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Protecting Investors in ChinaOfficials at Elf Aquitaine, France’s largest oil company, awarded business deals in return for large sidepayments. Along with the extra cash, they got seven years in jail and a €2 million fine for abuse of power.Russian oil firm Gazprom purchased materials for new pipelines through intermediaries owned bycompany officers. The high cost raised eyebrows, but not court battles.Big cases make headlines. But looting by corporate insiders occurs every day on a smaller scale, andoften goes unnoticed. To document the protections investors have, Doing Business measures howcountries regulate a standard case of self-dealing—use of corporate assets for personal gain.The case facts are simple. Mr. James, a director and the majority shareholder of a public company,proposes that the company purchase used trucks from another company he owns. The price is higherthan the going price for used trucks. The transaction goes forward. All required approvals are obtained,and all required disclosures made, though the transaction is unfair to the purchasing company.Shareholders sue the interested parties and the members of the board of directors.Several questions arise. Who approves the transaction? What information must be disclosed? Whatcompany documents can investors access? What do minority shareholders have to prove to get thetransaction stopped or to receive compensation from Mr. James? Three indices of investor protection areconstructed based on the answers to these and other questions. All indices range from 0 to 10, withhigher values indicating more protections or greater disclosure.The extent of disclosure index covers approval procedures, requirements for immediate disclosure to thepublic and shareholders of proposed transactions, requirements for disclosure in periodic filings and<strong>report</strong>s and the availability of external review of transactions before they take place.The extent of director liability index covers the ability of investors to hold Mr. James and the board ofdirectors liable for damages, the ability to rescind the transaction, the availability of fines and jail timeassociated with self-dealing, the availability of direct or derivative suits and the ability to require Mr. Jamesto pay back his personal profits from the transaction.The ease of shareholder suits index covers the availability of documents that can be used during trial, theability of the investor to examine the defendant and other witnesses, shareholders’ access to internaldocuments of the company, the appointment of an inspector to investigate the transaction and thestandard of proof applicable to a civil suit against the directors.These three indices are averaged to create the strength of investor protection index. This index rangesfrom 0 to 10, with higher values indicating better investor protection.If the rights of investors are not protected, majority ownership in a business is the only way to eliminateexpropriation. But then investors must devote more oversight attention to fewer investments. The result:entrepreneurship is suppressed, and fewer profitable investment projects are undertaken. Whereself-dealing is curbed, equity investment is higher, ownership concentration lower and trust in thebusiness sector deeper. Investors gain portfolio diversification, and entrepreneurs gain access to cash.32
1. Historical data: Protecting Investors in ChinaProtecting Investors dataDoing Business2006Doing Business2007Doing Business2008Rank 81 83Investor Protection Index 4.3 5.0 5.02. The following graph illustrates the Protecting Investors index in China compared to best practice andselected Economies:5.05.05.36.06.07.09.09.7RussiaChinaBrazilIndiaMexicoJapanHong Kong, ChinaNew ZealandNote: The higher the score, the greater the investor protection.33
Page 1 and 2: China
Page 3 and 4: © 2007 The International Bank for
Page 5: IntroductionDoing Business 2008 is
Page 8 and 9: 9. In China, a new property law put
Page 10 and 11: Summary of Indicators - ChinaStarti
Page 12 and 13: Starting a Business in China: Entry
Page 14 and 15: 3. Steps to Starting a Business in
Page 16 and 17: The following table shows Starting
Page 18 and 19: 1. Historical data: Dealing with Li
Page 20 and 21: 13. Review of construction drawings
Page 22 and 23: The following table shows Dealing w
Page 24 and 25: 1. Historical data: Employing Worke
Page 26 and 27: The following table shows Employing
Page 28 and 29: 1. Historical data: Registering Pro
Page 30 and 31: 4. Benchmarking Registering Propert
Page 32 and 33: Getting Credit in China: Legal Righ
Page 34 and 35: 3. Benchmarking Getting Credit Regu
Page 38 and 39: 3. Benchmarking Protecting Investor
Page 40 and 41: Paying Taxes: Tax Payable and Compl
Page 42 and 43: 3. Benchmarking Paying Taxes Regula
Page 44 and 45: Trading Across Borders: Importing a
Page 46 and 47: 3. Benchmarking Trading Across Bord
Page 48 and 49: Enforcing Contracts: Court Efficien
Page 50 and 51: 3. Benchmarking Enforcing Contracts
Page 52 and 53: Closing Business in China: Bankrupt
Page 54 and 55: 3. Benchmarking Closing Business Re
Page 56 and 57: APPENDICESStarting a Business in Ch
Page 58 and 59: - Appointment documents and identif
Page 60 and 61: Cost to complete:Comment:no chargeA
Page 62 and 63: 14 *Receive review of building draw
Page 64 and 65: Procedure1Request and obtain approv
Page 66 and 67: Comment:Procedure6The Shanghai Hous
Page 68 and 69: Procedure14Receive review of buildi
Page 70 and 71: Comment:No time limits apply for in
Page 72 and 73: 建建建建建建建建建
Page 74 and 75: Employing Workers in ChinaEmploying
Page 76 and 77: Registering Property in ChinaThis t
Page 78 and 79: Procedure3(v) Photocopy of the iden
Page 80 and 81: Protecting Investors in ChinaThe ta
Page 82 and 83: Paying Taxes in ChinaThe table belo
Page 84 and 85: Trading Across Borders in ChinaThes

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