Didi may face unprecedented penalties

Chinese regulators are considering serious, perhaps unprecedented, penalties for Didi Global after its controversial initial public offering last month, according to people familiar with the matter.

Regulators see the ride-hailing giant's decision to go public in New York despite pushback from the Cyberspace Administration of China as a challenge to Beijing's authority, the people said.

Officials from the CAC, the Ministry of Public Security, the Ministry of State Security, the Ministry of Natural Resources, along with tax, transport and antitrust regulators, began an investigation on-site at the company's offices, the cyberspace watchdog said.

Regulators are weighing a range of potential punishments, including a fine, suspension of certain operations or the introduction of a state-owned investor, the people said. Also possible is a forced delisting or withdrawal of Didi's US shares, although it's unclear how such an option would play out.

Deliberations are at a preliminary phase and the outcomes are far from certain. Beijing is likely to impose harsher sanctions on Didi than on Alibaba (9988), which swallowed a record 18.2 billion yuan (HK$21.87 billion) fine after a months-long antitrust investigation and agreed to initiate measures to protect merchants and customers, the people said.

Earlier this month, CAC started a cybersecurity review on Didi days after it raised US$4.4 billion (HK$34.3 billion) from the US IPO.

Regulators urged Didi to ensure the security of its data before proceeding with the IPO or to shift the location to Hong Kong or mainland China where disclosure risks would be lower, the people said. Regulators didn't explicitly forbid the company from going public in the US, but they felt certain Didi understood the official instructions, they said.

The CAC itself has come under scrutiny because of the Didi IPO, with a top party official having questioned why the agency hadn't blocked the company's offering, one of the people said.

Some regulatory officials expressed in private that they think Didi may have rushed its IPO out before China unveiled a new web security law, which could have hurt its valuation, one of the people said. Just days after the offering, China proposed new rules that would require nearly all companies seeking to list in foreign countries to undergo a CAC cybersecurity review.