Didi's share dropped in New York after a report claimed that Chinese regulators are considering serious penalties for the company.

Didi's Share Drops After Report Reveals Possibility Of Facing Harsher Penalties By China

by Bhaswati Guha Majumder - Friday, July 23, 2021 04:37 PM IST
Didi's Share Drops After Report Reveals Possibility Of Facing Harsher Penalties By ChinaDidi, China's ride hailing app.
  • Chinese ride-hailing app, Didi, witnessed 11 per cent drop in its share in New York.

    As per reports, the penalty on Didi is likely to be harsher than the fine imposed earlier this year on Chinese e-commerce giant Alibaba which was $2.8 billion.

The Chinese ride-hailing behemoth, Didi, which has been in the news since Chinese regulators launched a cybersecurity audit against the company, witnessed a drop in its share—11 per cent to $10.20—in New York on 22 July. It comes following news that Beijing regulators are considering harsh punishment for the company.

Didi debuted on the New York Stock Exchange at the end of June, raising $4.4 billion. But the shares of the company fell dramatically on the third morning of trading after the Cyberspace Administration of China (CAC) announced the investigation. According to the CAC, it found traces of "serious violations" by the Chinese ride-hailing giant. On 4 July, CAC said that it ordered Didi to remove its app from online stores due to violations of laws and regulations on the collection, as well as the use of personal data.

As reported by Bloomberg, some people familiar with the matter told the news agency that the ride-hailing giant's decision to go public amid CAC opposition is seen by regulators as a challenge to Beijing's power. Sources claimed that China's regulators mainly backed the notion of an IPO, but they have been concerned about Didi's data security policies since at least April. According to one of the sources, Didi had revealed details on taxi journeys taken by government officials, though it's unclear whether that specific problem was brought up with the firm.

It was also reported that regulators advised Didi to ensure the security of its data before proceeding with the IPO or to relocate the IPO to Hong Kong or mainland China, where disclosure risks would be reduced. Although regulators did not strictly prohibit the firm from going public in the United States, they were confident that Didi understood the official directives, stated the report.

One of the sources said that some regulatory officials privately expressed concern that Didi may have rushed its IPO before China announced the new Data Security Law, which could have affected its valuation. China announced new guidelines just days after the IPO, requiring practically all companies wishing to list in foreign countries to undergo a CAC cybersecurity evaluation.

Feng Chucheng, an analyst with consultancy Plenum in Beijing, said: "Beijing wants the internet sector to understand that cybersecurity and data security are now among the government's top priorities, and individual companies' profit can be sacrificed when cybersecurity and data security may be exposed to risks".

However, as per the report, the penalties for Didi could include the suspension of certain operations or government investment in the company. Minxin Pei, a professor of government at Claremont McKenna College in California, said: "It's hard to guess what the penalty will be, but I'm sure it will be substantial". In addition, the report said some sources claimed that Didi might be forced to withdraw its shares from the New York stock market.

It was also reported that the penalty is likely to be harsher than the fine imposed earlier this year on Chinese e-commerce giant Alibaba—which accepted a record $2.8 billion fine after an official investigation discovered that it had abused its market position for several years.

China has increased its surveillance of the biggest internet companies in the country this year. This week, the internet watchdog of the country ordered the removal of inappropriate child-related content from some of the country's largest online sites. CAC said Kuaishou, Tencent's messaging app QQ, Alibaba's Taobao and Weibo were warned to "rectify" and "clean up" all illegal content.

Meanwhile, another government agency has imposed fines on 12 corporations for anti-monopoly violations, and the list includes Tencent, Baidu, Didi, SoftBank and a ByteDance-backed firm. Additionally, the state media reported that Chinese President Xi Jinping had urged regulators to increase their monitoring of internet companies, a crackdown on monopolies and encourage fair competition.

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