Companies are not allowed to use custodians to own shares of insurance firms in China, the country’s top court has reportedly ruled.
The decision was made to deter what the Supreme People’s Court said were dangers to the financial systems. Authorities seek to stop a practice where companies hide their controlling assets in insurance firms to avoid regulation, Chinese financial portal Caixin reported. The illicit practice also enabled firms to pay for risky expansions through funds raised from the public.
The court’s ruling involved a case between Fujian Weijie Investment and Fuzhou Tiance Industry. Tiance accused Weijie of refusing to return 20 million shares of Junkang Life Insurance, in violation of a custody agreement, the report said.
The Fujian provincial court sided with Tiance in 2014, Caixin said. But the Supreme Court overturned the lower court’s decision and ruled against Tiance. It said the custodian agreement was not valid in the first place.
In a ruling published in Chinese, the Supreme Court warned that the practice of holding anonymous shares may hide firms from authorities’ supervision. This puts China’s financial order and stability at risk, precisely because the “vital interests” of many insured individuals.