"Why Jack Ma Separated Alipay In Alibaba’s Words"

Quoting from the site wsj.com

Posted by:Dr Ahmed.M.Shaban

In its latest filing with the U.S. Securities and Exchange Commission, Alibaba disclosed in more detail why the Alipay payment business had to be separated from the Chinese e-commerce giant back in 2011.

Bloomberg

The additional disclosure came ahead ofAlibaba’s U.S.initial public offering, which could happen as early as next month.

When Alibaba founder Jack Ma separated the Alipay payment unit from Alibaba Group and took it under his control in 2011, the move promptedobjections from major shareholders like Yahoo YHOO +1.43%.

At the time, Alibaba said the transfer ensured Alipay could get the license to continue its payment business in China. Yahoo at the time complained that it was blindsided by the transfer, while Alibaba said its board, which included Yahoo’s seat, had previously discussed the matter. Alibaba and Yahoo later reached an agreement on the terms of Alipay’s separation.

In its latest filing, Alibaba said that in June 2010, the People’s Bank of China, the country’s central bank, issued new regulations requiring non-bank payment companies to obtain a license in order to operate in China. The PBOC at the time provided license application guidelines only for domestic Chinese entities, and said it would clarify rules for foreign companies at a later date.

Like many other Chinese Internet companies, Alibaba has incorporated itself offshore—in the Cayman Islands—so it can attract foreign investors without running afoul of restrictions on non-Chinese ownership of sensitive companies. Key licenses to operate Alibaba’s Internet businesses in China are held by domestic entities that are tied to the offshore entity through contracts. But this structure makes Alibaba technically a foreign-invested entity, and Alipay at the time was still part of Alibaba Group.

“Although Alipay was prepared to submit its license application in early 2011, at that time the PBOC had not issued any guidelines applicable to license applications for foreign-invested payment companies,” Alibaba said in a newly added part in its amended IPO filing.

At the same time, the regulators required that any payment company that failed to obtain a license had to cease operations by September 1, 2011, Alibaba said.

“In light of the uncertainties relating to the license qualification and application process for a foreign-invested payment company, our management determined that it was necessary to restructure Alipay” as a company wholly-owned by Chinese nationals so it could apply for the payment business license based on the available guidelines for domestic Chinese entities, Alibaba said. That’s why Alibaba divested all of its interest in Alipay and the unit was separated from Alibaba, it said.

Alibaba also reiterated its view that the separation was to the benefit of Alibaba’s core e-commerce operations.

“This action enabled Alipay to obtain a payment business license in May 2011 without delay and without any detrimental impact to our China retail marketplaces or to Alipay.”

Alipay also noted in the filing that the PBOC even today still hasn’t issued license application guidelines for foreign-invested payment companies.

Still, it is unclear whether China’s regulators would have forced Alipay to stop its operation had it not been separated from Alibaba.

Tencent Holdings TCEHY +1.09%, another major Chinese Internet company, runs a payment business called TenPay as its subsidiary, not as a separate company. Hong Kong-listed Tencent, like Alibaba, is registered overseas and has foreign shareholders. Yet TenPay was able to obtain a payment business license in 2011 at the same time as Alipay. TenPay’s business, however, was much smaller than Alipay at the time.