Unloading State-owned Shares: Another Trial Under New Rules

By Michael G. DeSombre and Weiheng Chen, Sullivan & Cromwell LLP, Hong Kong

On April 29 2005, the China Securities Regulatory Commission (CSRC) promulgated the Issues Relevant to Pilot Reform Projects Regarding the Separation of Equity Ownership and Trading Rights of Listed Companies Circular(关于上市公司股权分置改革试点有关问题的通知) (the Circular, see p.35 for full translation), which unveiled the latest policy trial to resolve the high profile and highly contentious issue of reducing the government's ownership in listed companies. The Circular initiates a pilot program to resolve the legacy issue of non-tradable shares - a move that could pave the way for the gradual release of approximately two-thirds of the total shares of com   panies listed on China's stock exchanges and currently locked-up in the hands of the government and state-owned enterprises (SOEs). If successfully implemented, the Circular could finally result in the integration of segmented share structures for most of China's publicly listed companies.

Most companies listed on PRC stock exchanges have segmented share structures. This means that their common stock, although deemed as one class, is separated into: (i) shares that are listed and tradable on the stock exchange, and (ii) shares owned by the state, state-owned enterprises or other legal persons that are not listed or tradable on the stock exchange but can be transferred by agreement or by law only after receipt of certain government approvals. According to statistics published by the CSRC, non-tradable shares - that is those in category (ii) - account for about two-thirds of the aggregate share capital of all PRC listed companies as of March 31 2005.