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China Securities Regulatory Commission (CSRC), the market watchdog, Tuesday issued a draft circular providing standards for domestically listed companies offering share incentives to their board directors, supervisors, managers and other company staff.
A listed company can offer at most 10 percent of its shares to well-performing staff but a single individual could get no more than a 1 percent share bonus from the company, according to the circular.
The share bonus could come from three sources: reserves from a public offering, specially allocated shares for high managers of the company or shares bought back from the market.
In addition, the board directors or senior managers who receive share bonuses are prohibited from selling them until at least one year after their resignation.
The other incentive proposed by the regulator is a share option, which gives the holder the right but not the obligation to buy or sell a stock at an agreed-upon price during a certain period of time or on a specific date.
When issuing share options to company staff, the buying or selling price will be the higher one of either: the average share price from the former 30 trading days before the share option issuance, or the share price from the day before the issuance.
Share option incentive holders are required to exercise their rights at least one year after the issuance.
Managers or staff with a bad track record will not be offered incentives, a strategy to encourage management to behave responsibly at all times.
Listed companies found to have fiddled the books or to have committed other serious mal-practices are prohibited from offering incentives to staff.
A company's incentive proposals should be designed by its emolument commission and then passed by its board of directors and at the general shareholders' meeting.
The regulator has asked listed companies to layout clear standards for the incentives.
Strict information disclosure requirements were also stipulated in the circular, where the management's decisions and implementation procedures of the incentive plans should be publicized.
Currently in China there are no rules in place covering listed companies' incentive programs, and even though some companies have been implementing such practices, many of their bonuses were considered to be too high.
Moreover, the lack of a relevant legal framework has made it difficult to assess the fairness and efficiency of current incentive offers.
A well-designed share incentive system could develop the effectiveness of management within the company and maintain a balance between the interests of shareholders, the company and it's individual managers, CSRC said in the circular.
It also said that the incentive system could reduce management mal-practices and encourage them to care more about the company's performance and long-term development.
The commission will soon issue a formal version of the standards following some initial pilot programs.
As of yet, only listed companies having completed the share merger reform, where all shares are tradable, can offer incentives to their staff. Because for those companies with a separated share structure of tradable and non-tradable shares, the pricing mechanism gets distorted and the market price of the company's stocks may not reflect the company's management efforts, the commission said in the circular.
CSRC said that with the revised Corporate Law and the A-share reform the right conditions are being created for the commission to work out the rules for the share incentive system for listed companies.
The State asset administrator is also currently working on guidelines for a share incentive program for the country's State-owned enterprises (SOEs) as part of the SOE reform.
CSRC said the circular issued yesterday was a draft version and public opinions are welcome at ssb@csrc.gov.cn or 8610-88061504 (fax) before next Tuesday.
(China Daily November 16, 2005)
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