Against the backdrop of recent controversial mergers, the Ministry of Commerce has released a provisional rule on foreign investors' takeover of domestic enterprises, marking the authorities' efforts to better regulate such acquisitions.

Share swaps will be allowed in lieu of cash payment if foreign companies merge with, or acquire, domestic firms, according to the regulation, which will take effect on September 8.

The regulation clarifies how foreign companies can pay in the form of stock, cash or a combination of both in mergers with and acquisitions of local companies.

In 2003, the authorities drafted a temporary rule on foreign investors' takeover of domestic enterprises, which contains 26 articles. This rule has now been updated and expanded to contain nearly 60 articles, marking a major step for legislation in this respect.

It shows that China's legislation governing foreign investor-involved mergers and acquisitions is improving and becoming more applicable as legislators draw on their previous experiences.

The fourth article of the regulation allows foreign companies to use shares as payment for stakes in Chinese ventures, opening a potentially important new financing channel for them. This will make the internationally accepted method of share swaps during acquisitions more legally tenable in China.

On the other hand, it signals that the country is including offshore companies into its framework of regulation. Such problems as asset loss and fake foreign investment would thus be stemmed.

The practice of domestic companies disguising themselves as foreign ones is a serious problem in China. It is often entangled with the overseas listing of domestic companies and cross-border mergers and acquisitions. Investors will commonly register an offshore company and use its shares to purchase stakes in domestic assets; they then inject the domestic assets into the offshore companies, which would be listed overseas.

In this way, China may risk losing control of those assets and incurring investment risks if it cannot be proven that the ultimate controller of the assets is based in China.

This article, therefore, is very important in terms of safeguarding market order and ensuring the country's economic security. It will provide a legal basis for us to exercise control over Chinese assets.

The 40th article stipulates that the public offering prices of shares in companies listed overseas shall not be significantly lower than the stake value of the corresponding domestic assets. This will help prevent asset losses.

The new rule, to an extent, will also be conducive to holding back the red-hot domestic investment in real estate.

The overseas listing of domestic real estate developers and real estate investment trusts will easily usher in foreign investors, who have a strong zest for investing and pushing up prices in the domestic property market.

As the domestic economy remains strong, it is better to cool down the sector. The new rule will facilitate the proper management of real estate developers and real estate investment trusts.

Despite the improvements in the new rule, it still must be made more comprehensive and detailed.

Many of the articles in the regulation detail issues concerning asset assessment institutions and merger consultation.

It is stipulated that concerned parties shall base a deal's price on the results of assessment by relevant institutions; the two concerned parties can resort to domestically established institutions, which should abide by common international assessment practices.

The stakes or assets shall not be sold at a price significantly lower than the assessed price, which equals a stealthy transfer of assets overseas.

The merger consultants must have had good, relevant experience and good professional records over the past three years. They should be capable of investigating the overseas legal and financial documents of concerned companies.

Comprehensive as those articles are, it is hard to gauge whether asset assessment and merger consultation institutions are capable in accordance with those standards.

The relevant departments must further clarify those articles to make them more applicable.

It is interesting that the financial accounting firm servicing the controversial stake acquisition of Xugong Group is reportedly an unreachable bogus company based in a residential building.

Those who wish to steal State assets could easily control acquisitions though similarly farcical manoeuvres.

The rule must have detailed stipulations to prevent such irregularities.

Another problem is the "undue" due diligence investigation prior to acquisitions.

Some local governments, thanks to their enthusiasm for promoting political records, always try every possible means to force through mergers and acquisitions involving local enterprises. As a result, foreign companies are put in an advantageous position. Even if the deal is not made, they can possibly get knowledge of the commercial secrets of their Chinese counterparts through due diligence investigations.

The relevant departments should devise rules to protect the interests of Chinese firms by preventing this from happening.

Foreign investor-related mergers and acquisitions have aroused many controversies primarily because many serious problems have been exposed. For example, quite a few acquisitions have seen the senior managers of domestic companies illegally use their power to grab benefits and sacrifice corporate interest.

We are justified in believing that those managers are unqualified to assume their position. More seriously, the new rule does not cover such topics.

It will not be long before the rule is formally established. We hope the existing articles of the regulation can be carried out strictly, and other necessary articles should be added to make the rule more workable in ensuring an orderly corporate property rights market.

The author Mei Xinyu is a researcher with the Chinese Academy of International Trade and Economic Co-operation attached to the Ministry of Commerce.