General Rules on Enterprise Finance (2006 Revision)

General Rules on Enterprise Finance (2006 Revision) Order of the Ministry of Finance (No.41) In accordance with the provisions of the Reply of the State Council on the General Rules on Enterprise Finance and Enterprise Accounting Standards (No.178 [1992] of the State Council), the Ministry of Finance revised the General Rules on Enterprise Finance (Order No.4 of the Ministry of Finance). The revised General Rules on Enterprise Finance, which were deliberated and adopted by the ministerial meeting, are hereby promulgated and shall come into force as of January 1st, 2007. Minister of Finance Jin Renqing December 4th, 2006 General Rules on Enterprise Finance Chapter I General Rules Article 1 For the purpose of strengthening the financial management of enterprises, regulating the financial behaviors of the enterprises, protecting the legitimate rights and interests of the enterprises and the relevant parties and promoting the construction of a modern enterprise system, these General Rules are formulated in accordance with the provisions of the relevant laws and administrative regulations. Article 2 These General Rules shall apply to the state-owned enterprises and state holding enterprises established within the territory of the People's Republic of China according to law, with the exception of financial enterprises. Other enterprises shall follow these General Rules by analogy. Article 3 The state-owned enterprises and state holding enterprises (hereinafter referred to as enterprises) shall determine their internal financial management system, establish and improve their financial management systems and control their financial risks. The financial management of an enterprise means, in accordance with the formulated financial strategy, the rational raising of funds, effective operation of assets, control of the cost, regulation of the income distribution and such financial behaviors as reorganization and settlement and strengthen financial supervision and the management of financial information. Article 4 The Ministry of Finance shall be responsible for formulating the rules and regulations on enterprise finance. The financial departments of all levels (hereinafter collectively referred to as competent authorities of finance) shall strengthen the efforts in guiding, managing and supervising enterprise finance, their principle duties include: (1) supervising the implementation of the rules and regulations on enterprise finance, guiding the enterprises to establish and improve the internal financial systems in light of the financial relations; (2) formulating the financial policies that are beneficial for the reform and development of the enterprises, establishing and improving the financial fund management systems that support the development of the enterprises; (3) establishing and improving the enterprise annual financial report auditing system so as to check the quality of the annual financial report; (4) evaluating enterprise finance, monitoring the operation status of enterprise finance; (5) studying and drawing the systems on the distribution of state-owned capital gains and the operation budget of state-owned capital; (6) participating in the examination and approval of the important reform and restructuring schemes of the enterprises funded by the people's governments or the relevant departments and organs of the same level; (7) providing necessary assistance and services according to the demands of enterprise financial management. Article 5 Such enterprise investors as the people's governments of all levels and their departments and organs, business corporations, other organizations or individuals (hereinafter collectively referred to as investors), enterprise managers, factory managers, or other leaders that are actually responsible for the operation and management of the enterprises (hereinafter collectively referred to as operators) shall perform the duties of enterprise internal financial management in accordance with the laws, regulations, these General Rules and articles of association of the enterprises. Article 6 An enterprise shall pay taxes according to law. Where the financial treatment of the enterprise is inconsistent with any provision of any law or administrative regulation on taxation, it shall be adjusted according to law in paying taxes. Article 7 As for an enterprise funded by the people's government or any of its departments and organs, its financial relationship shall be affiliated to the financial organ of the same level. Chapter II Enterprise Financial Management System Article 8 An enterprise shall implement the financial management system that is clear in capital ownership, well-defined in financial relationship and conforms to the requirements of corporate governance structure. An enterprise shall establish effective grades of internal financial management. An enterprise group company shall decide its internal financial management system by itself. Article 9 An enterprise shall establish a financial decision-making system and clarify the decision-making rules, procedures, power limits and liabilities, etc. Where it is stipulated in any law or administrative regulation that certain financial items shall be decided after being deliberated by the workers' (representatives') congress or by soliciting the opinions of the workers and the relevant organizations, this law or regulation shall apply. An enterprise shall establish a withdrawal system for financial decision-making. As for the financial decision-making items under which the interests of any individual investor or operator conflict with those of the enterprise, the relevant investor or operator shall withdraw. Article 10 An enterprise shall establish a financial risk control system, clarify the management power limit and responsibilities of the operators, investors and other relevant personnel, and control the financial risks in accordance with the principles of equilibrating risks and proceeds and separating the incompatible duties. Article 11 An enterprise shall establish a financial budget management system so as to implement comprehensive budgetary management on such financial activities as fund-raising, assets operation, cost control, income distribution, reorganization and settlement, etc, by taking cash flow as the core and in accordance with the requirements of such financial objectives as maximizing the enterprise value. Article 12 The financial management duties of an investor mainly include: (1) deliberating and approving the internal financial management system, financial strategy, financial planning and financial budget of the enterprise; (2) deciding such significant financial items as fund-raising, investment, guarantee, donation, reorganization, remuneration for operators and income distribution, etc; (3) deciding the employment or dismissal of such intermediary organs as accounting firms or property assessment institutions; (4) supervising and evaluating the financial affairs of the operators; (5) appointing or recommending chief financial officers to exclusively-funded or holding enterprises in accordance with the relevant provisions. An investor shall perform the financial management duties through the shareholders' meeting, board of directors or other forms of internal institutions, and may grant part financial management duties to the operators by means of articles of association, internal systems or contractual stipulations, etc. Article 13 The financial management duties of an operator mainly include: (1) drawing enterprise internal financial management rules, financial strategies, financial plans, preparing financial budgets; (2) organizing the implementation of the financial schemes on fund-raising, investment, guarantee, donation, reorganization and profit distribution, etc, performing the obligation of debt repayment of the enterprise in good faith; (3) implementing the provisions of the state on employees' remunerations and labor protection, paying social insurance money and public accumulation funds for housing construction, etc, according to law, and safeguarding the workers' legitimate rights and interests; (4) organizing financial forecasting and financial analysis, implementing financial control; (5) preparing and providing enterprise financial report to reflect the financial information and the relevant situation according to the facts; (6) coordinating with the relevant organs in conducting such work as auditing, evaluation and financial supervision, etc. Chapter III Fund Raising Article 14 An enterprise may accept the financial contribution made by an investor in the form of monetary fund, real object, intangible assets, stock equity, or specific creditor's right, etc, among which, the specific creditor's right refers to the convertible bonds issued by the enterprise according to law and the creditor's rights that are swapped to equity in accordance with the relevant provisions. Where an enterprise accepts the capital contribution of an investor in the form of non-monetary assets, if there is any provision on the form of capital contribution, procedures or price assessment in any law or administrative regulation, this provision shall apply. Where an enterprise accepts the capital contribution of an investor in the form of such intangible assets as trademark right, copyright, patent right or other know-how, it shall conform to the relevant proportions prescribed in any law or administrative regulation. Article 15 Where an enterprise raises equity funds by means of absorbing direct investment or issuing shares, etc, according to law, it shall draw out a fund-raising scheme, determine the fund-raising scale, go through the internal decision-making procedure and necessary formalities of reporting for examination and approval and control the fund-raising cost. An enterprise shall entrust, according to law, a legal capital verification institution to verify the paid-in capital it has raised and produce a report on capital verification. Article 16 An enterprise shall implement the relevant capital management systems of the state and, within 30 days since it is approved for industrial and commercial registration, produce investment certificates to its investors according to the report on capital verification so as to determine the lawful rights and interests of the investors. As for the paid-in capital raised by the enterprise, during its continuous operation, the investors may transfer or decrease the capital in accordance with the relevant laws, administrative regulations and articles of association of the enterprise, but no investor may withdraw the capital contribution directly or in any disguised form. Except it is stipulated otherwise in the Company Law or any other relevant law or administrative regulation, no enterprise may repurchase the shares it has issued. An enterprise's repurchase of the shares according to law shall conform to the relevant conditions and financial treatment measures and be decided by the investors. Article 17 An enterprise shall manage the surplus of capital contribution actually paid by the investors which exceed the registered capital (including stock premiums) as capital reserve. After being deliberated and decided by the investors, the capital reserves may be converted into capital. Where it is stipulated otherwise by the state, the relevant provisions shall apply. Article 18 The surplus reserves withdrawn by an enterprise from its after-tax profits include legal accumulation funds and discretional accumulation funds, which may be used to make up the losses suffered by the enterprise or may be converted into increased capital. The part retained in the enterprise out of the legal accumulation fund that is converted into increased capital shall not be less than 25% of the registered capital before the conversion. Article 19 Where an enterprise increases the paid-in capital or converts the capital reserves or surplus reserves into paid-in capital, the investors shall complete the relevant financial items and industrial and commercial registration of alteration after conducting the financial decision-making procedures. Article 20 The various kinds of financial funds obtained by an enterprise shall be handled in accordance with the following different circumstances: (1) in case the fund is directly invested or injected by the state, the national capital reserve or government capital reserve shall be increased in accordance with the relevant provisions of the state. (2) in case the fund is an investment subsidy, increasing the capital reserve or the paid-in capital. If the state has stipulated on its ownership when appropriating the fund, the relevant provisions shall apply; otherwise, this fund shall be commonly shared by all investors. (3) in case the fund is a loan of discounted interest or a special subsidy, it shall be handled as an income of the enterprise. (4) in case the fund is reloaned by the government or a refundable subsidy, it shall be managed as a liability of the enterprise. (5) in case the fund is for making up loss, salvaging loss or any other purpose, it shall be handled as an income of the enterprise. Article 21 Where an enterprise raises debt funds according to law by means of loans, issuing bonds or financial leases, etc, it shall define the purpose of fund-raising, make necessary decisions on capital structure in light of the fund costs, debt risks and reasonable fund demands and sign a written contract. Where an enterprise raises funds for a fixed asset investment project, it shall abide by the industrial policies of the state, the provisions on industrial planning and proportion of self-owned capital and other provisions. In fund raising, an enterprise shall assess and use the fund according to the relevant provisions, fulfill the contract in good faith and accept supervision according to law. Chapter IV Assets Operation Article 22 An enterprise shall determine a reasonable assets structure and manage the assets structure in a dynamic way in accordance with the principles of equilibrating risks and proceeds and the operational purposes. Article 23 An enterprise shall establish an internal fun......