State-owned Assets Control: A First Step For Reform
May 02, 2002 | BY
clpstaff &clp articles &Fangda PartnersThe PRC Ministry of Finance (MOF) issued an opinion on December 28 2001 (关于改革国有资产评估行政管理方式加强资产评估监督管理工作的意见,…
Fangda Partners
The PRC Ministry of Finance (MOF) issued an opinion on December 28 2001 (关于改革国有资产评估行政管理方式加强资产评估监督管理工作的意见, Reform of the Executive Administration on State-owned Asset Valuation and Strengthening the Regulatory Work on Asset Valuation Opinion, the Opinion) that has greatly impacted China's present system of state-owned assets valuation and control. Though somewhat overlooked, this important MOF legislation is possibly a precursor to further change in the government's position on assets valuation.
The present system is based on the Administration of State Asset Valuation Procedures (国有资产评估管理办法, the Procedures) adopted by the State Council in November 1991, and implementing rules issued by the state-owned Assets Administrative Bureau (the State Bureau)1 in July 1992. These two administrative documents require all Chinese entities possessing state-owned assets (not just state-owned enterprises, but also all companies and entities with state-owned enterprises/companies as shareholders) to go through the assets valuation and confirmation process sanctioned therein. As the first step of the process, the relevant entity should apply to the State Bureau or its competent local counterpart for the approval of the "valuation" project. After such approval is granted, the entity must retain a qualified valuer to make the valuation. Before the entity enters into the underlying transaction involving the said assets, it should submit the valuation report to the same authority for its review and confirmation, and according to the implementing rules of the Procedures, the appraisal result as confirmed by the authority should be the bottom line of the transaction price.2
The Opinion has made the following changes: (i) the requirement of "valuation" project approval is relinquished; and (ii) that of the confirmation of the valuation report and appraisal result is to be replaced by the requirement of "verification" (核准) or "filing" (备案) of the valuation report, as the case may be. "Important economic projects" (重大经济项) will require "verification", while "filing" will be sufficient for other projects. The Ministry of Finance shall conduct the verification for those projects approved by the State Council,3 while those projects approved by the local government shall be handled by the state-owned assets administrative authority at the same level. Various authorities' power to accept the filings are granted under the Opinion on a similar line, with the addition that those state-owned companies, who have already been authorized by the national government or various local governments to exercise part of the government's power in terms of state-owned assets administration before the issue of the Opinion, can accept the filings within their power.
Despite the changes outlined above, the Procedures and their implementing rules, as cornerstones of the entire system, are not revoked. Therefore, the requirement mentioned above on the transaction price should still be heeded and abided by, and in practice it is still advisable for the opposite party of the transaction to make sure, before entering into the definitive transaction agreements, that the relevant verification or filing has been properly done.
The biggest difficulty in complying with the Opinion is how the parties to a transaction could reach reliable judgement that a specific valuation should be verified or filed. There is no express criterion in the Opinion, and as far as this author knows, to date there has been no further clarification on this point since the Opinion was issued (the Ministry of Finance stated in the Opinion that it will issue relevant implementing rules and guidelines as soon as practicable). In this author's consultation with the Ministry of Finance, it appears that all those transaction projects approved by the State Council (as opposed to its ministries and departments) or the local government itself (other than its internal bureaux and departments) will be deemed "important economic projects", thus requiring the verification of the valuation report.
It is foreseeable that along with China's further opening of additional industrial sectors for foreign investment and corresponding deregulation measures under the WTO commitments, there will be a great wave of mergers and acquisitions in the near future, and definitely a substantial number of deals will involve the disposal of state-owned assets. It is widely believed that the present state-owned assets control system could be a big deterrent to such activity, for foreign investors may be very reluctant to pay the book value on paper or even higher for those assets not able to generate meaningful returns. It might not be making a wild guess to say that the Chinese government has already started reform in this area.
By Kenneth Lu,
Fangda Partners,
Shanghai
Endnote:
1. Originally, the State Bureau was independent from the Ministry of Finance, although it was subject to the latter in terms of its business. It has been absorbed into the Ministry of Finance as a department.
2. But in practice, the authority has agreed to the maximum 10% discount of the appraisal value for the transaction price.
3. The approval here means that for the whole transaction, the body of regulations and rules for which are mainly based on relevant administrative power and authority of the State Council, its ministries and departments, local governments at various levels and their internal bureaux and departments.
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