Standards released for State firm buyouts
By Sun Min (China Daily)
Updated: 2005-04-15 06:07

Management buyouts of State assets and equities at big State-owned enterprises have been banned, a new regulation released yesterday says.

The long-expected rule, however, allows such transactions at small and medium-sized State-owned enterprises (SOEs) while setting up a formal series of standards.

The criteria on such sales were clarified by Chinese authorities for the first time.

The regulation was jointly released by the State-owned Assets Supervision and Administration Commission (SASAC) and the Ministry of Finance.

The standards include setting qualifications for management buyers of smaller and mid-sized firms, procedures and venues for dealings and relevant financing channels and information disclosures procedures.

The regulation is designed to ensure transparency and fairness in management purchases of State-owned property, a popular practice in China's SOE reforms in recent years but one that was meantime accompanied by many problems like self-dealing, illegal financing and erosion in the interests of the State and ordinary employees due to legal loopholes in the sector.

Irregularities

Li Rongrong, minister of SASAC, the central State asset supervisory body, said yesterday such irregularities and unstable factors have to be dealt with efficiently and the management acquisitions of State assets and equities must be done in an orderly way.

As stated in the regulation, potential management buyers of smaller SOEs cannot participate in the design plans to sell State assets or relevant audits, asset evaluations and pricing matters.

They should compete in such actions on equal terms with other potential buyers in designated assets and equities markets.

Those found liable for declining performances of their enterprises or engaged in fraud in their dealings cannot take part in bidding.

Li said the time is not ripe for big SOEs in China to sell State assets and equities to managerial staffers or to make them controllers, citing reasons like shortages of effective price systems for State assets and relevant financing tools for management buyers.

It would be easier for small and medium-sized enterprises to try such purchases, he said.

But those in sectors that restrict or limit private investments are exceptions.

SASAC statistics said that by the end of 2003, China had around 150,000 SOEs, among which 98 per cent were small and medium-sized firms.

Stock options

Li also said the commission is actively working on a regulation on the adoption of stock options in SOEs, which will be encouraged on an experimental basis.

"Now that the State economy is in a drastic reshuffle and a diversified equity structure is encouraged, it is essential for China to hasten the pace of legislation in the State assets management scheme to bring clearer standards for the reforms of State-owned enterprises and ensure fairness of such reforms," said Li Zhaoxi, deputy director of the Enterprise Research Institute of the Development and Research Centre of the State Council.

He told China Daily yesterday that China still has a long way to go to transfer to a mature market economy, so presently the authorities still have a lot of reform issues to address in the transition and combining of overseas expertise with Chinese characteristics.

The management purchase of the State assets and equities in the SOEs, for example, still needs further study in pricing and financing tools to give the management more incentives while curbing irregularities.

It is to some extent similar to management buyout practices in mature markets, in which management teams purchase outstanding shares in their companies through specialized financing arrangements and take their firms private.

Yet it is impractical for China to blindly copy foreign models because of the immaturity of the domestic capital market and other differences, he said.

(China Daily 04/15/2005 page1)

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