3. Notice on Relevant Issues Concerning Rights Issues by Listed Companies

Issued by the China Securities Regulatory Commission

This Notice was issued on March 17, 1999 and replaced five early notices issued between 1994 and 1998 as of the same date. Its aim is to standardize the procedures for the approval and execution of rights issues in the PRC.

A "rights issue" is defined in the Notice as the act of offering new shares to existing shareholders in proportion to their stake in the company. The conditions for rights issues by listed companies are listed as follows:

(1) The personnel, assets and finances of the listed company must be separate from those of its controlling shareholder to guarantee that the listed company's personnel are independent, its assets whole and its finances independent.

(2) The company's articles of association must be in compliance with the relevant provisions of the PRC Company Law, and they must have been amended pursuant to the 1997 Guidelines for Listed Companies' Articles of Association.

(3) The use of the proceeds of the rights issue must comply with State policy. (4) The previous share issue(s) must have been fully subscribed and the proceeds therefrom put to good use; further, the proposed rights issue must occur at least one full fiscal year (January 1-December 31) after the last issue.

(5) Companies which have been listed for more than three fiscal years must have maintained an average return on net assets of not less than 10 percent for the most recent three fiscal years; companies listed for less than the above time period and companies in certain State-supported sectors (e.g., agriculture, energy, raw materials, infrastructure, and high technology), the average return on net assets for the full fiscal years completed since listing may be lower than 10 percent, but under no circumstances lower than 6 percent.

(6) No false entries or major omissions have been made in the company's financial or accounting documents during the three years prior to application for rights issue.

(7) The company predicts that, after raising funds from the proposed issue, its return on net assets will match or exceed the bank deposit interest rate for the same period.

(8) The issued shares are limited to ordinary shares and must be issued to all of the company's shareholders whose shareholdings have been registered by the registration deadline.

(9) The total number of shares issued in one rights issue must not exceed 30 percent of the total shares of the company after full subscription of the last issue; certain companies, such as companies engaged in key State construction or technological reform projects may be exempted from this 30-percent restriction.

The Notice also outlines behavior for which an application for a rights issue will be denied, including failure to disclose information as required by PRC law, recent serious violations of PRC laws or regulations, and the existence of other transactions which might prejudice the company's interests. If refused approval by the China Securities Regulatory Commission, the listed company may not apply for another rights issue for a period of one year.

If the application for rights issue is approved, the company must proceed with various negotiations and procedures and coordinate the details of the rights issue with the relevant stock exchange.

In principle, rights issues of companies issuing domestically-listed foreign investment shares (B shares) shall comply with the provisions of this Notice, unless State regulations provide otherwise.