Despite long years of complaints, the latest amendment of the Law on Investment 2014 leaves several loopholes in Vietnam’s foreign ownership rules, allowing investors to continue profiteering against the spirit of the law.

More tweaks needed for foreign ownership rules

At the recent conference hosted by the Ministry of Planning and Investment (MPI) to collect comments for the first version of the draft law on the revision of the Law on Investment 2014 and the Law on Enterprises 2014, businesses and stakeholders raised a number of concerns, with foreign ownership rules being the biggest.

Loopholes in the investment regulations are nothing new, but recent discussions about the shortcomings of the foreign ownership limit (FOL) rules were once again particularly heated on the agenda. The rules were recompiled after it became clear that the current FOL rules enable foreign investors to make unfair profit.

The question of legal loopholes reminded people of the historic $5 billion sale of the state’s stakes at Saigon Alcohol Beer and Beverages Corporation (Sabeco) – the country’s biggest brewer – in late 2017. At the time, the foreign investor used a Vietnamese entity in which it owns a 49 per cent stake to buy 53 per cent of the state stake in Sabeco. This way, they bypassed the FOL, which was capped at 49 per cent for foreign investors.

This time, the MPI received a slew of questions, with many dealing with fundamental issues, like what a foreign investor is or which laws an enterprise selling stakes to a foreign investor should follow – the Law on Investment or other specified laws – which are not answered by the amendment and current laws with sufficient clarity.

“Article 23 of the Law on Investment only mentions investment procedures. Accordingly, if the FOL is 51 per cent or more of its charter capital, the company is to be treated as a foreign investor, which means procedural requirements pertaining to the investment are those for a foreign investor. If the rate is lower than 50 per cent, only the investment procedures for a domestic company apply,” said lawyer Nguyen Kim Dung, head of Legal and Government Relations of Apollo Vietnam.

Dung cited the education sector as an example, where if a foreign investor founds a preschool, the cap for Vietnamese students is less than 50 per cent of the total, and the company must complete investment procedures at an authorised department of the city or province. Meanwhile, domestic Vietnamese companies are not subject to such rules. However, Article 23 of the Law on Investment allows companies with foreign ownership of less than 50 per cent to complete investment procedures as a domestic one.

“This unclear treatment has led to unhealthy competition because companies with an FOL of less than 50 per cent are treated as domestic ones. In the meantime, under the World Trade Organization’s (WTO) commitment, Vietnam has yet to open up to foreign-invested enterprises in preschool education,” Dung said.

Regarding the WTO’s commitments, lawyer Ha Huy Phong, managing partner of law firm Inteco, said that there are some sectors like logistics where the FOL is capped at 49 per cent, while it varies in other areas. He brought the example of 100 per cent FOL for realty distribution. “Ministries should base legal changes on the country’s WTO commitments. A WTO member can extend the FOL, but not narrow it, to facilitate international trade. A government decision to widen the FOL should be preceded by a thorough consideration of the possible gains and losses as well as the list of legal documents that should be revised to fall in line with the new regulation. Simply adjusting the FOL rules in the Law on Investment is not enough,” Phong noted.

Echoing Phong’s concerns, lawyer Truong Thanh Duc from Basico law firm and others said that the amendment of FOL rules in the Law on Investment should align with other specialised laws, especially the revised Securities Law, which is to be approved by the National Assembly in the fourth quarter of 2019.

The draft law would raise foreign ownership in listed companies, equitised state-owned enterprises (SOEs), and private non-listed businesses that operate in a non-critical business sector to 100 per cent. However, investors are concerned that when the FOL at Vietnamese companies surpasses 51 per cent, they will be automatically regarded as a foreign entity by the local authorities, which would make them subject to stricter rules on investment, land ownership, and taxes.

With the amendment in the making, all these issues come to the fore, and the business community is pressing legislators to create transparent and accessible rules and introduce a higher level of clarity into foreign ownership. After many times of discussions with few positive results, businesses are now awaiting to see how the drafting board will adjust the draft law on revision of the Law on Investment and the Law on Enterprises.

Many expressed hope of seeing long-standing loopholes and contradictions finally closed as well as seeing the market grow even more attractive amidst a strengthening trend of mergers and acquisitions as a key trend among foreign investors in the nation.

According to statistics from the MPI, the country ­attracted nearly $35.47 ­billion worth of foreign direct investment in the form of newly-registered capital and expanded capital as well as stake acquisitions in 2018, of which nearly $10 billion came from stake acquisitions. This growth momentum is forecast to continue well into this year, driven by the accelerating drive for ­equitisation of SOEs and Vietnam’s stable economic growth across the table.

TRAN MINH HAI - Lawyer, BASICO Law Firm

There are worries that foreign investors may follow Thai Beverage’s footsteps and set up a Vietnamese entity to avoid the FOL. This is possible, but it can also be troublesome for them because it means their ownership at the Vietnamese entity must stay below 51 per cent, and that may not satisfy their requirements for control.

From another perspective, when a Vietnamese company has more than 51 per cent of foreign ownership, it will be treated as a foreign entity anyway, according to the current law. This may lead to another headache for overseas backers.

The draft Securities Law already states that the default FOL at a company is zero per cent, which means the direction for abolishing the FOL is already there.

With this in mind, we will probably see more cases of avoiding the FOL from foreign investors, although such acts can be risky from a legal perspective.

DOMINIC SCRIVEN - Executive chairman Dragon Capital

I believe the FOL issue accounts for 80 per cent of concerns for international investors in Vietnam. That’s how big the issue is. In fact, the FOL is directly related to whether Vietnam can be upgraded into the emerging market status by the MSCI.

Specifically, we should consider adjusting Article 23 of the Law on Investment, which states that Vietnamese companies with more than 51 per cent of foreign-owned shares are treated as a foreign entity. This is not appropriate in today’s age and results in unfair treatment towards different businesses in the market.

I strongly suggest that Vietnam launches non-voting depository receipts (NVDR) like Thailand did, because NVDRs allow the government to keep the FOL while eliminating the need to adjust any current laws in Vietnam and overseas. With NVDRs, Vietnam can still welcome foreign investment into listed companies that have already reached the FOL. To Vietnamese companies, NVDRs are also helpful because they can attract overseas investors while making sure that the amount of foreign-owned shares does not go over the 51 per cent threshold, turning them into a foreign entity.

HOANG VIET PHUONG - Head of Institutional Research, SSI Securities

In 2018, there were not many changes regarding the FOL at listed companies. Some even locked the amount of foreign-owned shares, which confused a lot of financiers from abroad.

In fact, many foreign investors have asked us whether there has been any improvement regarding the FOL issue. They said that they can only enter Vietnam if the FOL is relaxed. For example, they are willing to buy 5 or even 10 per cent of a listed company, but if this particular company has already reached the FOL, then the investors will back off.

The FOL issue is part of what the MSCI calls “market access for foreign investors,” and Vietnam has not fulfilled this requirement. Many funders from abroad have an interest in the top 30 or 50 listed companies, which they believe represent the Vietnamese market. However, before they put their money down, foreign investors demand changes regarding liquidity, the free-float level, and of course the FOL. The reality is that unfortunately for overseas investors, many blue-chips on the market – from FPT Corporation to Mobile World Corporation and the banks – do not have any more room for foreign investment. These blue-chip companies are also unlikely to relax their FOL.

Nguyen Xuan Thuy - Lawyer, LNT & Partners

In the draft law on the amendment of the Law on Investment 2014 and the Law on Enterprises 2014, some revisions and supplementations on capital contribution and stake acquisitions have yet to satisfy the spirit of cutting procedures in the cases that capital contributions and stake acquisitions do not increase foreign ownership rate in the companies.

In the draft law, overseas investors still have to complete procedures for capital contribution and stake acquisitions in two cases. First, capital contributions and stake acquisitions increase foreign ownership ratio and make contributors become controlling stakeholders. Second, capital contributions and stake acquisitions are made in the companies that have business and investment activities in some important fields, or in the localities with an important role in national defence and security. Under the draft, the government will detail the regulations. However, it is very difficult for investors to define which are the important fields, or localities having a major role in defence and security.

VIR