The unexpected halt of Ant Group Co. Ltd.'s dual listing in Shanghai and Hong Kong two days ahead of its scheduled debut highlights the fast-changing nature of China's regulatory environment for the financial technology sector and may lead some other fintech companies to rethink, or even pause, their IPO plans, experts say.

The suspension, which Shanghai Stock Exchange said was due to regulatory and disclosure concerns, came hours after China's central bank and banking regulator issued new draft rules on online microlending, one of the main businesses of the Alibaba Group Holding Ltd. affiliate. The proposals include more restrictions on capital, licensing requirements, funding sources and business scope, which analysts say will likely reduce the earning prospects of Ant’s consumer finance business that contributed about 40% of revenue for the six months ended June 30.

The abrupt stop of the listing also followed a Nov. 2 meeting between Ant’s senior executives including controlling shareholder Jack Ma, and China’s central bank and various top financial regulators, according to a Bloomberg report. The executives were told that Ant, which runs the country's largest mobile payments platform Alipay, will face heightened scrutiny, including restrictions on capital and leverage similar to banks, the report said, citing unnamed sources.

"Fintech is a constantly evolving paradigm, and it's not just a China problem," said Dickson Ng, a partner of Hong Kong corporate practice at law firm Eversheds Sutherland. "Companies may reassess their options or delay their listing plans to let the regulations on fintech play out first."

Ant's dual-IPO in Hong Kong and Shanghai, which closed Oct. 28, raised at least $34.4 billion. The offering eclipses Saudi Arabian Oil Co.'s IPO proceeds of $29.4 billion in 2019, according to S&P Global Market Intelligence data, making it the biggest initial share sale on record if the listing process is completed.

Still many unknowns

"Investors in microfinance companies must be aware that regulators in China will put de-risking the financial system ahead of all other priorities. That could result in abrupt changes in regulation and oversight. I believe the risk is limited to applicants engaged in microfinance," said Michael Norris, research and strategy manager at AgencyChina, an e-commerce and marketing consultancy.

It's not known whether and when the listing will happen. But Ant said in a filing to the Hong Kong Stock Exchange Nov. 4 that investors who applied for the Hong Kong IPO portion will be refunded by Nov. 6, as the "listing will not proceed in accordance with the timetable set out in the Prospectus."

"I wouldn't be surprised [if the listing] takes a little bit longer. It's impossible to know exactly what the regulators are thinking and how long it would take to clear up any discrepancies between Ant’s vision and the regulator and government’s vision," said Zennon Kapron, director of Singapore-based consultancy KapronAsia.

A representative of Ant Group wasn't immediately available to comment.

Tighter rules

The latest draft rules on online microlenders, if implemented, will change how Ant conducts its consumer finance business in China.

For example, the draft rules say at least 30% of the loans extended by online microlenders must be funded by themselves. They must also operate only in the province where they secure their license, or they will need to apply for a multi-provincial license to operate nationally and set aside at least 5 billion yuan as registered capital. All licenses need to be renewed every three years.

Ant matches potential borrowers with about 100 banks and trust companies through its popular lending apps Huabei and Jiebei on its mobile payments platform Alipay, according to Ant Group's IPO prospectus updated on Oct. 21. As of end-June, about 98% of its credit balance was underwritten by partner institutions, or securitized. Partner banks include its 30%-owned virtual bank Zhejiang E-Commerce Bank Co. Ltd., commonly known as MYBank. "Our approach is not to use our own balance sheet or provide guarantees," according to the prospectus.

"The Chinese banking regulators have been clear that banks must retain control over its own risk and compliance decisions. In Ant's lending model, such decisions have been made by Ant Group on behalf of the commercial banks," said Shirley Ze Yu, a political economist and a fellow at Harvard Kennedy School's Ash Center. "This represents a major financial risk."

Changing prospects

Norris said the new rules "will change [Ant's] risk profile, and the forward looking profit profile of [Ant’s] credit tech business."

Ant conducts its microlending business through various subsidiaries including Chongqing Ant Shangcheng Micro Loan Co. Ltd. and Chongqing Ant Small and Micro Loan Co. Ltd. According to the prospectus, Ant Shangcheng was established in 2011 with a registered capital of 4 billion yuan, while Ant Small was set up in 2013 with a registered capital of 12 billion yuan. The prospectus did not say from which province these subsidiaries secured their licenses.

"I think the PBOC is seeing Ant as any other financial institution for the right reasons, because of its size. Obviously, from the PBOC's standpoint, it has to make sure that Ant complies with all the regulations including the minimum capital requirement so that it would not pose systemic risk to the financial system," said Wong Kok Hoi, founder and chief investment officer of APS Asset Management.

Ma's 8.8% stake in Ant was worth $27.4 billion, based on the IPO pricing. That would lift his fortune to $71.1 billion, Bloomberg News reported. His net worth was slashed $2.84 billion overnight, according to the Bloomberg Billionaire Index, when Alibaba's U.S.-listed shares plunged by a record 8.1% on Nov. 3.

Ant's smaller rival JD Digits, formerly known as JD Finance, a financial service arm of Chinese e-commerce platform JD.com Inc., filed IPO papers on the Star Market in Shanghai Sept. 11, aiming to raise 20 billion Chinese yuan, according to Reuters and JD.com’s release. The IPO is still pending for approval by the exchange.

"While capital enthusiasm is clear, this compliance storm might affect more than Ant, but JD Digits' IPO as well," Harvard's Yu said. "It is natural that no regulators of any country are prepared for a fintech company that is today valued at over $300 billion globally. It is likely that Chinese regulators will be in a position to build a new regulatory framework for the rest of the world in global fintech governance," she said.

As of Nov. 3, US$1 was equivalent to 6.68 yuan.