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SASAC urges firms to merge split shares

(China Daily)
Updated: 2005-09-10 11:36

State-owned listed companies are encouraged to step up efforts to merge their split shares while protecting the interest of holders of tradable shares.

State-owned companies should push the reform while maintaining market stability, according to a guideline circular issued on Friday by the State-owned Asset Supervision and Administration Commission (SASAC) of the State Council to its local bodies and State-owned enterprises.

Listed companies are also encouraged to make reforms through more diverse approaches.

"The approach a company chooses to merge their shares depends on the negotiation between all the shareholders and the specific situation of the company," the circular stated.

"But we encourage holders of State shares to use more ways to deal with the issue. Besides share and cash offering, companies can try new ways such as buying-back tradable shares, share shrinking, issuing call and put warrants or promise of desirable dividends distribution,"

The China Securities Regulatory Commission, the top industry regulator, selected two batches of 46 companies to experiment with the flotation of the non-tradable shares.

Forty-four of the pilots chose to provide share compensations to the tradable share holders, although a few of them also offered other compensations such as cash and warrants.

Holders of State shares were asked to negotiate with other holders of non-tradable A-shares and keep their interests at a balance.

SASAC bodies at all levels should efficiently supervise the State assets and avoid irregularities such as under-table transactions, fraudulence or manipulations.

Companies with State shares have to get the approval of central or provincial SASAC bodies for their reform proposals.

Moreover, the local SASAC bodies have to make a copy of the reform proposals of the State-owned companies to the SASAC of the State Council.

SASAC bodies will also strictly supervise State share transfers or debt-paying deals with State shares.

These companies should analyze and assess possible State share price fluctuations before and after the reform and explain why and how many share percentages the State should keep.

The government will also consider taking the market value of State shares as an index for the performance of State-owned enterprises, the circular said.

This is very important to improve corporate governance and management, said Dong Chen, a senior analyst at China Securities.

In the past, holders of State shares were indifferent with the share prices due to the non-negotiation of the State shares. Supervisors also did not use the share price as a reference when evaluating these companies' performance. The tradable share holders always suffer due to the distorted share structure, the analyst said.

The circular also revealed that the government would consider allowing State-owned listed companies to distribute shares as rewards to the company's management team.

The likely move has aroused controversy in the market.

"I do not think it is a good way to award the management with company shares," said Jiang Wen, a stock trader in Beijing.

He said this is unfair for other investors because the internal management team always has more access to information about the corporation. In fact, it is the management team's duty to keep sound governance, he said.

Other supporters of the move think by offering shares to the managers, these people will have a direct interest in the company's share performance. Thus, this would encourage them to do a better job in order to enhance the share prices.