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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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