INSIGHT

New rules on foreign investment in Vietnamese credit institutions

Asia Banking Financing Vietnam

In brief

The long-anticipated changes to the rules on foreign investment in Vietnamese credit institutions, allowing greater levels of foreign investment (particularly in the case of 'weak' banks), will soon come into effect. Partner Robert Fish and Senior Associate Linh Bui report.

Background

On 3 January 2014, the Government issued new Decree 01/2014/ND-CP on the purchase by foreign investors of shareholdings in Vietnamese credit institutions (Decree 01). The New Decree will become effective from 20 February 2014.

It was adopted substantially in the same form as the draft decree, which was published in March 2013 (the Draft Decree).

The key differences between Decree 01 and the current Decree 69 are as follows.

New limits for different types of foreign investors

The individual limits for different types of foreign investors in Vietnamese banks have changed. These limits were proposed in the Draft Decree.

Current limits New limits
  • Any foreign investor and its affiliates, not being a foreign credit institution or foreign strategic investor – 5 per cent
  • Any foreign credit institution and its affiliates – 10 per cent
  • Any foreign strategic investor and its affiliates – 15 per cent (or 20 per cent with Prime Ministerial approval)
  • Total level of shareholding of all foreign investors and their affiliates – 30 per cent
  • Any foreign individual – 5 per cent
  • Any foreign organisation – 15 per cent
  • Any foreign strategic investor1 – 20 per cent
  • Any foreign investor and its affiliates – 20 per cent
  • Total level of shareholding of all foreign investors and their affiliates – 30 per cent

Foreign investment limits can be lifted in special cases

The Prime Minister now has the power to allow foreign investment above the individual and aggregate foreign ownership caps set out in Section 2 in 'special cases in order to implement restructuring of a credit institution which is weak, facing difficulties, [in order to] ensure safety of the credit institution system'.

In addition to the 'weak' banks referred to in the Draft Decree, Decree 01 now also refers to banks 'facing difficulties'. However, it is unclear from the wording whether the bank needs to be 'weak and facing difficulties' or 'weak or facing difficulties'. The drafting is vague, and the terms 'weak' and 'facing difficulties' are not defined. Therefore, it appears that the Prime Minister will be able to exercise his discretion on a case-by-case basis.

A foreign investor acquiring shares in a 'weak' Vietnamese bank must develop a restructuring plan for the target bank, and obtain approvals from the State Bank of Vietnam and the Prime Minister.

There appears to be no upper limit applicable to this special approval regime, so, in basic terms, the Prime Minister may authorise any foreign institution meeting the relevant criteria (see below), whether it is a foreign bank or not, to hold any percentage in a 'weak' Vietnamese bank that is deemed appropriate in the circumstances.

Board representation of the foreign investor

Decree 01 provides that a foreign investor can only participate in the Board of Management (BOM) of one Vietnamese bank, except for the following cases:

  • the foreign investor participates in the Board of Management of its subsidiary bank in Vietnam, which is defined in the Law on Credit Institutions as a bank in which the foreign investor owns 50 per cent of voting shares or more, or has other control rights; or
  • the foreign investor participates in the BOM of a weak bank to implement the restructuring plan.

Foreign ownership in non-bank credit institutions

The individual foreign investment limits set out in Section 2 apply to foreign investment in all forms of Vietnamese credit institutions (including banks, finance companies and finance leasing companies).

However, for non-bank credit institutions, Decree 01 provides that the aggregate foreign ownership is not 30 per cent but shall be determined according to the laws applicable to public and listed companies. Therefore, for non-banks the limit would be 49 per cent.

Other changes

Other changes introduced by Decree 01 in relation to the requirements that a foreign investor (eg the assets/capital of the foreign investor) and the target Vietnamese bank must meet, transfer price rules and approval requirements for the acquisition are the same as in the draft decree. (Please see our Focus: Greater foreign investment in Vietnamese credit institutions for further details.)

What's next?

The new rules are expected to boost foreign investment in Vietnamese banks, as part of the Government's efforts to restructure the banking system. Foreign investors can now consider acquiring a 'weak' Vietnamese bank with a restructuring plan, as a way of tapping into the fast-growing financial services market in Vietnam.

 

Footnotes

  1. Only a foreign bank can qualify as a 'foreign strategic investor' in respect of a Vietnamese bank.