due to a local listing system that favors large, State-run firms.

The mainland's securities regulator needs to take steps to change the situation and create a listing system that welcomes companies like Alibaba to make IPOs at home. Failure to do so will lead to a continuing exodus of some of the country's most promising private firms, creating a lost opportunity for local investors to buy into these homegrown business leaders.

Alibaba has been in the headlines for much of this year in the run-up to its IPO. Media attention has only grown since the company launched its investor roadshow last week. In its latest public filing just before then, the company said it could raise up to $24.3 billion from its offering if its shares price at the top of their range and all overallotment options are exercised.

If it reaches that size or comes in slightly lower, it would be the largest IPO of all time, eclipsing the current record held by Agricultural Bank of China, which raised $22.1 billion when it listed in Hong Kong and Shanghai in 2010. The listing would also eclipse the current record holder for a tech IPO, social networking giant Facebook, which raised $16 billion when it listed in 2012.

The latest reports indicate that Alibaba could quite possibly make it into the record books, as its roadshow has met a strong reception so far. According to the reports, interest has been so favorable that the company may end its roadshow a day earlier than planned, with the stock's trading debut set for Friday.

So, why has Alibaba chosen New York over a listing closer to home, where its various brands, including the Tmall and Taobao shopping platforms and the Alipay electronic payment service, are highly respected? The company initially pursued a listing in Hong Kong, but opted for New York after failing to get an exemption that would have allowed it to use an unusual partnership structure.

But it never seriously considered either of the mainland's stock markets in Shanghai or Shenzhen. It was barred from considering such a listing for technical reasons, since it is formally incorporated outside of the mainland - a common practice among venture-backed tech firms that allows them to list overseas. Such overseas incorporation has not only barred Internet giants like Tencent and Baidu from listing on the mainland, but has also locked out other major names like China Mobile and Lenovo, which are also technically incorporated outside the mainland for historical reasons.

Realizing it was losing some of the nation's best companies to overseas listings, local securities regulators began discussing plans more than five years ago for an international board in Shanghai where overseas-based firms could list and make their shares available to local investors. But that plan has repeatedly been put on hold due to anemic performance of the domestic stock markets, which also resulted in a freeze on new IPOs last year and for most of the first half of 2014.

The mainland's securities regulator has many issues on its plate right now, including combating insider trading and making companies report more honestly and transparently. But the regulator also needs to make room on its agenda for reforms that could finally allow companies like Alibaba, Baidu, China Mobile and Lenovo to list at home.

It could do that by either reviving plans for the international board, or by modifying its rules to allow listings on its main boards by companies that do the majority of their business on the mainland, regardless of where they are officially incorporated. Failure to act soon could mean that more privately run corporate leaders will follow in the footsteps of Alibaba, depriving Chinese of the opportunity to invest in some of the nation's most promising and well-run companies.