SOE rules toughened up

The Ministry of Finance (MoF) has announced a draft decree on transforming wholly state-owned enterprises (SOEs) into equitised enterprises, with an aim to seek feedback from enterprises.

Notably, the draft’s Article 6 stipulates that if an investor wants to be a strategic shareholder in an SOE, they “must have the same core business sectors as the target equitised SOE”.

Additionally, the strategic investor must “have a strong financial capacity”, with at least two years of profits (at the time of buying the stake). Moreover, its equity in the latest financial report, which has to be audited by an independent auditing firm, must be sufficient to purchase the stakes.

The strategic investor must also have a written commitment, endorsed by an authorised agency, stating that it will have long-term cooperation with the equitised SOE, and support the enterprise in terms of technology transfer, human resource training, improvement of financial capacity, corporate governance, material supply, and development of output markets.

The strategic investor must also deposit 50% of the initial subscription price, a figure which will not be returnable in the event of the investor pulling out of the deal. Current guidelines only require the strategic investor to deposit 10%, have sound financial capacity, and a written commitment endorsed by an authorized agency.

Nguyen Lan Phuong, partner from law firm Baker & McKenzie, told VIR that some strategic investors currently invest in SOEs to seek short-term (three to five years) profits without performing their commitments in supporting equitised enterprises.

This has led the MoF to impose stricter regulations so that enterprises vital to the state are not exploited for personal, short-term financial gain.

In Phuong’s view, a strategic investor should be an investor who is in the same industry with the equitised SOE. This is also the commonly understood definition of a strategic investor elsewhere.

A strategic investor is expected to bring in industry-specific know-how, expertise, and knowledge, as well as long-term commitment and vision for the future development of the equitised SOE. Having a strategic investor in the same core business and in the same industry is like having an additional business channel.

“However, there is always the other side of the coin. A dominant strategic partner would also have plans to take over the entire business and drive it the way they want,” Phuong said.

Responding to VIR’s question about whether the new regulations will affect foreign firms wishing to become strategic partners of Vietnam’s SOEs, Phuong said “yes and no”.

“Yes, in the sense that a more selective pool of foreign investors (meaning only industry investors) can be qualified and selected to participate in the equitisation of SOEs,” Phuong said. “No, in the sense that the new draft decree does not introduce interesting changes that may turn around the current languishing SOE equitisation landscape.”

Meanwhile, Barry Weisblatt, head of research at Viet Capital Securities, said “The provisions in draft decree Article 6 that the investor must have the same core business and must have two years of income and adequate capital, help to ensure that strategic investors truly are strategic and can enhance the value of the equitised SOEs through business synergies and transfer of knowledge and technology.”

Both experts also frowned upon the new deposit-related regulation.

According to Phuong, the new draft decree’s stricter regulation about a 50% deposit of the initial subscription price “may drive away some risk-averse investors.”

Agreeing with this view, Weisblatt said, “The requirement of a 50% deposit may be somewhat of a deterrent to some potential strategic investors.”

Phuong agrees it is important that the government choose the right partners, including strategic investors, and that sensible requirements on strategic investors should be regulated. However, she believes that rewards for investors are lacking in the new draft decree, arguing that they will not be willing to be bound by all the conditions if they are not going to receive any special treatment in terms of subscription price and/or management rights.

In Weisblatt’s view, now that the draft decree more strictly defines the criteria for an investor to be considered a strategic partner, the MoF could consider relaxing the provision on the minimum investment price in order to attract more strategic investors who, in the view of management, add value in other ways.

Among Vietnam’s big SOEs seeking strategic investors are Sabeco, MobiFone, Viglacera, Airports Corporation of Vietnam (ACV) and BIDV.