China Sinochem International Corporation will set aside 20 million shares for its high-ranking managers as part of a plan to float its non-tradable shares.

Allowing top managers to buy shares is being brought in to encourage them to support the selling off of the firm's non-tradable shares.

This is necessary because if the change is brought in, managers will lose some privileges they currently enjoy under the existing system.

The company will also offer shares and cash compensation to tradable shareholders if the flotation plan goes ahead.

This is the first time a firm planning to sell off its non-tradable shares has announced it will give shares to its top managers.

In a compensation proposal released yesterday, the chemical firm said top managers would initial have to pay 0.5 yuan (6 US cents) for each share to secure the option.

This entitles the holder to purchase shares at the price of an extra 5 yuan (60 US cents) a share.

The firm also says the corp's non-tradable shareholders will pay tradable shareholders 1.5 shares and 5.58 yuan (67 US cents) in cash for each 10 shares held.

The two proposals have to be agreed by two-thirds of the tradable shareholders.

The managers windfall still needs the nod from market watchdog the China Securities Regulatory Commission (CSRC), but market insiders said the CSRC might approve it within this week.

The corp's non-tradable shareholders have also promised not to put their shares on the market for sale within 12 months after the floatation in order to ease investors' concerns over flooding the market with shares, leading to a possible price fall.

Within 36 months after the reform, newly-tradable shares will account for no more than 10 per cent of the company's total shares.

The managers' windfall will act as a good instrument to encourage top managers to push forward the share structure reform, but the right should be combined with obligations, said Yi Xianrong, a finance expert in Beijing.

The option gives the managers the right to enjoy rewards for good performance, but there are no punishments if they failed, he said.

Moreover, the corp's last trading price was 5.58 yuan (67 US cents) before trading was suspended on June 17 to undergo the share structure reform.

It seems the share price will remain above 5 yuan (60 US cents), said Zhong Wei, director of the International Finance Research Centre with Beijing Normal University.

If the option works as an encouragement, there should be some challenges, he said.

He also pointed out that the reward to top officials might lead to a dramatic decrease in "corporate cohesion."

If the reward to top managers is approved, there will be an even bigger difference in the salaries of ordinary staff and top officials in the big State-owned enterprises. This could lead to complaints from lower paid staff, the expert said.

Moreover, how to judge top officials' performances in the share reform and avoid fraud is another big issue, said Dong Chen, a senior analyst at China Securities.

There should be some clear and measurable standards, he said.

The analyst also mentioned that effective supervision is quite important.

It is hard for the State to exercise effective and strict supervision of big SOEs, and strategic investors must be invited to work as the watchdog, he said.

The strategic investors can be international investment banks, funds, Qualified Foreign Institutional Investors and foreign firms.

Strategic investors are long-term investors and care about the development of the firm. They can set clear standards and carry out strict supervision of the listed firms.

Also yesterday, many of the second batch of the 42 firms that are being allowed to engage in the share floatation reform unveiled their compensation proposals.

China Yangtze Power, owner of the world's biggest hydropower project, will compensate its tradable shareholders with 1.6706 shares and 5.88 yuan (67 US cents) in cash for every 10 shares held.

Tradable shareholders of Shanghai Port Container, the publicly traded unit of China's biggest port, will receive 1.5 shares and 10 yuan in cash for every 10 tradable shares they hold.

(China Daily July 5, 2005)