CIRCULAR No CIRCULAR No. 104/1998/TT-BTC OF JULY 18, 1998 GUIDING FINANCIAL MATTERS WHEN CONVERTING STATE ENTERPRISES INTO JOINT-STOCK COMPANIES (Pursuant to Decree No. 44/1998/ND-CP of June 29, 1998) In furtherance of Government Decree No. 44/1998/ND-CP of June 29, 1998 on converting State enterprises into joint-stock companies, the Ministry of Finance provides the following guidance on financial matters: Part one GENERAL PROVISIONS 1. Subject to this Circular are State enterprises in the category of equitisation stipulated in the Appendix of classification of State enterprises promulgated with Article 1 of Government Decree No. 44/1998/ND-CP of June 29, 1998. 2. Terms used in this Circular shall be understood as follows: 2.1. Joint-stock company is an enterprise where shareholders jointly contribute capital, take part in management, share profits and jointly bear the risks correspondingly to the stakes contributed. 2.2. Share is the company�s charter capital divided into numerous equal parts. 2.3. Shareholder is an individual or a legal entity that owns shares of joint-stock companies. 2.4. Share is a certificate of value issued by joint-stock companies to certify shareholders� ownership of shares. 2.5. "Charter capital" of a joint-stock company is the total capital contributed by shareholders and specified in the company�s charter. 2.6. Book value of enterprises is the total value of assets expressed in the Accounting Balance of enterprises according to the current accounting system. 2.7. Actual value of enterprises is the total real value of the assets (tangible and intangible) that belongs to enterprises and is calculated at market price at the time of the determination of the value of enterprises. 2.8. Book value of State capital is the remainder after subtracting debts payable, balance of the welfare funds and rewards(if any) from the total value of the assets reflected in the Accounting Balance at the time of the determination of the value of enterprises. 2.9. Actual value of State stake in enterprises is the remainder after subtracting debts payable, balance of the welfare and bonuses funds (if any) from the total real value of enterprises. 2.10. Dividend is a part of after-tax profit of joint-stock companies to be divided among shareholders. 2.11. Value of enterprises� goodwill is the added value created by such goodwill elements as geographical positions or prestige of enterprises� lines of products. 2.12. State governing shares are types of shares that meet one of the two following conditions: - State shares that represent more than 50% (fifty per cent) of the company�s total shares; - State shares that at least double the number of shares owned by another biggest shareholder in the Company. 2.13. State�s special share is the share of the State in the company where the State does not hold governing shares but has the right to decide on a number of important matters of the company as stated in the organization and operation charters of joint-stock companies. 2.14. Proceeds from the sale of shares is the sum collected when selling shares of joint-stock companies. 2.15. Proceeds from the sale of shares that belong to State capital is the actual value of the State stake in enterprises minus (-) the value of State shares contributed to the company. The sum actually collected from the sale of shares that belong to State capital is the money gained from selling shares that belong to State capital minus (-) equitization expenses and the preference value granted to employees of enterprises. 2.16. Equitisation expenses: are necessary and actual expenses to convert State enterprises into joint-stock companies. 2.17. The direct managing bodies of equitized enterprises are: - The branch managing ministries (if they are independent enterprises under the management of ministries or branches); - The provincial/municipal People�s Committees (if they are independent enterprises under the management of the provincial/municipal People�s Committees); - Managing Boards of State corporations (if they are member enterprises of the State corporations); and - Directors of independent enterprises (if they are parts of independent enterprises, separated for equitisation). 2.18. Direct manager of State capital is the person deputed by competent State agency(ies) to directly manage the State stake in joint-stock companies. 2.19. The time of equitisation is the time specified in a decision by the competent State agency to convert a State enterprise into a joint-stock company. 3. After State enterprises are converted into joint-stock companies, the latter shall inherit all the rights and perform all the obligations of the former. 4. Forms of equitisation Depending on the specific situation and requirements, State enterprises may select and apply one of the following four forms of equitisation: 4.1. To keep intact the existing State capital in enter-prises, to issue shares and to attract more capital for the enterprises� development. According to this form, the value of the State shares contributed to companies is equal to the actual value of the State stake in enterprises minus (-) the equitisation expenses, the preference value granted to employees and the value of the amounts to be paid in installments by poor employees in accordance with the stipulations of the State. 4.2. To sell part of the value of the existing State capital in enterprises. By this form, the State shall use part of the actual value of its capital in enterprises to sell to shareholders. 4.3. To separate parts of enterprises for equitisation. Under this form, a part of an enterprise may operate independently and make separate accounting of the value of its assets separated for equitisation (e.g. workshops, stores, service sections, etc.). 4.4. To sell the entire value of the existing State capital in enterprises in order to convert the latter into joint-stock companies. By this form, the State shall not participate in shares in such joint-stock companies. Part two SPECIFIC PROVISIONS I. ENTITLEMENT TO PURCHASE SHARES FOR THE FIRST TIME When State enterprises are turned into joint-stock companies, the entitlement to purchase shares for the first time stipulated in Article 8 of Government Decree No. 44/1998/ND-CP of June 29, 1998 shall be as follows: 1. For enterprises where the State holds governing shares or special shares, each legal person shall be entitled to buy not more than 10% and each individual not more than 5% of the total number of an enterprise�s shares. 2. For enterprises where the State does not hold controlling shares or special shares, each legal person shall be entitled to buy not more than 20% and each individual not more than 10% of the total number of an enterprise�s shares. 3. For enterprises where the State does not participate in shares, there shall be no limitation as to the number of shares which a legal person or an individual may buy but there must be sufficient number of shareholders as provided for by the Law on Companies. 4. If before equitisation, State enterprises have borrowed capital from employees for production and business, part or whole of such capital lent to the enterprises which have been converted into joint-stock companies may be turn into share capital if they so request. After 30 days from the date of beginning to sell shares, if the number of shares actually sold out is not up to the approved plan while shareholders� buying demand is higher than the stipulated governing level, the body deciding the equitisation shall, at the request of equitised enterprises, consider augmentation of the entitlement to purchase shares for individuals and legal persons in conformity with the enterprises� situation. For enterprises where the State holds controlling shares, the augmentation of the entitlement to purchase shares shall not affect the State controlling shares. II. DETERMINATION OF ENTERPRISES� VALUE 1. Principle for determination: The determination shall comply with the stipulations in Articles 11 and 12 of Government Decree No. 44/1998/ND-CP of June 29, 1998. 2. Inventory of assets under enterprises� ownership: The assets owned by State enterprises and subject to inventory shall include current and short-term investment assets and fixed and long-term investment assets reflected in the Accounting Balance according to the current accounting regime. Separate inventory shall be made with regard to assets hired outside, materials and goods undertaken to hold in trust, to process, to sell in trust and to be deposited. 2.1. Inventory of assets shall comply with the following requirements: 2.1.1. To determine the quantity of the assets that actually exist till the time the enterprise�s value is determined. 2.1.2. To classify the existing assets under enterprises� ownership: - For assets which enterprises have requirements to use, the remaining quality of each asset, kind or group of assets shall be determined on the basis of the technical parameters and the actual state of assets. The remaining quality shall be manifested in the percentage compared to the quality of the assets newly procured or invested in new constructions. - For assets which enterprises do not have requirements to use, including assets that are not in use and assets that are beyond the possibility of restoration for production and business, they must be declared and inventoried separately so that handling measures shall be taken. - Assets formed from reward and/or welfare fund (if any) shall be inventoried so as to hand over separately to joint-stock companies for management and use. 2.1.3. To determine the assets that are deficient comparing with books (if any). 2.1.4. To compare and classify items of debts. Recoverable bad debts must be proved by valid and concrete evidences: - Debts not acknowledged by debtors; - Debtors are legal entities that have been dissolved or have gone bankrupt; - Debtors are individuals who have died, or fled without any inheritors of their responsibilities; - Bad debts due to other causes. 2.2. Organization of inventory of assets Directors of equitised State enterprises shall have to set up asset inventory councils according to the above-mentioned requirements. Membership of the inventory council shall comprise: - The Director of the equitized State enterprise as its the president; - The chief-accountant as a member; and - The head of the technical department as a member. Besides, depending on concrete situtation, directors of enterprises shall invite technical experts conversant with the properties, effects and quality of assets to participate in the asset inventory council. 3. Handling of assets and debts prior to equitisation: 3.1. The following assets shall not be calculated into the value of enterprises for equitisation: 3.1.1. Those assets that enterprises cannot continue to use and that have been reflected on financial reports before the time of determination of enterprises� value may be handled by one of the following measures: - The direct managing body of enterprises shall transfer them to other enterprise under its management; - Organization of auction sales (or liquidation sales). The proceeds collected from auction (or liquidation) sales after subtracting expenses for the auction (or liquidation) sales shall be accounted in enterprises� value if they incurred prior to the equitisation or paid to the corresponding account stipulated in Point 2, Item V hereof if they incurred after the equitisation; - If State enterprises are turned into joint-stock companies while it is impossible to sell these assets by auction (or liquidation sales), the body deciding the equitisation shall authorize the joint-stock companies to manage them on its behalf. Within 90 days at the latest from the time of equitisation, the body deciding the equitisation must organize auction (or liquidation) sales in order to recover capital. The auction (or liquidation) sales shall be carried out in conformity with the current stipulations. 3.1.2. Recoverable bad debts as stipulated in Point 2.1.4 of this Item. 3.1.3. Unfinished construction costs of works that have been suspended prior to the time of determination of enterprises� value. 3.1.4. Long-term investment in other enterprises, which is, however not put to equitisation effected by enterprises shall be handled by the body deciding the equitisation. 3.1.5. Financial leasing assets which are the part of debts unpaid to owners of assets. 3.1.6. Assets hired outside: Where the lessor agrees to sell and the lessee-enterprise agrees to buy the assets being leased, the latter shall be responsible for payment at the mutually agreed price. Where the lessor being a State enterprise has agreed with the direct managing body to transfer such assets to the equitised enterprise, the direct managing body of the enterprise shall decide to transfer assets to the lessee, the asset transferor shall be entitled to account it as reduction of capital while the transferee shall account it as a capital increase. The asset transferee (the equitised enterprise) shall re-evaluate the assets and calculate them in the enterprise� s value. Where an equitised enterprise leases assets and make investment in the improvement of the or upgrade the leased assets, the remaining value of the portion that has been invested in, renovated or upgraded shall be dealt with as follows: + Where the leasing enterprise takes back the assets, it shall pay to the lessee-enterprise the invested or upgraded value. Where the lessor which is a State enterprise agrees to take back assets together with the invested, renovated or upgraded value, the two parties may hand over the invested and upgraded value which shall be accounted according to the principle of capital increase or reduction as mentioned above; + Where a joint-stock company continues to lease the assets, the costs of investments, renovation and upgrading that have been spent shall be calculated into the enterprise�s value. 3.1.7. Assets formed from reward and/or welfare fund (if any) 3.2. With regard to assets that are being managed and used by enterprises the owners of which, however, have not been determined, they shall be considered assets under the State capital and the value of which must be determined. When their owners are determined, the Ministry of Finance shall handle specific case by case. 3.3. Other reserves for price reduction of stocks, reserves for bad debts, reserves for reduction of prices of securities and for differences in exchange rates and undistributed profits (if any) shall be also dealt with prior to the determination of the actual value of enterprises. 3.4. The balance left in reward and/or welfare funds shall be divided among employees for purchasing shares. 4. Market prices which are used to determine the actual value of assets shall be stipulated as follows: 4.1. For assets which are circulated on market, the market prices are the prices at which these assets are being purchased or sold. 4.2. For assets which are of specialised use or are construction investment products, the market prices shall be based on investment rates (or investment prices) at the time of determination of enterprises� value, stipulated by the competent authority. 4.3. For particular assets that are not circulated on market, the market prices shall be calculated on the basis of the prices of assets of the same kind with similar capacity and technical properties. If such similar assets are not available, the prices of the assets shall be calculated according to their prices inscribed on account books. 5. Description and methods of determination of the actual value of enterprises for equitisation: 5.1. For immovable and moveable assets which are inventoried objects, their actual value shall be determined according to the following formula: Actual Actual Market prices of The value quantity assets at the time remaining of = of each x of determination x quality of assets kind of enterprises� assets (%) asset value 5.2. For assets which are capital in cash, their actual value shall be calculated according to the balance of cash capital which has been checked and compared at the time of determination of enterprises� value. If the balance is in foreign currency(ies), it shall be converted into Vietnamese currency at the interbank exchange rate promulgated at the latest date. 5.3. For recoverable debts, their actual value shall be those debts that have been compared and acknowledged. 5.4. For unfinished expenses (including expenses incurred in production, business, non-business expenses and expenses in construction), their actual value shall be calculated according to the actual balance of expenses on account books. 5.5. For short-term and long-term deposited assets, their actual value shall be calculated according to the actual balance on account books compared and acknowledged at the time of determination of enterprises� value. 5.6. For short-term and long-term investment assets, those items that join-stock companies will inherit shall be calculated in enterprises� value. 5.7. For intangible assets (if any), their actual value shall be calculated according to the remaining value which is being accounted on account books. 5.8. For enterprises that have business goodwill, the goodwill value shall be calculated into the actual value of enterprises as follows: - Where the goodwill value (such as prestige of goods, geographical position) has been evaluated, the actual balance on account books shall be taken to calculate into enterprises� value; - Where the goodwill value has not been determined, it shall be calculated on the basis of the average superprofits ratio of the three years that immediately precede the time of determination of enterprises� value to calculate the goodwill according to the following formula: Enterprises� The total profits gained in 3 immediately average preceding years profits ratio = --------------------------------------------------------- of three Total State capital according to account books years of the three immediate preceding years Average Enterprises� Enterprises� general average super- average profits ratio of State enterprises profits = profits - of the same production/business ratio ratio of lines in the same area three years (provinces or cities) Goodwill State capital value according to the calculated average account Average into = books of three x superprofits x 30% enterprise�s immediately ratio value preceding years The enterprises� actual value for equitisation is the total of items (5.1 + 5.2 + 5.3 + 5.4 + 5.5 + 5.6 + 5.7 + 5.8) mentioned above. 5.9. For those enterprises that have failed to comply with law provisions on book accounting and statistics, the body that decides their value shall consider the hiring of independent auditing organizations to make the determination. The cost of hiring audit shall be calculated in the equitisation expenses. 6. Determination of the actual value of the State capital in enterprises: The actual value of the State capital in enterprises is the remainder of the actual value of enterprises minus the actual debts payable including balance of the welfare and/or reward funds. - Actual debts payable are the total debts stipulated in Item A (Debts payable - Code No. 300) of the Accounting Balance minus (-) non-performing debts. - Non-performing debts are those debts where creditors have been dissolved, gone bankrupt, died, fled or abandoned the right to claim debts. 7. Council for Determination of Enterprises� Value: 7.1. Such a council shall comprise: - A representative of the financial agency who will act as its chairman; - Representatives of branch managing agencies (ministries, branch managing municipal/provincial Services, Corporations 91) who will act as members; - A representative of the leadership of the to be equitised State enterprise as member. Apart from the above-said official members, depending on the situation of t

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