Government mulls relaxing foreign share caps

The ministry of finance has submitted the prime minister a written request for the increases in the rate of capital contribution and share by foreign investors at businesses to have hope for more openness in attracting foreign investment of diverse sources and pushing up capital market development.
According to Pham Phan Dung, chief of the finance and banking department of the MoF, the ministry suggests that the government would allow foreign investors to buy unrestricted amounts of shares in an equitising state company via auctions based on the principle of the list of classified SOEs and member companies with independent accounting under stated owned corporations. This was promulgated in agreement with Decision 155/2004/QD-TTg dated August 24 2004 by the prime minister.
With regard to strategic shareholders in a position as foreign investors, the MoF recommends that the bodies deciding equitisation be allowed to set the rate for selling shares to these shareholders in line with ministerial Decision 187/2004/ND-CP of November 16 2004 stipulating the shift from SOEs to joint-stock companies.
“As far as other companies, the MoF suggests that the government would permit foreign investors to take equity stakes at an unlimited rate,” said Dung.
All economic experts think that the rate set to curb the participation of foreign investors in capital contribution to and share purchase of domestic businesses has been a barrier to inflows of foreign indirect investment. Specifically, under Decision 36/2003/QD-TTg of 11 March 2003 issued by the prime minister, foreign investors are only entitled to contribute capital to and buy shares of Vietnamese companies at a maximum rate of 30% of chartered capital in companies operating in a tight range of business areas and trades as stated by the prime minister or by the planning and investment minister dependent on each case.
Similarly, under Decision 146/2003/QD-TTg dated July 17 2003 by the prime minister, with regard to companies listed on the stock exchange, foreign investors are allowed to buy shares up to a maximum of 30% of the total. Dung said, referring to the legal documents in force, Vietnam’s policy on attracting foreign indirect investment lacks synchronicity. For instance, the amended law on home investment took effect in early 1999, the above Decision 36 was issued in early 2003 but until now, no guiding document has been in place to clearly define the areas and trades in which foreign investors are given permission to invest up to 30% of chartered capital. “On the one hand, this renders Vietnam’s investment environment less overt and transparent and it restrains the effectiveness of state administration,” said Dung.
Another problem indicated by the MoF is that in Decision 187 regarding the shift from SOEs to joint-stock companies, the government has permitted foreign and domestic investors to take part in the purchase of shares of equitised SOEs but the 30% share cap obstructs financially strong foreign investors who also have sophisticated technologies to help the process of equitisation. This means that attracting foreign indirect investment in form of share purchases of Vietnamese companies is severely limited. Moreover, the restriction is no seen as irrelevant because in the area of foreign investment, the government already allows investors either to have a joint-venture with others or own 100% of a foreign invested company. It simply doesn’t make sense to curb the rate of foreign investment in shares at 30% in a local company that operates in the same areas or trade as the fully foreign owned firm.
“At present, some foreign investors have bought up shares on the stock market up to the limit of 30%. Many of them expect to increase their investments but by law were not able to do so,” added Dung.
However, for the aforesaid amendments to be actualised early, Dung’s proposal is that while awaiting the changes to the law on domestic investment, the Ministry of Planning and Investment had better promulgate the list of the specific trades and areas in which investors are allowed to invest the 30% rate of investment according to the stipulations of Article 5 of the Law on Domestic Investment and Encouragement. On this basis, the MoF said it would submit to the prime minister a request for amendments to Decisions 36 and 146 by which foreign investors would be permitted to acquire shares at unrestricted rates and in a position as strategic shareholders o[and conceivably majority control] f a domestic company.

 

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