The Chinese authorities are taking concrete action to curb fund embezzlement by the big shareholders and affiliates of domestic listed companies in order to protect the interests of small shareholders and promote the healthy growth of the stock market.

The China Securities Regulatory Commission (CSRC) and the State-owned Assets Supervision and Administration Commission (SASAC) jointly issued a circular over the weekend to standardize the management of fund flows between listed companies, their major shareholders and affiliated firms.

It requires listed firms to be independent, objective and fair in deals with such parties and prohibits the misuse of funds.

For example, major shareholders and their affiliates cannot ask a listed company to pay for their salary, welfare, insurance, advertisement and other expenses. The listed company also cannot provide loans to the major shareholder or the affiliate through banks or other financial institutions, or pay their debts.

To control risks, listed firms will also have to follow strict rules in guaranteeing services and enhancing information disclosure. The total volume of guarantees it gives to other companies cannot exceed 50 per cent of its net assets over the past fiscal year, the circular said.

Analysts said the new policy shows the regulators' determination to clear up the affairs of listed companies and curb rampant embezzlement of funds.

An investigation by the CSRC in the second half of 2002 found that fund embezzlement by the major shareholders existed in more than half of the listed companies, involving about 96.7 billion yuan (US$11.7 billion). Many of the firms were controlled or owned by the State.

Co-operation between the securities watchdog and SASAC would ensure better implementation of the new rules.

It would urge the listed companies to use the funds they raise from the stock market more efficiently and upgrade their own management quality, said Zhang Mingxing, a researcher with the State Information Centre.

But he also said that some companies would still find ways to evade the regulation and continue to misuse funds.

"The essence is to solve the liquidity problem in the stock exchanges and gradually float non-tradable State holdings," he said. "Then the stock prices will better reflect the status of the listed company, helping improve its management and internal control."

But he added that this is a very complex issue, requiring detailed attention to be paid to the drawing up of the new rules.

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