UK Watchdog Delays Shein's IPO Over Supply Chain Concerns
UK Watchdog Delays Shein's IPO Over Supply Chain Concerns.
Concerns have also been expressed regarding allegations related to labor practices at the suppliers of the fast-fashion retailer.
Britain's financial regulatory authority is experiencing delays in approving the stock market listing of the fast-fashion retailer Shein. This is due to a thorough examination of its supply chain management and an evaluation of potential legal risks following a challenge from an advocacy group representing China's Uyghur population, as reported by two sources familiar with the situation.
The Independent Anti-Slavery Commissioner in Britain, which operates under the Home Office, has also expressed concerns to the government regarding Shein's initial public offering (IPO) due to allegations surrounding the labor practices of its suppliers.
Shein, headquartered in Singapore, offers products such as $5 tops and $10 dresses, primarily manufactured in China, and operates in 150 markets globally. The company submitted a confidential application to the Financial Conduct Authority (FCA) for a London listing in early June.
Additionally, Shein is awaiting approval from China's securities regulator for its London IPO, according to two separate sources, who indicated that this approval is expected to follow the FCA's decision.
In June, the advocacy group Stop Uyghur Genocide (SUG) initiated a legal challenge and submitted a dossier to the FCA in August, alleging that Shein sources cotton from the Xinjiang region of China.
The United States and various non-governmental organizations have long accused China of committing human rights violations in the Xinjiang Uyghur Autonomous Region, where it is claimed that Uyghurs are subjected to forced labor in the production of cotton and other goods. The Chinese government has denied these allegations.
Shein did not respond to inquiries from Reuters regarding the FCA process. A company spokesperson stated that Shein maintains a zero-tolerance stance on forced labor and is dedicated to upholding human rights.
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Recently, the company introduced a global external ESG advisory board to enhance its governance framework.
In its sustainability report released in August, Shein disclosed the identification of two instances of child labor within its supply chain in 2023, while reporting no occurrences of forced labor. Similar to Primark and other clothing retailers, Shein employs the isotopic testing service Oritain to authenticate the source of its cotton, which constitutes 9.9% of the textiles used in Shein-branded products.
The FCA refrained from commenting on the listing or any potential delays. A representative from the FCA indicated that the timelines for IPO approval are contingent upon the specifics of each case. Market analysts suggest that the decision-making process typically spans several months.
The FCA is not required to evaluate evidence submitted by civil society organizations and generally allows investors to form their own conclusions, according to Lorna Emson, a partner at the law firm Macfarlanes. Should compliance issues arise, the FCA would likely address these matters privately with the company.
NGO pressure is expected to persist: “Regulators are being given more to think about – and are required to do so under the watchful scrutiny of the increasingly well-funded and litigious NGO and activist community,” said Lucy Blake, partner at law firm Jenner & Block.
Non-governmental organizations are not the sole entities expressing apprehension regarding Shein's initial public offering (IPO). The Independent Anti-Slavery Commissioner communicated with the Home Office and the Department for Business in June concerning the IPO, as revealed by previously undisclosed letters acquired by Reuters via a Freedom of Information request.
“Encouraging a company like Shein to float on the UK market inadvertently implies endorsement of poor labour practices and the prioritisation of attracting business to the UK over human rights abuses,” commissioner Eleanor Lyons wrote.
The Home Office and the Department for Business have jointly stated that the Financial Conduct Authority (FCA) makes independent decisions regarding listings, and that the United Kingdom has established regulations to protect against modern slavery.
Similar to other retailers, Shein is required to adhere to forthcoming European Union regulations concerning forced labor, as well as the Uyghur Forced Labor Prevention Act in the United States, both of which are regarded as more stringent than the UK's Modern Slavery Act.
The FCA, which has recently streamlined its listing regulations, is under pressure from the newly formed Labour government to address the ongoing initial public offering (IPO) drought.
Rachel Reeves in mid-November told the FCA in a letter that she wants to ensure “innovative new firms are supported to enter the market” The Chancellor of the United Kingdom also stated that regulatory measures ought to be less cautious regarding risk and should prioritize growth more effectively.
The Financial Conduct Authority (FCA) is required to evaluate Shein's governance and ensure that its disclosures are robust, particularly in light of the possibility that SUG may seek a judicial review of an IPO approval, as indicated by a regulatory lawyer who spoke to Reuters on the condition of anonymity.
The FCA has refrained from commenting on SUG's legal challenge or the potential for a judicial review application.
Rahima Mahmut, the executive director of SUG, informed Reuters that she is scheduled to meet with legal counsel this week to deliberate on subsequent actions.
Last year, ClientEarth, a non-governmental organization, sought a judicial review of the FCA's decision to sanction the IPO of Ithaca Energy, a company in the oil and gas sector, claiming that its prospectus failed to adequately address climate-related risks; however, the high court dismissed the application.
In this instance, some legal experts believe that a judicial review application from SUG would also be unsuccessful.
For Shein, which was valued at $66 billion during a fundraising round last year, the success of its IPO will be influenced by the risks that the FCA determines must be included in its prospectus and how those risks are assessed.
Worker exploitation has been prevalent in the supply chains of retailers and brands globally, affecting not only the fast fashion sector but also the luxury market.
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According to Coresight Research, Shein's revenues are projected to reach $50 billion this year, representing a 55% increase from 2023.
Shein's IPO delay highlights significant concerns regarding its labor practices and supply chain transparency. Despite claims of a zero-tolerance policy for forced labor, allegations of exploitation in its supply chain persist, particularly in regions like Xinjiang, where forced labor is reported.
The company’s reliance on third-party audits and external advisory boards fails to reassure critics, raising questions about its commitment to ethical practices. As regulatory bodies scrutinize Shein’s operations, the retailer’s failure to fully address human rights concerns could tarnish its reputation and hinder its future growth, especially in markets with stringent labor regulations.
