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Debt repay plan fails to curb irregularities
By Sun Min (China Daily)
Updated: 2004-08-02 08:59

After Chinese regulators unveiled a plan to let some pilot companies repay liabilities to their listed subsidiaries with equities, some companies responded with detailed proposals last week.

But analysts have cast doubt on the effects of such debt repayment in the long run.

They say it is not sufficient to simply make the account book pretty when a permanent solution is needed to the spreading fund appropriation by controlling firms that exists in many listed companies in China.

The first listed company expected to try the experiment is Hunan TV & Broadcast Intermediary Co Ltd, a Shenzhen-listed media company, which announced in a circular last Wednesday that its controlling firm, Hunan TV & Broadcast Industry Centre, would use more than 75.4 million shares it holds in the listed company to offset 539.3 million yuan (US$65.1 million) of liabilities it owes to the company.

The equities to be used to offset the debts are priced at 7.15 yuan (86.4 US cents) per share, which is slightly higher than the 7.12 yuan (86 US cents) net asset per share of the listed firm.

"But the price is still a bit too high," said Wang Yuanhong, a senior researcher with the State Information Centre.

Investors would hope for a discount price based on the net asset per share, or the barometer generally used for such equity transfer, he said.

The Hunan media company is to be followed by several other listed firms to try the practice of using equities to offset debts owed by the major shareholders, including Shanghai-listed Lotus Flower, a condiment manufacturer that has also submitted a similar proposal to the authorities to resolve the fund appropriation problem by its controlling firm.

The China Securities Regulatory Commission and the State-owned Assets Supervision and Administration Commission on Tuesday released a circular to explain the situation.

In such cases, the controlling firm gives off some equities in the listed subsidiary to offset its debt and the equities are written off later, which will ultimately reduce the ratio of stakes owned by the debtor and improve the earnings per share of the listed firm.

But the pricing of the equities is a general concern for many on the issue.

If the prices are set too high, it will help debtors evade debt payment and erode the interests of the creditors, or, in this case, the listed companies and minority shareholders, who have already suffered from the behaviour of the major shareholders who take the listed firm as their own automatic teller machines.

"How to find an upright intermediary to give a fair price evaluation is also very important for the creditors," said Wang.

Even if the creditors agree on prices, they would still have little to gain.

Some listed companies are already in very poor condition after their funds have dried out, said Wang.

It would be better if the controlling firms could pay back the embezzled funds in cash. But often, poor management results in financial problems and the losses are left for the listed companies and shareholders to shoulder.

Using equities to offset liabilities only temporarily improves the listed firms' financial figures on the books, but does not help much to improve their fundamentals in the long term, analysts said.

It also does not prevent the controlling firms from making similar irregularities in the future.

Ultimately, such rescue measures would have to go together with comprehensive reforms, including bankruptcy for poor performers and corporate governance construction, said Wang Yuanhong.

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