HONG KONG — Jack Ma’s Ant Group is being forced by Beijing into a comprehensive overhaul after a significant tightening of regulations around China’s top online financial platform halted plans for the world’s largest initial public offering.

Ant, which was set to raise up to $39.6 billion this week in Shanghai and Hong Kong, will have to boost capital and liquidity buffers at key units which make small loans online, a vital part of its business. The measures could dampen the company’s profitability and slow its growth.

The group will also have to use more of its own funds for loans it underwrites and open itself up to greater regulatory scrutiny as a condition for listing, according to two people familiar with the company. Scores of state-run banks, which provide the funding for loans originated by Ant, have been asked to slow this flow down by regulators, the people added.

Ant will also have to reapply for licenses for the lending units to operate nationwide, Bloomberg reported, citing people familiar with the matter.

The changes being demanded of Ant follow a crunch meeting between Ma, company executives and Chinese regulators this week which led to the Shanghai Stock Exchange forcing Ant to suspend its IPO plans on Tuesday. Ant then called off plans for a simultaneous listing in Hong Kong, disappointing over a million small investors who had clamored to buy into the fast-growing company.

Ant was due to make its debut on both markets on Thursday.

This week’s dramatic IPO suspension underscores Beijing’s desire to safeguard China’s banking system, the world’s largest, amid rising levels of bad debt, with some small lenders already forced into government rescues.

It also highlights tensions between Ma, who late last month criticized state-owned banks as well as local and global regulation of the financial sector, and Chinese authorities.

The new curbs will in effect put the brakes on Ant’s expansion, which had seen its loan growth run at 90% a year.

As a result, bankers and analysts are almost certain to have to cut the valuations they had assigned to Ant, which were set to put it ahead of most of the world’s largest publicly listed financial institutions. Potentially, Ant could be forced to rework its entire IPO application.

Shares of Alibaba Group Holding, which owns a third of Ant, closed down 7.5% at HK$277.20 in Hong Kong trading on Wednesday.

“The new rules are quite expansive and will require Ant to reposition its lending business,” said a person involved in the now suspended IPO. “The loans business was a juggernaut and based on Ant’s ability to assess credit risk using big data, a departure from the old conservative models. Regulators aren’t buying it completely and that changes all the valuation assumptions.”

Ant, which started as Alibaba digital payment processing service Alipay in 2004, has modeled itself as a virtual finance mall, offering everything from payments to loans to wealth management to insurance. Alibaba owns a third of the company and Ma, as general partner of two investment partnerships, has effective control. He however he holds no official role at Ant.

Like many financial services providers to have emerged out of the tech world, Ant has so far operated with far less regulatory oversight than its more traditional financial peers.

A 40% annual growth rate over the next decade, as modeled by analysts, boosted valuations for the company from $150 billion at the company’s last fundraising in 2018 to about $250 billion when the IPO was filed, on to almost $320 billion when the offering was priced.

Analysts at banks marketing the IPO went as far as asserting a $450 billion post-listing valuation, irking regulators and some investors.

“I was bothered about the craziness and speculation in the run-up into the IPO,” said Ram Parameswaran, founder of San Francisco-based Octahedron Capital Management, which owns shares in Alibaba.

“Putting a dampener on that speculation is arguably a good thing. There was growing regulatory concern over Ant, given how fast especially its lending business was growing in 2019. Loan books by design should grow slowly and steadily.”

The IPO was suspended after Ma, along with Ant executive chairman Eric Jing and CEO Simon Hu, were summoned to a meeting with Chinese regulators on Monday that was later described as a regulatory warning. No specific details of the meeting, which came days after Ma criticized state-owned banks, local and global regulation at a financial summit attended by scores of bankers and regulators, were revealed by either side.

Suspending the listing on Tuesday, the Shanghai exchange cited “major” changes to the Chinese group’s regulatory environment.

Guo Wuping, an official with the consumer rights protection department of China’s Banking and Insurance Regulatory Commission, published an article in a Chinese business newspaper on Monday emphasizing the need for strong regulation of internet companies to prevent a “winners’ take all” situation.

State media published a series of other articles questioning Ant’s business model and valuation after Ma’s speech. In an opinion article published on China Finance, a central bank-affiliated newspaper, an unnamed senior scholar attributed the rapid rise of Ant to a lack of regulations, and said regulators should not grant big tech companies “super national treatment.”

The People’s Bank of China and the banking regulator on Monday published draft rules that set a 5 billion yuan ($746.8 million) registered capital threshold for microlenders that offer loans online across different regions of the country. The rules also called for internet platforms to fund no less than 30% of total loans themselves, compared with Ant’s 2% now.

The proposal would require Ant to put up an additional 90 billion yuan in additional capital, estimated Iris Tan, a senior equity analyst at Morningstar.

Ant could increase its registered capital, shift the business to a new consumer finance company that can qualify for higher leverage or scale back its total consumer credit portfolio, Tan said.

The rules come on top of a flurry of other regulation imposed by the authorities to curtail risk in the digital lending sector since Ant filed its IPO prospectus in August. Other measures include a limit on use of securitization to fund consumer loans, a cap on loan rates, and new capital and licensing requirements for financial conglomerates.

Ant was the largest online consumer credit and small-business loan originator in China as of June 30, with outstanding balances of 1.7 trillion yuan and 422 billion yuan, respectively, according to consulting firm Oliver Wyman.

Ant will likely have to temper loan growth to an annual range of 30% to 40%, say analysts and investors.

Octahedron Capital’s Parameshwaran values Ant’s online lending business at $20 billion to $30 billion, based on a multiple of 20 to 30 times estimated forward earnings. He said the company garnered most of its value from its wealth management, insurance and other digital businesses where it is the market leader in China.

“The new regulations are a clear hit to sentiment but in terms of enterprise value creation, not as impactful as the news would have you believe,” he said. “I think it is safe to say that a $300 billion enterprise value at IPO is unlikely” as and when Ant relaunches the offering.

“I’d be personally thrilled, I’d be happy to put in a lot of allocation below $300 billion,” he said.

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