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Focus: Draft decision providing extra legroom for foreign investors flying into the Vietnamese securities market

9 october 2013

In brief: A new decision on foreign ownership limits in the Vietnamese securities market is expected to be issued shortly to encourage further foreign capital into Vietnam. The changes proposed in the draft decision, if implemented, will have the potential to significantly transform the capital market for foreign investors, although they may not be felt evenly across all market sectors or have immediate impact. Partner Robert Fish (view CV) and Lawyer Chi Ha report on what the new law may mean for foreign investors looking at opportunities in the securities market of Vietnam.

How does it affect you?

  • Recently, the State Securities Commission (the SSC) of Vietnam held a semi-public meeting with various stakeholders to consult on the new draft decision (the Draft Decision) to replace Decision 55/2009/QD-TTg of the Prime Minister (Decision 55) on foreign ownership limits in the Vietnamese securities market (overall, the Consultation).
  • The Draft Decision will significantly change the existing foreign ownership cap of 49 per cent applying to various categories of company participating in the public securities market, including, public companies, listed companies, securities investment funds, securities companies and local fund managers.
  • Refinements will be made to the Draft Decision after the discussion at the Consultation but it is expected that the key features, aiming to boost foreign investment in the Vietnamese securities sector, will stay.

Background

Decision 55, which was issued in April 2009, placed a 49 per cent cap on ownership by foreign individuals and foreign institutions of shares, units or charter capital in public companies (including listed companies), public securities investment funds, securities companies and fund management companies.

This cap has limited the ability of foreign investors (as well as companies or funds established in Vietnam with more than 49 per cent foreign ownership) to actively participate in the market such as to buy controlling stakes in securities companies or to trade stocks in Vietnam's 'blue-chip' companies that already have high levels of foreign ownership.

In early 2013, as part of a package of measures to boost activity in the sluggish securities market in Vietnam, the SSC recommended that the Government increase the cap and/or provide more 'room' for foreign investors.

Key changes on foreign ownership limits introduced by the Draft decision

The Draft Decision seeks to maintain control of foreign ownership of Vietnamese public/listed companies by restricting the maximum number of voting shares that can be acquired while encouraging foreign investors to inject capital into the market via preferential non-voting shares in those companies.

The Draft Decision keeps the 49 per cent cap for unlisted public companies but applies that only to voting shares rather than to the total number of shares. However, foreign individuals and organisations will be able to hold an unrestricted number of preferential non-voting shares in Vietnamese unlisted public companies.

With respect to listed companies, the Draft Decision proposes a higher threshold that would allow foreign investors to hold a maximum of 60 per cent of the voting shares in these companies. However, for this to apply, the following conditions must be satisfied:

  • the listed company must have a need to attract foreign investment and the issuance of new voting shares to foreign investors must have been approved by the majority of shareholders at a shareholders' meeting (generally requiring a 75 per cent majority under the law, unless the company's charter specifies otherwise);
  • the listed company's business must not fall within areas that are otherwise restricted to foreign capital. This includes sectors such as banking, insurance and pharmaceutical retailing; and
  • there is no other foreign ownership limit under specific laws or international commitments.

In addition, the application of a cap threshold higher than 49 per cent would be determined on a case-by-case basis and dependent on final approval of the Prime Minister. This process will require the Ministry of Finance to make an assessment of the conditions of the listed company and make a recommendation to the Prime Minister. Although the wording of the Draft Decision suggests that the increased shareholding by foreign investors must be made by newly issued voting shares, it is understood that, following the Consultation, the final regulation will be amended to allow for foreign ownership to be increased via purchases of existing shares in listed companies. As with unlisted public companies, foreign investors may hold an unrestricted number of preferential non-voting shares in listed companies.

Under both Decision 55 and the Draft Decision, the foreign ownership cap does not apply to foreign holdings of corporate bonds issued to the public. The Draft Decision nevertheless clarifies that an issuance of convertible bonds that can be converted to voting shares of a public and/or listed company would be subject to the foreign ownership caps applicable to those voting shares immediately from the time of the issue of the convertible bonds.

Finally, under the Draft Decision, the 49 per cent cap for securities investment funds and securities investment companies is to be scrapped and foreign institutions and individuals would be able to have unlimited ownership holdings in these entities.

Those key changes between Decision 55 and the Draft Decision on foreign ownership limits are summarised in the table below.

Decision 55 Draft Decision
  • Public companies (including listed companies) – 49 per cent of total shares (or lower if restricted by specific laws).
  • Public investment funds – 49 per cent of total units.
  • Securities investment companies – 49 per cent of charter capital.
  • Corporate bonds – no limit.
  • Unlisted public companies – 49 per cent of total voting shares. No restriction on preferential non-voting shares.
  • Listed companies – same as unlisted public companies but may be increased to 60 per cent of total voting shares with Prime Minister's approval.
  • Securities investment funds – no limit, up to 100 per cent.
  • Securities investment companies – no limit, up to 100 per cent.
  • Corporate bonds – no limit.
  • Convertible bonds issued by public companies (listed or unlisted) – same limit as for the applicable public companies applied on an 'as converted' basis.

Other rules regarding foreign ownership in securities trading entities

The Draft Decision includes provisions regulating foreign ownership percentages in securities trading entities (securities companies and fund management companies). These provisions seek to confirm and clarify a number of provisions in Decree 58/2012/ND-CP that was issued on 20 July 2012 providing detailed regulations and guidance on the implementation of certain provisions of the Law on Securities (Decree 58).

As mentioned in our January 2013 Vietnam Legal Update, under Decision 55 and before Decree 58 was issued, generally foreign investors could only acquire or contribute up to 49 per cent of the charter capital of a securities company or a fund management company.

From September 2012, Decree 58 removed such limit and allows eligible foreign investors to acquire or establish securities trading entities with 100 per cent foreign invested capital. This was expected and is consistent with the five-year timetable for integration of the securities sector under the World Trade Organisation's commitments that Vietnam entered into in 2007.

However, there has been confusion about the application of Decree 58, which appears to allow foreign investors to hold only either 49 per cent or 100 per cent of the securities trading entity's capital. New provisions in the Draft Decision clarify that eligible foreign investors might acquire up to 100 per cent of the charter capital of an existing securities trading entity. When implemented, this will provide foreign investors with a broader range of options for buying into these entities.

Some preliminary observations

It is expected that the final decision to be issued by the Prime Minister will not significantly deviate from the Draft Decision except for some refinements and clarifications arising from the Consultation. Some preliminary observations about the Draft Decision are therefore noted below.

  • Overall, any moves to further liberalise the Vietnamese securities market and attract much needed foreign capital into Vietnam should be welcomed and, as (for example) the debate about increasing foreign ownership in domestic banks has shown, it is unrealistic to expect changes to be introduced that would permit foreign investors to control Vietnam's 'blue chip' companies (noting that decision-making at the shareholder level for a public company in Vietnam requires a 65 per cent majority). However, there are reasons to believe that the impacts of the changes may not be immediate or as far reaching as may be hoped.
  • From a policy perspective, the increased room for foreign investors clearly aims to attract a greater inflow of foreign capital into the Vietnamese securities market. The use of preferential non-voting shares gives foreign investors an opportunity to participate in the growth and (hopefully) to enjoy a higher rate of return from Vietnamese public and listed companies, similar to the performance of a 'Non-Voting Depository Receipts' product that the SSC (together with the Hanoi and Ho Chi Minh City stock exchanges) are also looking at implementing.
  • This policy may appeal to passive foreign investors with a 'buy and hold' strategy but may not satisfy active investors (such as private equity houses) whose preferences for direct control and management of target companies will not be met by non-voting shareholding products.
  • Generally speaking, Vietnamese companies should benefit from the active presence of foreign investors in their management with knock-on improvements to corporate governance structures and accountability and the influx of valuable managerial skills. However, offering non-voting shares to foreign investors is unlikely to advance that and the impact is further diminished by the fact that unlisted public companies will remain subject to the 49 per cent voting share cap, which could be viewed as a missed opportunity to improve the fundamentals for a strong securities market.
  • There remain different regulatory treatments between a Vietnamese-owned company and a foreign-invested company in Vietnam in various sectors such as retail and distribution, even where that sector is not subject to a foreign ownership restriction. The distinction between these two groups is generally made based on a foreign ownership threshold of 49 per cent. It is unclear how the proposed increase in foreign ownership up to 60 per cent for listed companies will affect their business operations, especially since the regulatory requirements for foreign-invested companies are often more complicated and onerous compared to those for domestic companies.
  • The SSC has stated that non-voting shares are not intended to be included when determining whether an entity is a 'foreign entity' or not (ie entities with more than 49 per cent shareholding held by foreign investors). However, that intention was not reflected in Article 3 of the Draft Decision that sets out the definition for 'foreign organisations'. In addition, we expect significant challenges in the implementation of such view across other legislations (eg the Law on Investment) because existing laws have not been built upon a concept of control and voting rights but rather on the basis of capital contribution by foreign investors.
  • Finally, the higher cap for listed companies of up to 60 per cent can only be determined on a case-by-case basis and requires Prime Minister's approval. Given the lack of details in the Draft Decision on this process, further guidance will need to be provided. The effect of the 'increased room' for listed companies therefore is unlikely to be felt immediately upon the implementation of the final decision and it will be a while before one can start to see the intended positive impacts on the Vietnamese securities market.

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