Following the first ever issuing of shares by a foreign company on May 27, the legal aspects of future planned foreign firm share issues and IPOs is criticised as incomplete.
It is stipulated in the article 20 of the governmental Decree 144/2003/ND-CP that a joint stock company must satisfy four requirements to list on the stock market. Accordingly, a listing company has to have legal capital of five billion dong or more; make a profit in two successive years prior to the listing; commitments of holding shares by the firm’s board, and for three-years and shares sold to outside investors which represent for 20% of legal capital are held by at least 50 external shareholders. [In case of the company which registers chartered capital of 100 billion dong, this ratio is 15%.] Given such regulations, the listing procedure is not an intricate process.
If a joint stock company which is shifted from a foreign invested firm meets all four above mentioned requirements, the State Securities Commission or SSC has no reason to delay the listing decision. Taya Wires and Cables Co Ltd is a good example. After being transformed into a joint stock company May 27, Taya has an imbalance in its shareholder structure in which the two founding shareholders own 80% of equity. However, it is still eligible for listing if 20% of its shares are sold to over 50 external investors. This confirmation was made by a senior official from the SSC. Previously, the finance ministry requested the SSC to issue a regulation on listing requirements for foreign invested firms turning into shareholding companies. However, given the existing legal documents, the SSC said it found the finance ministry’s request unnecessary noting that procedures and process for a foreign invested firm turning into a joint stock company via a new share issue and listing on the stock market are provided in governmental decree 144/2003/ND-CP and its guiding documents. Moreover, the listing process and procedure is completely similar to that of domestic joint stock companies, the SSC said.
However, limits on foreign shareholder numbers and equity rates are a headache for the SSC and the finance ministry. As stipulated in point 1, article 10 of the Decree 38/2003/ND-CP, a foreign invested firm when turning joint stock must have at least one foreign founding shareholder and total equity of this foreign shareholder is a minimum of 30% of the share capital throughout the life of the company. According to article 1of the governmental Decision 146/2003/ND-TTg, any alien individual and or institutional investor trading on the stock market is eligible to hold up to a maximum 30% of total shares of a listed firm. Given these legal documents, securities authorities are in somewhat of a dilemma.
Three recommendations are given as follows: First, all the chartered capital of foreign invested firms after transforming to a shareholding company should be allowed to be listed. Founding shareholders must hold up to 30% of the share capital of the new listed firm while the balance of 70% will be offered to local investors. But what is not clear is that after the escrow period for founding shareholders [three years] will local investors be able to buy the 20% of shares still held by founding shareholders and will founding shareholders have to maintain their share cap if the listed firm makes new share issues further down the line.
Second, any foreign invested firm after turning into a joint stock company lists 70% of share capital. Foreign investors can then buy up to 30% of this 70% of share capital. If Taya moves in this direction, its founding shareholders are only allowed to buy more shares if their ownership reduces to below 51%.
Also, local investors can transact 20% of shares sold to external investors and can buy more shares from founding shareholders if and when the shareholders sell.
Third, the foreign invested company after shifting into a joint stock company starts selling 20% of its capital to outside investors and foreign investors could then buy a maximum 30% of these shares. However, this recommendation seems infeasible due to its rigid limitation for founding shareholders and it is hard to clarify the external investors’ obligations.
For the time being, the SSC is preparing a modified draft of Decision 146/2003/QD-TTg, said a source from the SSC. As expected, the finance ministry will provide instructions of foreign investment caps in listed joint stock companies that are transformed from foreign invested businesses.
It is warned that investors should not consider listing as the most important signal of business performance or strategy of a foreign invested business after turning to a joint stock company, advised a senior official from the SSC. Instead, they should pay due attention to business performance of the listed company announced prior to each share issue.