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Employee stock ownership plan raises concerns in China

(Xinhua)

08:17, August 07, 2012

BEIJING, Aug. 6 (Xinhua) -- A new regulation aimed at facilitating the formation of employee stock ownership plans (ESOP) has received mixed reviews from experts.

The draft regulation, which was released Sunday by the China Securities Regulatory Commission (CSRC), would put emphasis on stock ownership by average employees. China currently has an incentive regulation that favors executive stock ownership.

The draft regulation is open for public comment until Aug. 17.

Zhou Ye'an, a professor of economics and corporate finance at Renmin University of China, said the new regulation will certainly help adjust the ownership structure of companies and bring employees extra income through stock ownership.

"However, the biggest defect is that existing shareholders would have to share their stock interests with new ones," Zhou said, referring to the dilution of existing stocks.

Another issue worrying experts is taxation.

In the United States, neither companies nor employees pay taxes on contributions to an ESOP. Stock proceeds are only taxed when an employee retires or leaves the company, according to an ESOP research center in America.

Zhou said that without a preferential tax policy like this, an employee stock ownership plan could "hardly" create any incentive.

CSRC is still negotiating with relevant parties about taxation, said an insider.

However, Guo Tianyong, director of the China Banking Industry Research Center, noted the incentive potential of employee stock plans.

Guo said when employees' personal wealth is "bound together" with the company, they will keep business goals in mind, strive to find more customers and be devoted to cost savings.

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