New foreign equity cap to spur market

08:00 | 06/07/2015
Pursuant to a plan to upgrade Vietnam’s “frontier” market classification to “emerging” market classification at MSCI and increase the flow of foreign capital to the local stock markets, on June 26 the Vietnamese government issued  the landmark Decree No60/2015/ND-CP (Decree 60) to lift the 49 per cent foreign equity cap for public companies. Decree 60 is intended to add vitality to the Vietnam stock markets and boost the equitisation of state enterprises.

Lifting the foreign equity cap

Under current securities laws, a foreign equity cap of 49 per cent applies to all public companies (both listed companies and non-listed public companies). According to Decree 60, a public company will no longer be subject to any foreign equity cap, except in the following cases:

- If a public company operates in a sector where Vietnam’s World Trade Organization (WTO) Schedule, an international agreement, or other relevant Vietnamese laws provide for a foreign equity cap, the public company will be subject to such a foreign equity cap, the same as for a non-public company. By way of example, a company, whether public or non-public, will be subject to the foreign equity cap of 65 per cent if it engages in “non-facilities based online information and data processing services” because this is the level of commitment under Vietnam’s WTO Schedule.

- If a public company operates in a sector “conditional for foreign investment” where applicable relevant laws are silent on any specific equity cap. In these cases the public company will be subject to the cap of 49 per cent.

Under Decree 60, the term “foreign equity” includes both (i) equity held by foreign investors and (ii) equity held by any entity incorporated in Vietnam in which foreign investors hold at least 51 per cent of its charter capital.

The same foreign equity cap rules as above will apply to state enterprises conducting an IPO in its equitisation process, unless the relevant laws on equitisation provide otherwise.

As such, Decree 60 takes the dramatic and welcomed step of allowing foreign investors to own 100 per cent of the shares of most public companies. Nevertheless, Decree 60 does not resolve the previous concern relating to the Mekophar case. Foreign investors will not be able to directly hold shares in public companies that conduct a business not opened to foreign investment under Vietnam’s WTO Schedule such as distribution of medicines, petrol, lubricants, cigarettes, or rice. Additionally, public companies operating in certain sectors such as banking, insurance, and telecommunications will remain subject to the foreign equity caps under relevant laws governing their sectors or Vietnam’s WTO Schedule. 

In the case of a public commercial bank, it is unclear whether foreign investors may subscribe for new non-voting shares after the “aggregate foreign shareholdings” in the bank reach the cap of “30 per cent of its charter capital” as provided in current Decree No01/2014/ND-CP. Further guidance from regulatory authorities appears necessary to resolve the conflicts among relevant regulations.

Other significant changes

Below are some other significant changes introduced by Decree 60:

1.Acquiring a securities company or fund management company: Foreign investors licensed in their home countries in any of the securities, banking or insurance sectors and having operated for at least two years in their home countries, if satisfying some other conditions, may acquire part or all of the equity of a securities company or a fund management company. Other types of foreign investors can acquire less than 51 per cent of the equity of a securities company or a fund management company.

2.Offshore offering and listing of an investment fund: A fund management company may conduct an offshore offering to form an offshore investment fund or conduct an offshore listing of shares issued by an onshore fund. The international offering or listing must be reported to the State Securities Commission.

3.Restrictions on redemption: Decree 60 eases the current restrictions on redemption. Current laws prohibit the redemption of shares from a manager of the issuer or its related persons, a holder of shares restricted from trading or a large shareholder. Decree 60 adds three situations where the above prohibition does not apply: redemption with a tender offer, redemption pursuant to a court or arbitral order, and redemption of listed shares from a large shareholder via the automatic order-matching mode. 

4.Real Estate Investment Fund: Decree 60 amends certain requirements of the operation of a Real Estate Investment Fund (REIF). Specifically, these are:

- At least 65 per cent of its net assets must be invested in qualifying real estate and shares of real estate companies of which at least 65 per cent of revenues or incomes derive from the real estate business;

- Government bonds will be excluded from the securities counted towards the investment in securities of one single issuer, which is capped at 5 per cent of the asset value of the REIF. Decree 60 also creates a legal framework for the contribution of capital in the form of real estate to a REIF.

Decree 60 will take effect on September 1, 2015.

By Vo Ha Duyen - VILAF lawyer

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