Detailed foreign exchange regime for Foreign Invested Enterprises in Vietnam

Circular 19/2014 issued this week is a major regulations on foreign exchange management of foreign-invested enterprises in Vietnam. Circular 19/2014 has filled much of the vacant left by Circular 4/2001 on the same subject. Before Circular 19/2014, foreign invested enterprises (FIEs) can only rely on a few general provisions of Decree 160/2006. Under Circular 19/2014

• It now seems that Circular 19/2014 only applies to FIEs that have been granted an Investment Certificate. A foreign investor which acquires shares in a Vietnamese company and participates in the management of such company does not need to comply with Circular 19/2014 if the acquisition is not subject to issuance of an Investment Certificate. Instead, in that case, the foreign investor will comply with Circular 5/2014 on foreign exchange regime applicable to “indirect” investment. This is an encouraging news for many M&A lawyers who can now advise with more certainty which bank accounts should be used for acquisition of a domestic companies;
• Circular 19/2014 also repeals the requirements under Circular 5/2014 that a foreign investor must convert into compliance with the foreign exchange regime applicable to foreign direct investment once the indirect investment by the foreign investor becomes a direct investment.
• Similar to Decree 70/2014, Circular 19/2014 repeatedly require “an FIE and the foreign investors in such FIE” to open direct investment capital accounts (tài khoản vốn đầu tư trực tiếp) (one in VND and one in foreign currency). 

• Circular 19 expressly requires all payment for transfer of capital in an FIE to be made through the direct investment capital account. In the past, some foreign investors have preferred to by passing the direct investment capital account and receiving payment for capital transfer offshore. 

• The direct investment capital account now also receives proceeds from domestic loans both in Vietnamese Dong and foreign currencies. Under the old regulations, this account only receives proceeds from foreign loans. This requirement may restrict the banking operation of many FIEs in case these FIEs have multiple domestic loans at different banks. This is because an FIE can only have one direct investment capital account for each currency;

• The VND direct investment capital account can receive capital contribution in VND by both foreign investors and Vietnamese investors;

• The direct investment capital account must be used to transfer proceeds from sale of shares or capital contribution in an FIE by a foreign investor unless the sale of shares or capital contribution results in a “change in the legal entity” of the FIE. It is not clear what change in the legal entity means;

• Any foreign currencies converted from VND by a foreign investor must be remitted out of Vietnam within 30 working days from the date of conversion. Presumably, this provision is to prevent foreign exchange speculation by foreign investors in Vietnam;

• A foreign investor is expressly allowed to bring in foreign currency for the preparation of an investment project even before issuance of the Investment Certificate; and

•  By March 2015, all special foreign currency capital accounts (tài khoản tiền gửi vốn chuyên dùng bằng ngoại tệ) opened under Circular 4/2001 must be closed and converted into direct investment capital account under Circular 19/2014. 

Sale of secured assets without auction in Vietnam

The key to reduce bad debts in Vietnam is to sell or otherwise deal with the assets that are mortgaged or pledged to secure unpaid debts more quickly and effectively. Otherwise, the Government can only either delay the situation (but only up to a point) or use its own depleted budget to remove bad debts from the banking system. Circular 16/2014 jointly issued by the State Bank, the Ministry of Justice and the Ministry of Natural Recourse and Environment in June 2014 should assist creditors including banks and the VAMC  in enforcing the secured assets mortgaged or pledged to them. Circular 16/2014 contains specific and detailed procedures for the enforcement of certain types of mortgages or pledges.

One important point under Circular 16/2014 is that it provides for a process whereby the secured asset can be sold privately without going through a public auction. In particular, If the mortgage/pledge agreement allows the creditor to sell the secured assets through private sale but does not specify the valuation method, then the creditor and the securing party may

(1)          mutually agree on the value of the secured assets;

(2)          if (1) fails, the securing party may appoint a valuer to value the secured assets;

(3)          if the securing party does not appoint a valuer then the creditor may do so;  

(4)          if the assets cannot be sold at the valuation determined by the valuer at (2) or (3), then the creditor may reduce the sale price within 15 days. The creditor may reduce the sale price three consecutive times (up to 10% each). The creditor may only reduce the sale price after 30 days for secured assets being real properties or 15 days for other assets from the last price reduction; and

(5)          if the assets cannot be sold after three times of reducing price, the creditor may take over the secured assets in lieu of the secured obligations at the valuation being the latest sale price being proposed at (4). 

Mortgage of land use rights where land rental is exempted

Under Decree 46/2014, a land user in Vietnam who leases land under lump sum payment for the entire lease term and is exempted from all land rental may have the option to pay the exempted land rental in order to enjoy the rights and obligations applicable to a normal land user including the right to mortgage the relevant land use right with credit institutions.

This is an important new point for many BOT projects which need to be able to mortgage their land use rights in favour of their lenders. Under the old land regulations, investors in a BOT project are exempted from land rental payment. However, this investment incentive has caused considerable difficulties for project sponsors in offering an acceptable security package to foreign lenders. 

Foreign borrowing conditions for private companies in Vietnam

Under Circular 12/2014 of the State Bank of Vietnam (SBV), a private company including foreign-invested companies in Vietnam can only borrow from a foreign lender if it satisfies the following requirements, among others:

• A foreign loan can only be used to (1) implement an investment project of the borrower or of a company in which the borrower has “direct investment” capital; or (2) refinance existing foreign loans without increasing borrowing costs. (1) is a positive development as it allows the borrower to use a foreign loan proceed to make capital contribution or, even possibly, on-lend to another company. (2) seems to be more restrictive than earlier regulations and may make it more difficult for a Vietnamese company to restructure its foreign debt;
  

•  A foreign loan with a term of no more than 1 year is considered as a short term loan. A short term foreign loan must not be used for medium or long term use. In practice, a short term foreign loan is not required to be registered with the SBV. However it must be made in writing before draw down;
  

• The repayment and disbursement of a foreign loan of Vietnamese borrower being a foreign invested enterprise must be made through a foreign direct investment account in foreign currency opened by such borrower with a licensed bank in Vietnam. The bank will check all supporting documents before making any repayment to foreign lenders;
  

• A medium and long term loan together with all other outstanding  long and medium term loans of must not exceed the difference between the total investment capital and the equity capital of the investment project as recorded in the relevant investment certificate. However, a short term loan is not subject to this restriction. This is a positive development as under old regulations a short term loan is also subject to the same funding limit except in limited circumstance;
  

•  A medium and long term foreign loan must be registered with the SBV within 30 working days from the signing date of the loan agreement and before disbursement;
  

• A foreign loan must be made in foreign currencies except for loans given to micro finance organisations, loans between the foreign investor in a foreign-invested company and such foreign-invested company; or loans approved the SBV; and
  

• A foreign loan secured by shares or capital contribution or convertible bonds issued by a Vietnamese issuer must comply with the relevant foreign ownership limits. It is not clear if this means that the parties need to comply with the relevant foreign ownership limits at the time of taking or enforcing the relevant securities.