The Risk Regulation Of The Corporation’s External Guarantee

Under the background of the market economy, guarantee itself can be performed to reduce the transaction risk and increase the transaction safety and promote the security and effectiveness of the capital market development. However, some improper guarantees or guaranty regulation violations conducted by listing companies can not avoid the market risk by protecting the right of creditors and the small shareholders but increase the risk of the whole security market and thereafter have a negative effect on the capital safety and the quality of management of the listed company. It eventually affects the healthy development of the securities market and spoils the safety and order of transaction in the market economy Thus, it can not protect the interests of the creditors and the small shareholders. By analyzing the value and function of the guarantee regulations, this thesis reveals the reasons and harm of the unsuitable guarantee and attempt to discovery an effective strategy aiming to not only balance the interest of the debtor and creditor, guarantor and shareholders in the listing companies, but also promoting the guaranty market functions. The thesis consists of introduction and the main body. The first chapter illustrates the background, purpose and significance of the paper topic. On the other hand, it summarizes the theoretical studies and the current situation of the unsuitable guaranteeing scheme as for the listed company. Meanwhile, it introduces the basic methodology and the main content of the thesis. The second chapter, through analyzing the statistics of guarantee behaviors in the listed company, the thesis states the cases and potential influence of unsuitable guaranteeing on our security market and financial orders and stress the necessity of prevention measure. Thereafter it put forward the definition and functions of company guaranteeing and notice the necessity of it for the company operating and illustrates the basic function of the corporate guaranty. Any guaranty which disobeys the basic functions of it, the guarantee becomes nonsense which results in the introduction of unsuitable guarantee definition that: unsuitable guarantee is the guarantee behavior that controls the shareholder guarantee something externally in the name of the company itself by controlling the board which finally violates the laws and regulations and spoil the interests of the shareholders and creditors. The subject of the unsuitable guaranty is listed company and the characteristics of the behavior is the law breaking and regulation violation and consequently the right of shareholders and the creditors are injured. The unsuitable guaranty can be divided into two kinds:procedures improper and content incorrect in the behavior of guaranty. The third chapter emphasizes the illustrating the cause and the harm of unsuitable guaranty. In many unsuitable guaranty cases, guarantee always does harm on the small shareholders without consciousness by concealing from big stockholders. Secondly, the benefit of creditors can not be guaranteed. In the mutual guaranty cases, the guarantor is the debtor and the debtor is also the guarantor; the parties in the mutually guaranteeing circle have the obligation of paying the debt and guaranteeing in time. Creditor’s right has the safeguard on the surface but there is no safeguard of guaranteeing in a real sense. In addition, situations in over-guaranty are quite common. Some guaranty cases out of the guarantor capacity bring the direct risk that the guarantor can not take the responsibility of guaranteeing the unpaying result and eventually the creditors take the risks. Once the compensation happens, the creditors are unable to realize the right. Based on the negative effect caused by the above harm, with the increasing of the amount and scope of guaranty, unsuitable guaranty not only harm the individual listed companies and mutual guarantors, but also have a negative influence on transaction in the whole security market. On the one hand, it results in the ineffective capital allocation, on the other hand it will cause a chain of effects once guarantees are unable to pay the debt. The recent cases show that the listed companies face the guaranty risk frequently. When it comes across the public companies who should pay the debt, the price of the company goes down suddenly and intensify the stock market risk. On the other hand, the assets in commercial banks and in the securities markets influence each other in a large degree and therefore once a fluctuation happens in the stock market, there is a systematic financial risk brings about in the commercial banks. When analyzing the potential reasons which cause the unsuitable guaranty, the thesis first starts to find reasons in legal precautions. The current legal precautions are not referred to the unsuitable legal precautions such as no relevant regulation on mutual guaranty in the circle, imperfect laws has no strict requirement on the responsibility that the guarantor should take as a result of its unsuitable guaranty behavior. Another reason lies in the ineffectiveness of corporate governance such as ownership allocation, supervision of board and the function of supervision board and internal mechanism on risk controlling. The most comprehensive summary is made on the reasons of unsuitable guaranty resulting from corporate governance. These internal management schemes can forms the regulations gradually later. There are some other external reasons caused the bad guaranty such as limitation on the channels of financing for the corporate, imperfect system of credit management and local protection rules. Chapter Four explains the reasons of unsuitable guaranty from the listed company. By exploring the study on the overseas regulations on guaranty and absorb the good aspect of it, especially some rules and put forward some better method to perfecting the corporate guaranty and preventing the guaranty risk. The first way is to perfect the legal precautions and strengthen the controlling on the unsuitable guaranty. There are some flaws in Chinese laws such as "the circle of guaranty" coming to unsuitable guaranty. It is not limited in the laws and other things such as information disclosure system and guaranty effect-taking are not considered in the current laws. If there is a specific statement in the Chinese institutions, such unsuitable guaranty behaviors can be reduced and therefore the right to know can be protected by laws. The second way is to strengthen the internal corporate governance. Motivating the executives and punishment on the executives when the unsuitable guarantee occur are the effective measure to avoid it. As a result, top management will pay more attention when they make a decision on guaranty becausethey will take the responsibility on it and by doing this, the amount of guaranty will be reduced substantially;on the other hand, bettering the internal mechanism on the guaranty decision-making and risk controlling scheme for the listed company on the external guaranty will limit the existence of unsuitable guarantee. Even if the risk taking place, the risks can be reduced to the minimum degree; thirdly, board of supervisors and independent directors scheme will deepen the strictness of the guaranty procedures and bring down the damage of unsuitable guarantee; other aspect as the standardization of the market environment and the expansion of channels to judicial relief and the deepening of the judicial fairness. The operation of the listed company become more standardized which is the landmark of the Chinese market economy development and a very important party of our standardization of law.