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|Policymakers must address the issues investors in Vietnam still have|
Draft amendments to the Law on Investment (draft LoI)
As per Article 1 of the draft LoI, it shall not be applicable to public-private partnership (PPP) projects which will be subject to a separate law, meaning the Law on PPP which is currently under the drafting stage.
|Dang Duong Anh and Tran Thi Ha Phuong from Vietnam International Law Firm|
In the latest draft LoI, the investment conditions are separated into two groups. These are business investment conditions, which apply to the operation of an investment project, and market access conditions for foreign investors, which apply to such investors who wish to invest in sectors or industries that attract market access restrictions. Accordingly, overseas investors will no longer be required to obtain merger and acquisition (M&A) approval when they acquire stake in a local company, which is subject to the business investment conditions but not the market access conditions for foreign investors.
The draft LoI provides for additional conditions to receive investment incentives for a project having its investment capital of at least VND6 trillion ($260.8 million) disbursed within the first three years under Article 15.2(c) of the LoI, meaning with minimum revenue of VND10 trillion ($434.78 million) annually within three years after the revenue generated year, or if it employs over 3,000 employees. However, the stated investment incentives under Article 15.2(c) are not applicable to mining, investment in commercial residential houses, and production or trading in products or services subject to special sales tax, with the exception of automobile production (Article 15.4).
The draft LoI adds some new sectors, such as startup innovative enterprises, which are able to grow quickly by using intellectual property, technology, and new business models, and operate for no more than five years from the date on which the first enterprise registration certificate is issued into the list of preferential investment industries entitled to receive investment incentives.
This includes the application of a lower rate of corporate income tax than the normal tax rate for a definite period or for the whole duration of implementation of the investment project; exemption from import duty in respect of goods imported to form fixed assets; and exemption from and reduction of land rent, land use fees, and land use tax. However, further detailed guidelines are awaited on this startup innovative sector.
So as to select investors to implement investment projects in Vietnam, the latest draft introduced three forms of selecting investors, including the auction of land use rights and assets attached to the land; tender for selection of investors for the project; and following the procedure for approving in-principle investment approval.
In the latest draft LoI, it appears that the proposed definition of foreign-controlled enterprises has been eradicated. Accordingly, the regime regarding foreign investors equivalent under Article 23.1 of the LoI remains unchanged. This should be a major relief for transactions which have relied on existing definitions of foreign investor equivalent.
The foreign investors wishing to engage in public companies, securities companies, or investment funds shall comply with the Law on Securities, which means that these investors will be subject to the conditions, restrictions, and procedures as under this law. Should the Law on Securities have no regulation on these matters, the conditions under the LoI shall be applied.
The draft has provided stricter provisions on outbound investments carried out by Vietnamese investors. It has further supplemented the industries where the investors are prohibited or subject to conditions, including but not limited to financial services, securities, real estates, and technologies. However, this requires further guidance in the policy.
In order to enhance and complete the provisions on conditional investment and business sectors, the draft LoI has eliminated 17 business lines from the list of conditional sectors and amends six other conditional business lines, as well as adding three new business lines into the list.
Draft amendments to the Law on Enterprises (draft LoE)
The draft LoE amends the regulation on the capital contribution for company formation in Vietnam.
As per the draft, members must contribute their shares of capital contribution to the company in full and in the type of assets as undertaken when registering the establishment of an enterprise, within 90 days from the date of issuance of the enterprise registration certificate (ERC). In addition, the draft LoE has made a positive shift and provided that in the circumstance where a member contributes capital by way of assets, the time of import and implementation of administrative procedures to transfer ownership of such assets shall not be included in the time limit for making capital contribution.
Nevertheless, in both LoE and the draft version, the 90-day time limit for capital contribution applies only for the first time the capital is injected in the company, but the law is silent on any further capital contribution scenario. In the case that the investor subsequently raises the capital, the law does not specify any timeline for contributing such increased charter capital.
Taking advantage of the ambiguity in the laws, many companies have increased their capital in the ERC but do not contribute in time which leads to false statistics with the Ministry of Planning and Investment on the registered charter capital and increases the burden on the authorities to ensure timely capital contribution as stated in the ERC of the company. In case the member is incapacitated to contribute the increased charter capital, the authorities are required to deal with the default or entertain charter capital reduction in the ERC.
The draft LoE provides that when ordinary shares are deposited to issue non-voting depositary receipt (NVDR), owners of such NVDR shall have full rights and obligations with respect to such ordinary shares, except for voting rights. In other words, when investors invest in NVDR, they would receive the same financial benefits, including dividends, right issues or warrants, as ordinary shareholders, except for voting rights.
In addition, voting for ordinary shares that are deposited to issue NVDR shall comply with the company’s charter and the provision under the Law on Securities, as applicable. New provisions on NVRD shall encourage companies in Vietnam to raise capital from foreign investors. Under the Law on Securities, if a public company operates in a conditional business line with conditions applicable to overseas investors, but there is not yet any specific provision on foreign ownership ratio, the maximum foreign ownership ratio is capped at 49 per cent. If the investors own NVRD, it will not amount to an increase in the ownership ratio of a particular public company, so foreign funders will have an option to invest further in a public company.
In addition to the right to initiate a legal action against members of the board or the directors in certain cases regulated in Article 161, shareholders and groups of shareholders owning at least 1 per cent of the ordinary shares in a company shall have the right to (i) nominate a candidate to the management board and the controllers’ board; (ii) review and extract the minutes book and resolutions of the management board, and mid-year and annual financial reports in the form as prescribed under the Vietnamese accounting system; (iii) request convention of the general meeting of shareholders in one of three circumstances, including when the board commits a serious breach of the rights of shareholders or the obligations of managers or makes a decision which falls outside its delegated authority; the term of the management board has expired for more than six months and a new board has not been elected to replace it and other cases as stipulated in the charter of the company; (iv) request the controllers’ board to inspect each issue related to the company’s administration where necessary and (v) review, search, extract the necessary information to exercise their rights during the proceedings and by decisions of the court of arbitration. This new regulation ensures the balance of interests between major shareholders and minor shareholders in a company.
Under the LoE, the division of enterprises may only be carried out in one of three following cases: (i) part of capital contribution or shares of members or shareholders together with assets corresponding to the value of the share of capital contribution or shares shall be distributed to new companies in accordance with the ratio of ownership in the company being divided and corresponding to the value of assets transferred to new companies; (ii) all of capital contribution or shares of one or more members or shareholders together with assets corresponding to the value of their shares or capital contribution shall be transferred to new companies; and (iii) combination of two cases in sub-clauses (i) and (ii) as mentioned above. However, according to the draft LoE, a limited liability company or joint stock company can split or divide their shareholders, members, and assets in order to establish two or more new companies in any circumstance, not just subject to the three cases outlined above.
The draft LoI and draft LoE facilitate enterprises to improve the autonomy in business investment and management activities by safeguarding the balance of interests among shareholder groups in the company.
The first proposition to be made is removal of the requirement for escrow deposit or security guarantee that is required to be made to the relevant investment registration authority to reduce the cost burden which is not included in the investment project. The escrow deposit amount ranges from 1-5 per cent of the guarantee amount for arrangement of the guarantee. Or if the above proposal is not feasible, it is recommended to calculate the value of the escrow deposit or security guarantee on the equity of the investment project without calculating the total investment of the project.
The second proposition involves Article 48.2 and Article 112.1 of the LoE request for full contribution of charter capital within 90 days for the first time after ERC issuance. The draft LoE does not address this issue and it would be in the interest of businesses that such a short timeline should be extended for the first time charter capital contribution, and there should be clarity on the timeline for contributing any subsequent increase in the charter capital as aforementioned to a plausible timeframe to support the investors and at the same time provide the authorities ample time with a clear legal base to manage the paperwork.
Article 31.2 and Article 32.2 and 32.3 of the LoE regulate the performance of enterprise registration procedures. Although the draft LoE does not emphasise on this, it is pertinent that according to the provisions of the LoE, the enterprises shall carry out the business registration procedures within 10 days from the date on which such changes are made to the business registration contents of the enterprise. In the transactions of purchase, sale and transfer of shares, capital contribution, the registration agency interprets this provision in a way that the seller and the purchaser must complete the transfer of payment of shares/capital contribution before the company is allowed to carry out the procedures to record the name of the new shareholders/members (the purchaser) into the content of the enterprise registration.
This mechanism seems to deflect with the actual practice and the international standards with respect to M&A transactions. The reason is that it does not guarantee the purchaser’s benefits when it is required to pay 100 per cent of the transfer value while its name has not been recorded in the content of the enterprise registration. A more specific and clear provision on implementation of procedures for changing business registration for M&A transactions is the need of the hour.
The overall business conditions in Vietnam are catching up to help make the economy a regional leader in the coming years, but there are a raft of issues that investors are facing and that need to be addressed by policy-makers to support the businesses already operating in the country, and enrich the overall investment portfolio of Vietnam.