Legal overlap stymies foreign shareholding

Effective since September 2015, Decree 60/2015/ND-CP has paved the way for listed Vietnamese firms to raise the foreign ownership cap to 100%. However, nine months after this decree took effect, there are still less than 20 listed firms that have opened themselves completely to foreign investment.

This slow progress has dampened the enthusiasm of overseas investors, who have waited a long time to invest in good-quality Vietnamese firms.

“We value the government’s intention to open up the foreign ownership limit in the stock market, as evidenced by Decree 60. However, the impact of this regulation on the stock market has been very limited. For example, very few of approximately 700 listed companies, or 1,000 companies if we include the unlisted stock exchange, have been able to increase their foreign ownership limits so far,” executive chairman of Dragon Capital, Dominic Scriven, said.

One of the key reasons, according to Scriven, is that the authorities are still confused between the concepts of foreign direct investment (FDI), which comes under Investment Law, and foreign indirect investment via the stock markets, regulated by the Securities Law.

According to the Investment Law, a company in which foreign investors hold 51% or more of charter capital is considered a foreign-owned entity and subject to the rules and restrictions on FDI firms.

This has proven to be problematic for listed firms which are governed both by Investment Law and Securities Law. Chairman of the State Securities Commission, Vu Bang, acknowledged that many firms may not scrap their foreign limit due to differences on tax, customs and bank credit eligibility between foreign-owned entities and their domestic counterparts.

For example, Phu Nhuan Jewellery Joint Stock Company and Mobile World Corporation, both long-time favourites of overseas investors, have decided against raising their foreign limit at their recent annual general meetings. The firms are concerned that once foreign investors own more than half of their stakes, they will become a foreign entity and their retail network will be negatively affected.

“A foreign company has to face greater bureaucracy and restrictions when opening new retail stores. As our company intends to expand our retail network, more red tape like that will be very cumbersome and put us at a disadvantage to other domestic retailers. Due to this problem, we won’t lift our foreign limit this year,” said Cao Thi Ngoc Dung, chairwoman of Phu Nhuan Jewellery.

Eager to invest in good listed firms, investors have put forward some suggestions in order to solve this matter. Dominic Scriven, for instance, recommended that listed enterprises and their foreign ownership limit should be governed only by the Securities Law. This will exempt listed firms from the 51% restriction set by the Investment Law for FDI companies.

Other experts, meanwhile, suggested that the foreign-entity-or-not classification should not be applicable to listed firms when they trade on stock exchanges. This means that any listed company, whether its foreign ownership surpasses 51% or not, should be allowed to buy another publicly traded firm.

Another solution put forward by overseas investors includes launching non-voting depository receipts (NVDRs), which grant foreigners stakes in the listed company but no voting rights. According to Petri Derying, manager of PYN Elite Fund, NVDRs will satisfy overseas financial investors, who look for financial gains rather than control at the invested firm.

Moreover, as they have zero voting rights, NVDRs will not be counted among the foreign stakes in a listed company, thus preventing the firm from becoming a foreign entity.

However, most overseas investors stress it is crucial that the Investment Law and Securities Law work in tandem, as this will provide the legal basis for firms to open themselves up to foreign ownership.