Foreign companies falling foul of investment rules

Some foreign companies investing in China have made financial losses due to a lack of understanding of the country's laws and regulations, a Shanghai court has revealed after reviewing commercial cases involving foreign companies over the past four years.

"Some investors didn't know that foreign companies could only invest in particular sectors after obtaining permission from the relevant administrations, which led to various illegal practices and disputes," said Chen Jianwei, vice-president of Huangpu District People's Court in Shanghai.

The court accepted 152 commercial cases concerning foreign companies from 2009 to 2012, with the number rising each year during this period. The amount of money involved in such cases rose by more than 94 percent each year, reaching nearly 44 million yuan ($7 million) last year.

"The growing number of cases shows the prosperity of foreign trade and investment in Shanghai in recent years and reflects the need for better guidance for foreign companies on how to abide by the laws, as well as the creation of a fair and orderly legal environment," Chen said.

In one case in 2011, Yang Shu Hwei, a citizen of the United States, signed a business contract with the defendant, Shanghai Qitong Hutong Electronic Seal Safety Certification Co Ltd. Yang paid 5 million yuan to obtain the franchise rights of the company's products.

However, the arrangement failed because the police department does not allow foreign companies to invest in the safety certification of electronic seals. Yang filed a lawsuit against the company but lost the case.

Some foreign firms have attempted to invest in areas that are prohibited to foreign investors by disguising their true intentions behind a seemingly legal cover operation.

In some cases, foreign companies have held shares in a domestic company under the name of another Chinese company to circumvent the strict rules against overseas-funded enterprises merging with domestic ones.

One case in May 2011 demonstrates this practice well. The Huangpu court ruled that Tan Teow Feng, a woman from Singapore, was not a shareholder in the company Shanghai Aotian, which counted bars and hotels among its key businesses.

"She purchased equity in the company and registered it under the name of a Shanghai-based domestic business, but the court ruled that the equity transfer contract was invalid because it goes against Chinese law," said Shen Lan, a presiding judge with a civil adjudication tribunal at the court.

"Foreign businesspeople should fully investigate which industries they are encouraged and allowed to invest in by the authorities. Regarding those areas that prohibit foreign funding, investors should not take any risks in the pursuit of economic gain," Shen said.

Zhang Min, director of the district's commerce commission, said the commission will be investigating the backgrounds and qualifications of foreign investors more closely in future before providing them with approval to conduct business.

zhouwenting@chinadaily.com.cn