SCIC To Take Control of State capitals in a Large Number of Vietnamese Enterprises

The Ministry of Finance has just issued Circular 118/2014 to allow State Capital Investment Corporation (SCIC) to take over State capital currently held by numerous provincial People’s Committees (PCs) and Ministries in a large number of enterprises. In particular, the SCIC will replace the provincial PCs and Ministries as representatives of State’s capital in:

• Limited liability companies with two members or more which have State capital;
• Joint venture companies in which provincial PC or Ministries are joint venture parties;
• Joint stock companies which are converted from wholly State-owned enterprises or which are newly incorporated in which provincial PC or Ministries are shareholders;
• Single member limited liability companies after being restructured pursuant to plans approved by the Prime Minister for the period 2011 – 2015; and
• Large State Economic Groups in case instructed by the Prime Minister.

To show commitment to the SOEs restructuring process, Circular 118/2014 expressly imposes liabilities to provincial PCs or Ministries which delay the transfer process. Circular 118/2014 is another effort in making SCIC to be a “Temasek” of Vietnam.

However, Circular 118/2014 would likely make it more difficult for existing and future strategic investors in SCIC-to-be-transferred enterprises to structure their investments. This is because existing and potential strategic investors in these enterprises usually want to have a shareholder agreement with representative of State capitals being provincial PCs or Ministries. If SCIC is to replace these provincial PCs or Ministries, it is not clear whether SCIC will accede to such shareholder agreement or if the strategic investor will need to re-negotiate and enter into a new shareholder agreement.

Further guidance on divestment of State capital in Vietnamese State-owned enterprises

The Vietnamese Government has been pushing hard for divestment of State capital in Vietnamese State-owned enterprises whether by way of equitisation or sale of existing State capital. One of the key issues that hinder this process is the actual areas that the Government should be pushing. To address this issue, finally, in June 2014, the Prime Minister issued Decision 37/2014 setting out the State-ownership limit in various sectors or industries. This replaces Decision 14/2011 of the Prime Minister. In particular,

• Comparing older regulations, Decision 37/2014 has  opened for private ownership regarding a number of business sectors including (i) managing and exploiting important seaports, airports (exclusive of airports having important decision on national defense); (ii) producing cigarette; (iii) Radio broadcasting and television, and (iv) controlling and maintaining dykes, flood division and disaster prevention. Previously, companies in these sectors must be wholly owned by the State;

• Decision 37/2014 also removes the restriction on state ownership on enterprises operating in (i) producing pig-iron, steel with capacity up to 500,000 tons/year; (ii) producing rotary kiln cement with capacity up to 1.5 million tons/year; (iii) producing newspaper printing paper, writing paper of high quality; (iv) Building and repair of air transport facilities; and (v) producing large-scale power from 500 MW upwards. Previously, the State must own a majority of the capital in companies in these sectors;

• The State shall remain to hold 100% of charter capital for enterprises operating in, among other things, (i) business of lottery, publishing, (ii) business relating to national defence and security, and (iii) enterprises play a key role in the activity of production and business, development strategy, holding business keys and technology that the groups and state corporations need to hold 100% of the capital in order to carry out the tasks and main business line assigned;

• The State shall hold from 75% of charter capital for enterprises operating in, among others things, (i) providing telecommunication infrastructure, (ii) exploiting the mineral with large scale and (iii) exploiting oil and natural gas;

• The State shall hold between 65% and under 75 % of charter capital for enterprises operating in, among others things, (i) processing oil and natural gas, (ii) producing cigarette, (iii) wholesaling foodstuffs, medicine and gas and oil, (iv) banking finance (exclusive of insurance, security, fund management company, finance company and finance leasing company) (v) air transportation, and (vi) power distribution; and

• The State shall hold between 50% and under 65 % of charter capital for the enterprises operating in, among others things, international maritime transport and railway transportation.

The classification based on the voting thresholds of 65% and 75% under Decision 37/2014 may become obsolete if the voting thresholds under Enterprise Law are reduced to 51% and 65% under the proposed amendments to the Enterprise Law.