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They're two top Asian Internet companies, each a leading portal in monster economies for their regions. One is near the top of the heap in India, the other in China. Both have backing from high-profile corporate investors including Intel and Pacific Century CyberWorks. Top investment banks are underwriting their U.S. public offerings, Goldman Sachs in India and Credit Suisse First Boston in China.
But the similarities end there. The Indian company, Rediff.com, has just had a spectacular Nasdaq debut. The Chinese company, Sohu.com, has been hindered for months by bureaucratic headaches and is still waiting to do its IPO. The different fates of these companies should provide clues for anybody wondering which of Asia's giant countries has the edge in the race to become a force in the New Economy.
Rediff shares started trading on June 14 and promptly soared, doubling to $23.50, raking in $55 million for the company. For Nasdaq, it was just like old, pre-crash, times, when almost any IPO with dot-com attached to it was a success. Even though the market has now soured on most dot-coms, Rediff triumphed because of the scarcity value of Indian Internet plays: Few Indian companies are available for investors interested in the world's second-most-populated country.
RISKY BUSINESS.
China doesn't have many Net plays either. But despite months of waiting patiently, Sohu hasn't been able to take advantage of that scarcity. For that, Sohu executives can blame regulators like Wu Jichuan, the Chinese Information Industry Minister, who has waged a campaign against companies like Sohu that have foreign ownership. Sohu is certainly not giving up. In late May, it filed a new prospectus with the U.S. Securities & Exchange Commission and is awaiting final approval from Beijing before it proceeds with its Nasdaq listing.
While it's waiting, let's have a look at the "risk factors" section of the prospectus. It makes for very interesting reading. The sort of risks would-be investors in a Chinese Internet company face are far weightier than for an Indian company. After all, says Sohu in its prospectus, "there are...substantial uncertainties regarding the interpretation of current [Chinese] Internet law and regulations." That's certainly an understatement.
Here are a few of the more revealing passages:
*Beijing is preparing new regulations governing online advertising and online news reporting, Sohu tells investors. The vagaries of the existing rules and the uncertainty over the new ones "have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of [Chinese] Internet companies, including us."
*Because of those uncertainties, "it is possible that the relevant [Chinese] authorities could, at any time, assert that any portion or all of our...existing or future ownership structure and businesses, or this offering, violates existing or future [Chinese] laws, regulations or policies."
*And if the government follows through on Sohu's fears and finds that the company has transgressed some current or future rules, what might happen? "The relevant [Chinese] authorities would have broad discretion," the prospectus says. "Without limitation," Beijing could confiscate Sohu's income, revoke its license, force a restructuring, or make the company "discontinue any portion or all of our Internet businesses."
NIGHTMARE SCENARIOS.
The lawyers putting together Sohu's prospectus then treat investors to a litany of nightmare scenarios in which Sohu might incur Beijing's wrath. For instance, Sohu admits that it's "subject to potential liability for content on our Web sites that is deemed inappropriate." Moreover, Sohu may also be liable for "any unlawful actions of our subscribers and other users of our systems."
The unpredictable nature of the Chinese legal system means Sohu can't count on transparency when deciding how to avoid trouble. "We are required to delete content that clearly violates that laws...and report content that we suspect may violate [Chinese] law," Sohu declares. But who knows for sure what sort of content will bother the regulators? Not Sohu. "It is difficult to determine the type of content that may result in liability for us," the company says.
What if Sohu screws up and angers the mandarins? "If we [determine] wrong, we may be prevented from operating our Web sites." That's not as unlikely as you might think: A financial Web site in the Chinese city of Wuhan guessed wrong, reprinting an article from a Hong Kong newspaper that accused a local government official of corruption. The company suffered a 15-day shutdown last month as a result.
BIZARRE OWNERSHIP.
Then consider the contortions that Sohu has endured to win regulatory approval for its IPO. Like Sina.com, the only Chinese-based portal yet to go public, Sohu has adopted a bizarre ownership structure in which the foreign-listed company will own no equity in the Chinese-based company. The Chinese company will control valuable advertising and Internet content provider (ICP) licenses and will share revenue with the U.S.-listed company on a contract basis. The Chinese company, known as Beijing Sohu, is controlled by Sohu's founder and CEO, Charles Zhang, 36.
Given risks like these, it's no wonder that Sohu is stuck in the Nasdaq queue, while Rediff has raced ahead. Of course, India is no paradise, and the Rediff prospectus does point out that New Delhi has imposed some restrictions on foreign investment that could impede that company's progress. But an Indian portal faces nowhere near the difficulties that a Chinese portal does.
For all its faults, the Indian government does tolerate a free press and so is far less nervous about what sort of information its dot-coms make available for citizens to read. The Chinese government, obviously, doesn't tolerate a free press, and its info-phobia is going to remain a major impediment to the development of Internet companies like Sohu.com -- and an obstacle to China's efforts to keep pace with rivals like India.
Einhorn covers Asia from Business Week's Hong Kong bureau
EDITED BY BETH BELTON
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