The Chinese government is to bring in major revisions to both Company Law and Partnership Law as they relate to risk investment.

"In the first draft of the revised Company Law provisions, many restrictive regulations applying to risk investment have been deleted or revised, and some new provisions intended to promote the development of risk investment have been introduced," said Zhou Xiaoyan, vice director of the Department of Treaty and Law of the Ministry of Commerce. He was speaking mid-June at a Sino-US enterprises' development forum held in Xi'an, the capital of Shaanxi Province.

Zhou said, "The State Council Legislative Affairs Office sought comments on the revisions from interested parties in late May. This time the modifications are significant. Actual payment of capital is being changed to warrant payment. There will be several new ways to raise funds such as transferring shareholder's rights. New provisions will deal with intellectual property rights and copyright. Restrictive measures relating to the transfer of shareholder's rights are to be removed or amended. And companies will be allowed to repurchase their own stock."

"Although not yet finalized, the draft provisions would basically remove the regulatory obstacles to risk investment which are of most concern to investors," said Zhou adding, "Work has also started on revising the Partnership Law which is another important piece of legislation affecting risk investment. However this is at an earlier stage of development and is still only being researched at this time."

"When the current Company Law was adopted on December 29, 1993 it was mainly aimed at manufacturing and trading enterprises. Many of its provisions are considered to be unsuited to today's entrepreneurial enterprises which have capital investment as their main business. Meanwhile, the limited partnership which is not even mentioned in the extant Partnership Law is regarded as the most suitable vehicle for risk investment by most American investors," Zhou said.

Many insiders consider the development of risk investment has gone relatively slowly in China due to difficulties in the legal environment. Risk investment started in China back in the mid-1980s and was called "pioneering investment". In 1995, the CPC Central Committee issued the "Decision on Scientific and Technological Systems' Reform" that provided the first guidelines and policy for risk investment.

In that same year, the China New Technological Pioneering Company opened its doors as the first risk investment company in the country. A succession of scientific and technological risk investment companies, risk investment funds, and scientific and technological investment guarantor companies were soon to follow its lead. Governmental departments were the main investors.

According to Zhou, a good set of mechanisms for the withdrawal of capital is necessary to promote the effective circulation and reinvestment of risk investment capital. Currently the three options for withdrawal (shareholders' rights transfers, public listings and settlement) all lack clear, specific and targeted laws and regulations. What's more there is no legal guarantee mechanism in place.

"The stipulations of the Company Law are now considered too onerous. There are no operational regulations for shareholders' rights transfers. The relevant provisions of the Bankruptcy Law are only suitable for state-owned enterprises," said Zhou.

Shareholder's rights transfer is a typical property right's transfer. However a market for trading copyright has not yet emerged in China. High transfer costs and the lack of a clear legislative and regulatory framework for ownership rights in the hi-tech, scientific and technological areas, coupled with now outdated supervisory and management practices have served to restrict the freedom of hi-tech enterprises to conduct property rights' transfers.

Zhou recalled that in May 1996 the National People's Congress adopted the Law on Promoting the Transformation of Scientific and Technological Achievements. This provided a legal basis for the operation of risk investment companies. Then in December 1999, the central government issued "Some Suggestions on Establishing a Mechanism for Risk Investment". This was followed in January 2003 by "Provisional Rules on Mergers with and Acquisitions of Domestic Enterprises by Foreign Investors". These legislative steps served to introduce "pioneering investment" experience to China's developing market economy.

"However these measures were essentially conceptual and set out only the basic principles. There remains a need to bring in operational regulations," said Zhou adding, "The rights and responsibilities of the various parties in commercial transactions of this nature need to be clearly defined and legislation is necessary to protect their investments."

(China.org.cn by Li Jingrong, June 28, 2004)