Shanghai will ban the use of taxi-hailing apps during rush hours after controversies over the software pointed to it disturbing market order and impeding social justice.

The city's transportation authorities called for an urgent halt of on-demand cab-booking mobile apps during daily peaks from 7:30 am to 9:30 am, as well as 4:30 pm to 6:30 pm, in an announcement issued on Wednesday.

Effective from March 1, taxi drivers that reject roadside hailing customers are subject to fines worth 200 yuan ($32) and 15 days' suspension of their work permit.

Drivers will also be restricted from using their mobile phones while driving.

Passengers can report such malpractices by submitting photos, audio and video clips as evidence to the Shanghai Transport and Port Authority.

Any partnerships between booking applications and private vehicles without rental licenses are illegal, the notice added.

Taxi-hailing apps essentially allow customers and drivers to negotiate a market price for transportation by skirting government price caps. As a result, many taxi drivers cruise the streets with their eye on a collection of cell phones dotted on their dashboards running various apps while searching for big-ticket bids, which poses potential safety hazards.

Shanghai's transportation authority also plans to enlist the city's taxi dispatch centers to supervise and regulate taxi-hailing apps. It has arranged talks with leading app operators Kuaidi Dache and Didi Dache and vowed to iron out the issue.

In an ideal scenario, the dispatch centers will create a record of reservation after taxi drivers accept orders from mobile apps. They then will turn on the red light on top of the taxi to indicate it's been booked.

Taxi-hailing apps have become successful because both drivers and riders are heavily subsidized by Internet gurus that back certain app operators.

Drivers get 10 yuan per ride by using Hangzhou-based Kuaidi Dache (loosely translated as Fast Taxi, Catch a Cab), which received 500 million yuan in funding from China's largest e-commerce vendor Alibaba. Customers get a 13 yuan rebate for using Alibaba's digital wallet Alipay for the fare.

"Alipay will strictly abide by the new policies from the Shanghai Transport and Port Authority. But customers and drivers are still encouraged to receive their daily rebates by scanning a barcode and paying via Alipay wallet," according to a company statement on Thursday.

With an easy name to remember, Kuaidi's archrival, Didi Dache (Honk, Honk, Catch a Cab), has rolled out similar offerings to lure users, most of whom are using mobile chat app WeChat.

"Didi is designed to make the best use of public resources and ease traffic congestion. We have been coordinating closely with Shanghai's transportation bureau to integrate the software into government-supervised reservation centers," one of Didi's largest shareholders and Internet conglomerate Tencent said in a statement.

Actions by Alibaba and Tencent may violate laws on unfair competition, said Hu Yue, a lawyer at Shanghai Jiehua Law Firm.

"An operator should not sell its goods at a price that is below the cost for the purpose of excluding its competitors. If the fare is priced at 14 yuan and passengers get 13 yuan back, the expenditure is significantly lower than the real cost," Hu said.

But it's still debatable whether such behavior is illegal, he noted, as companies such as Alibaba are giving out rebates rather than simply lowering costs.

Drivers are among the biggest beneficiaries of the incentives offered by apps. Liu Shijun, a driver with 10 years of experience at Shanghai-based Haibo Co, said he's making 100 yuan more every day with the app.

"The first thing I do every day is start up the apps. It helps me earn more and lets me prioritize my destinations. Why does the transport authority interfere in a win-win situation?"

But Mary Smith, an American business consultant in Shanghai, said she and her friends couldn't agree more with the ban.

"The apps have made it so hard to get a taxi," said Smith.

She attributed the Alipay-type payment as the culprit, since foreigners usually sign up for this service using a credit card from their home country, which often incurs fees when used internationally.

"Now drivers may choose to only drive people who use Alipay so that they receive more money. I can see it turning into a 'No Alipay, No ride' situation."