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	OPINIONS ON EXERTING FURTHER EFFORTS IN DEBT-EQUITY SWAP OF THE STATE-OWNED ENTERPRISES

	(Circular of the General Office of the State Council on Transmitting the Opinions on Exerting Further Efforts in the Work of Debt-Equity Swap of State-owned Enterprises of the State Economic and Trade Commission, the Ministry of Finance, and the People's Bank of China (Docket No.8 [2003] of the General Office of the State Council), February 23, 2002: The Opinions on Exerting Further Efforts in the Work of Debt-Equity Swap of State-owned Enterprises of the State Economic and Trade Commission, the Ministry of Finance, and the People's Bank of China have been approved by the State Council. Please carry them out accordingly)


SUBJECT : DEBT-EQUITY SWAP
ISSUING DEPARTMENT : THE GENERAL OFFICE OF THE STATE COUNCIL OF THE PEOPLE'S REPUBLIC OF CHINA
ISSUE DATE : 02/23/2002
IMPLEMENT DATE : 02/23/2002
LENGTH : 1,819 words
TEXT :

In order to exert further efforts in the work of debt-equity swap (hereinafter referred to swap) of the state-owned enterprises, to promote the swap enterprises to accelerate the establishment of modern enterprise system, to activate the non-performing financial assets, to prevent and resolve financial risks, and to regulate the acts of the enterprises applying the swap, of the financial asset management companies and the relevant entities, the following opinions are hereby presented in accordance with the Company Law of the People's Republic of China (hereinafter referred to Company Law) and the Regulations on Financial Asset Management Companies, and the relevant provisions of the State Council:

I. ESTABLISHMENT OF NEW SWAP COMPANIES

(1) An enterprise applying the swap upon the approval of the State Council shall, in accordance with the Company Law and other relevant laws and regulations, establish the modern enterprise system. The enterprise shall define the rights and obligations of the shareholders' conference, the board of directors, the board of supervisors and the management by formulating the articles of incorporation of the company and other relevant documents; shall form the corporation governance structures that are in charge of their respective duties, coordinately function, and are effectively balanced by each other; shall legally establish or change the registration to be a stock limited company or company of limited liabilities (hereinafter referred to new company).

(2) When making the industry and commerce registration, a new company shall not have its employees hold any of its shares. Where the original enterprise had the employees hold shares, the entity that approved the scheme of the employees' holding of shares shall consult with the relevant parties to solve the problem appropriately.

(3) A new company shall, upon establishment, make the evaluation of assets and the registration of title. Public bid invitation must be issued for the asset evaluation of a swap enterprise to determine the evaluation institution and charging standard through competition. The asset evaluation institutions participating in the bidding must meet the qualification conditions set forth by the Ministry of Finance. The asset evaluation report of a swap enterprise shall be, if the enterprise is a central enterprise, submitted to the Ministry of Finance for record. If the enterprise is a local enterprise, submitted to the finance department at the provincial level for record. Where the result of net asset evaluation is negative and the swap scheme needs to be adjusted, the State Economic and Trade Commission, the Ministry of Finance and the People's Bank of China shall present the settlement method, and the case shall be submitted to the State Council for decision.

(4) With respect to a swap enterprise that has been inspected by the board of supervisors of state-owned enterprise, or was fully audited by the state auditing department in the previous year, and that was audited by the qualified intermediary institution and issued the auditing report, no more auditing is required.

(5) The shareholders of a new company shall enjoy equal status, share the interests and jointly bear the risks according to law. The shareholders may transfer their shares between themselves according to the principle of free will.

(6) An enterprise applying the swap upon the approval of the State Council may, if it is one of the 580 swap enterprises determined by the State Council, stop paying interests for the debts swapped to equity from April 1, 2000; other enterprises may stop such payment from the day on which the State Council approved the swap. A financial asset management company may, from the day of stop of payment of the interests, take part in the profit distribution of the original enterprise on the basis of the proportion of shares, and a new company, after establishment, enjoys the corresponding rights and interests of shareholders. Except when the State Council has any otherwise provisions.

(7) After the establishment of a new company, the financial asset management company may, as the shareholder, dispatch personnel to the board of directors and board of supervisors of the new company pursuant to the law and articles of incorporation of the company. The new company shall actively explore to establish the new mechanism of personnel selection and use that meets the requirements of the modern enterprise system. The company shall combine the assessment and recommendation by the organization with the introduction of market mechanism and with the open employment from the society, and shall combine the principle of the party's leading over cadres with the director board's selecting of managers pursuant to law and with the managers' exercising of personnel power pursuant to law.

(8) A new company shall, strictly in accordance with the Accounting Law of the People's Republic of China and the Regulations on Enterprise Financial Auditing Reports, normalize and improve the enterprise financial system, lay stress on strengthening the cost accounting and cost management, capital management and financial statement management.

(9) A new company shall take measures to promote the reform of the personnel, labor and distribution systems actively and appropriately. The company shall establish the personnel system in which the managerial personnel compete for their posts and assume the posts according to their abilities; shall establish the labor system in which personnel are employed for their merits and are free from coming to and leaving the company; shall establish the distribution system in which the incomes can either be added or reduced as effective incentives.

II. REDUCTION OF THE BURDEN OF THE SWAP ENTERPRISES

(10) With respect to the profits of a new company that are increased as a result of the stop of payment of interests, the income tax thereon shall be returned to the original enterprise (where the original enterprise has been written off upon alteration of registration, to the subscribers of the original enterprise, hereinafter all referred to original enterprise), but may only be used to purchase equity from the financial asset management company, and at the same time, the state capital of the original enterprise shall be increased accordingly.

(11) Where a swap enterprise inputs material assets to the new company, except that the assets unstamped before the swap shall be stamped upon establishment of the new company, the value added tax and other relevant taxes thereon shall be exempted.

(12) Where an original enterprise inputs the allotted land used in production and operation to the new company, if the land falls within the statutory scope of allotted land, the land may continue to be used as allotted land. If not, the issue may be settled by the state's investing (purchasing shares) with the land use right upon evaluation. The state-owned capital increased therefrom shall be held by the original enterprise. The original enterprise may be exempted from the charges for alteration of registration of land use right and the handling charges, excluding the cost of production.

(13) A new company is exempted from the enterprise registration charges in the establishment registration or alteration registration during the swap process.

(14) A swap enterprise shall, according to the requirements of the approved swap scheme, cut apart the non-business assets, separate the society supporting function, and let go of the surplus personnel, and the local government shall perform the corresponding obligations.

III. ACTIVATION OF NON-PERFORMING FINANCIAL ASSETS

(15) In the swap agreement and scheme signed between the financial asset management company and the original enterprise, the following clauses shall be repealed:

1. Fixed return on equity in any form;
2. Establishment of regulatory account;
3. Asset mortgage or equity pledge of the original enterprise or a third party's providing guarantee for the withdrawal of equity by the financial asset management company, as the precondition or affixation for the swap;
4. Where the original enterprise enjoyed the policies of annex or reduction of employees to raise efficiency, the interests that should be written off by the bank are included in the sum converted into equity;
5. Relevant clauses requiring the original enterprise to purchase all the equity held by the financial asset management company;
6. Using the depreciation fee of fixed assets to purchase the equity held by the financial asset management company;
7. The financial asset management company, in the swap, directly replaces the equity of any listed company of the subscribers of the original company; and
8. Any other contents that do not meet the relevant provisions of the Conference Minutes on Relevant Issues of the Study of Swap Work (Docket No.16 [2000] of the State Council).

(16) Where a new company meets the conditions for listing, China Securities Regulatory Commission (CSRC) shall accept and ratify its application for listing. A financial asset management company shall observe the relevant provisions of the state in transfer of the state-owned equity of a listed company.

(17) Where a financial asset management company transfers equity (excluding state-owned equity of listed company) to any overseas investor through agreement, the equity price must be evaluated by the qualified asset evaluation institution, and the transferee and transfer price shall be determined according to the principles of justice, fairness and openness and by means of bidding or auction, and the original enterprise is entitled to the right to purchase by priority under the same conditions.

(18) Where the equity held by a financial asset management company can not be transferred to overseas investors through agreement, the original enterprise may purchase the equity with the proceeds of equity dividends, the purchase price shall be negotiated by the two parties by referring to the evaluated net assets per equity.

(19) With respect to the issue of disposition of the final losses resulted from the equity transfer or sale by financial asset management companies, the Ministry of Finance shall present the resolving scheme and separately submit that scheme to the State Council for decision.

(20) With respect to enterprises that are of significance to the national economy and the people's life and that must be controlled by the state, the transfer or listing thereof must be subject to the approval of the relevant department of the state, and it must be ensured that the state occupy the controlling position.

(21) Upon the termination of a financial asset management company, with respect to the disposition of the remaining equity of any new company held by that management company, the Ministry of Finance, the Stat Economic and Trade Commission and the People's Bank of China shall present the resolving method and separately submit that method to the State Council for decision.

IV. SUPPORTING THE DEVELOPMENT OF THE ENTERPRISES APPLYING SWAP

(22) The relevant departments under the State Council shall promote the reform and development of the new companies, and shall, according to the industrial policy of the state, actively support the new companies to make technical innovation and promote product upgrading, and thus to enhance the market competitiveness of the new companies.

(23) With respect to the loan needed by swap enterprises in production and operation, the relevant commercial banks shall continue giving support if the relevant conditions are met.