In a letter to the government, the Ministry of Finance said the company's equity does not meet the minimum of VND700 billion (US$31 million) required for an airline with a fleet of up to 10 aircraft and operating international flights, the Vietnam News Agency said.
Founded in April 2010 by the defense ministry, the company's equity was estimated at VND652.7 billion (US$29.2 million) at the end of last year.
It is not immediately clear how Vietstar will deal with this technicality. The finance ministry has reportedly demanded that the equity requirement be strictly met.
Vietstar was expected to become Vietnam's fourth carrier, after authorities had to ground privately-owned Indochina Airlines and Air Mekong in 2011 and 2015, only after a few years of unsuccessful business.
The company plans to operate routes within Vietnam, besides services to Southeast Asia and East Asia destinations in the first five years, after it acquires the license.
Currently providing charter flights, filming and rescue services, Vietstar has reportedly stricken a deal to lease three Boeing 737 aircraft to operate passenger services.
Vietnam's domestic passenger air market is now dominated by state-run Vietnam Airlines and private low-cost Vietjet Air, with respective shares of 40.8% and 36.3%.
Jetstar Pacific Airlines, another low-cost carrier run by Vietnam Airlines and Australian-owned Qantas, controlled 14.9%. The national airline's short-haul carrier VASCO owned the rest.
Vietnam's air market is forecast to see a rise of 19% to 45 million passengers this year, with the domestic sector accounting for more than 58%.