Management buyouts of state assets and equities in large state-owned enterprises (SOEs) have been banned, according to a new regulation released Thursday. But the long-expected rule does allow such transactions at small and medium-sized SOEs as long as they follow a set of standards.

The criteria on such sales were clarified by authorities for the first time in the regulation, jointly released by the State-owned Assets Supervision and Administration Commission (SASAC) and the Ministry of Finance.

They include setting qualifications for management buyers of small and mid-sized firms, procedures and venues for dealings and relevant financing channels and information disclosure procedures.

The regulation is designed to ensure transparency and fairness in management purchases of state-owned property, a popular practice in SOE reforms of recent years but one that has been accompanied by self-dealing, illegal financing and erosion in the interests of the state and ordinary employees due to legal loopholes.

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

Potential management buyers of smaller SOEs cannot participate in plans to sell assets or in relevant audits, asset evaluations and pricing matters; they should compete on equal terms with other potential buyers in designated assets and equities markets.

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

Li said the time is not ripe for big SOEs to sell assets and equities to management or to make them controllers, citing a lack of effective asset pricing systems and relevant financing tools for management buyers.

According to the SASAC, by the end of 2003 there were around 150,000 SOEs, 98 percent of which were small and medium-sized.

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

"Now that the economy is changing and a diversified equity structure encouraged, it is essential to hasten the pace of legislation to bring clearer standards for SOE reform and ensure fairness," said Li Zhaoxi, deputy director of the Enterprise Research Institute of the State Council's Development and Research Center.

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

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

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

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

(China Daily April 15, 2005)