VAMC - New tool to resolve bad debts
The much expected Decree on setting up Vietnam Assets Management Company (VAMC) was finally issued on 18 May 2013 and will take effect from 9 July 2013. VAMC is expected to play a major role in resolving the massive amount of bad debts accumulated by Vietnamese banks. However, a quick review of the Decree indicates that in order for VAMC to be up and running many steps and decisions remain to be taken.
The Basic
VAMC is a non-profit State-owned enterprise and incorporated as a single-member limited liability company. VAMC has a chartered capital of VND 500 billion. The SBV is the representative of the State capital in VAMC.
How it works
Decree 53/2013 establishes a quite complicated mechanism to deal with bad debts of Vietnamese banks. Below is an example of how such mechanism works:
- Borrower B mortgages its house to borrow a loan of VND 100 billion (Secured Debt) from Bank A. Borrower B fails to repay the Secured Debt and the Secured Debt becomes bad debt of Bank A. Bank A has not set aside any reserve for the Secured Debt..
- VAMC issues special bonds (VAMC Bond) according to an issuance plan to be approved by the State Bank of Vietnam (SBV). VAMC Bond has a term of five years and carries no interest.
- Bank A sells the Secured Debt to VAMC in exchange of VND 100 billion VAMC Bond. This step requires the Secured Debt and Borrower B to satisfy certain conditions. As a result of the transfer, VAMC will become the owner of the Secured Debt and be entitled to the mortgage over the house of Borrower B (the Mortgage). The transfer is made by way of a contract between VAMC and Bank A. In some cases, the SBV may even force Bank A to sell its bad debts to VAMC if Bank A does not cooperate with VAMC.
- Bank A pledges VND 100 billion VAMC Bond with the SBV to obtain a recapitalisation loan from the SBV (SBV Loan). The amount and interest of the SBV Loan is subject to separate regulations.
- During the term of the VAMC Bond, Bank A needs to establish a reserve (Bank Bond Reserve) of at least 20% of the value of VAMC Bond each year.
- After taking over the Secured Debt and the VAMC will either directly or authorise Bank A to deal with Borrower B. Decree 53/2013 seems to offer substantial legal supports for VAMC to enforce the Mortgage. For example, Decree 53/2013 requires all competent authorities to cooperate with VAMC to allow VAMC to enforce the security interests that it holds.
- VAMC authorises Bank A to enforce the Mortgage and recover VND 50 billion (Recovered Amount) and VND 50 billion remains to be unpaid (Remaining Debt).
- Within five business days after the earlier of (1) the last day of the term of VAMC Bond or (2) the date on which the aggregate of the Bank Bond Reserve and the Recovered Amount is equal to VND 100 billion, Bank A must (2) repay the SBV Loan and get back the VND 100 billion VAMC Bond, and (3) sell back VND 100 billion VAMC Bond to VAMC in return of the Remaining Debt. VAMC will also return the Recovered Amount less the enforcement expenses and a haircut (to be decided) for VAMC to Bank A.
- After Bank A gets back the Remaining Debt and returns the VAMC Bond to VAMC, Bank A will need to use the Bank Bond Reserve to resolve the bad debt resulted from the VAMC Bond and to continue resolve the Remaining Debt.
In March 2018, the Government issued a new Decree (Decree 40/2018) on multiple level marketing (MLM) activities. Decree 40/2018 takes effect from 2 May 2018 replacing Decree 42/2014. In general, Decree 40 inherits many regulations of Decree 42/2014 and its implementing Circular (Circular 24/2014). That said, Decree 40/2018 introduces various new and stricter requirement on MLM activities. In particular,
A MLM enterprise must now register its activities with provincial competent authorities, where there are MLM activities conducted by its consultants. A MLM enterprise must appoint an individual representative in each province where it does not have branch or representative office. Under Decree 42, a MLM enterprise only needs to notify provincial competent authorities where there are MLM activities conducted by its consultants.
A MLM company must now make an escrow deposit of VND 10 billion or 5% of the charter capital, whichever is higher instead of VND 5 billion with a local bank or a foreign bank branch in Vietnam. The deposit is to secure for the MLM company’s obligations with respect to the members of the MLM network.
A shareholder (especially a foreign shareholder) in a Vietnamese joint stock bank (VN Bank) must know how much its shareholding in the VN Bank is. This is because (1) there are ownership caps applicable to a single shareholder or a group of related persons, and (2) a “major shareholder” is required to obtain an approval from the State Bank of Vietnam (SBV). Since the Law on Credit Institutions 2010 (LCI 2010) and Decree 1/2014 introduces the concept of “indirect ownership”, it may be difficult to determine the exact shareholding ownership of a shareholder in a VN Bank for the purpose of (1) and (2) above. Indirect ownership is defined as an organization or individual owning the charter capital or shareholding capital of a credit institution via a related person or trust investment.
Given the lack of clarity on tender offer rules and the difficulty in enforcing such rules in practice, it is not so difficult for an investor to accumulate significant stake in a public joint stock company (target company) in Vietnam. However, if such investor is not supported by the Board of the target company, then the unwelcomed investor may find a hard time to participate in the management of the target company even if the investor can acquire control of the target company at shareholder level. This is because:
In March 2018, the Government issued Decree 32/2018 containing major amendments to the regulations on sale of State capital in State-affiliated enterprises. The amendments will take effect from 1 May 2018. State-affiliated enterprises are joint stock companies (State-owned JSC) or limited liability companies with two members or more (State-owned LLC) a part of which is owned by the State or by a wholly State-owned enterprises (Wholly SOE). New amendments under Decree 32/2018 include:
Stricter pricing control
· Decree 32/2018 requires the State-seller to retain licensed valuer to value the State’s capital and to determine an asking price before commencement of the sale process even if the State-affiliated enterprises are listed companies. Under Decree 91/2015, it appears that if a State-affiliated enterprise is a listed company, then there is no need to retain a licensed valuer. Decree 32/2018 also provides that the asking price is only valid for a period of six months from the date of the valuation report. This suggests that a re-valuation is required if a sale is not completed within six months of the date of the valuation report.
· For a listed State-affiliated company, if the asking price determined by the valuer is lower than the average share price of the company during the period of 30 consecutive trading days before public announcement of the sale, then such average share price will be used as the asking price. It is not clear if the average share price is a arithmetic average or weighed average (which takes into account the trading volume each trading day).
· The licensed valuer when valuing the State’s capital must take into account the value of land leased by the State-affiliated enterprise and “history” of such State-affiliated enterprise. Decree 91/2015 only requires the value of land granted (not leased) to the State-affiliated enterprise to be taken into account. However, Decree 32/2018 does not specifically require the valuer to take into account whether the sale stake is a minority stake or a control stake.
Under the Law on Credit Institution 2010,
- a major shareholder of a joint stock commercial bank in Vietnam (VN Bank) is a shareholder, who owns directly or indirectly at least 5% of the total voting shares of the VN Bank. Indirect ownership is defined as an organization or individual owning the charter capital or shareholding capital of a credit institution via a related person or trust investment; and
- a SBV’s approval is required for “transfer of shares by a major shareholder” or “transfer of shares resulting in a major shareholder becoming a non-major shareholder and vice versa”.
Under the definition of a “major shareholder”, a holding company (Parent Co), which indirectly owns shares in a VN Bank through one of its subsidiaries (Sub Co) could be considered as a major shareholder of the VN Bank if the aggregate shareholding is 5% or more. However, in that case, it is not clear:
- whether Sub Co or Parent Co or both are considered as major shareholders of the VN Bank. And if the Parent Co only owns a part of Sub Co, then whether the indirect shareholding of the Parent Co in the VN Bank should be calculated with reference to the shareholding of the Parent Co in Sub Co; and
- whether a transfer of shares in Sub Co by a Parent Co is considered as a transfer of shares in VN Bank and is subject to SBV’s approval.
According to Social Insurance Law 2014, from 1 January 2018, any employee working under a labor contract with a term of from one month to three months must participate in the compulsory social insurance scheme (SI Requirement). The social insurance contributions are paid by both employer and employee subject to the contribution rate, of which the employer usually pays larger part. However, it is not clear whether an employee working under a “probation labour contract” (hợp đồng thử việc) with a term of from one to two months (Probationary Contract) must comply with the SI Requirement. There are various views on this issue.
Under the Law on Credit Institutions 2010 (as recently amended), a bank is subject to several limitations when extending a loan and other forms of credit to a borrower including the following:
(a) the aggregate outstanding credit extended to (1) a single client and (2) a single client and its related persons must not exceed 15% and 25% of the equity capital of the bank respectively. The outstanding credit includes, among other things, (1) bonds issued by the client and its related persons, (2) loans to clients being other credit institutions or loans secured by guarantees by other credit institutions, (3) loans secured by individual saving deposits, and (4) loans financed by funds entrusted by the Government, organizations or individuals. The Prime Minister may decide to waive this limitation subject to a limitation of 400% of the equity capital of the bank;
(b) a commercial bank must not extend credit to (1) board member, member of member council, member of board of controllers, general director, director, deputy director, deputy general director and equivalent positions in the commercial bank, legal entities being a shareholder whose representative of the capital contribution portion is a board member or member of board of controllers; and (2) a parent, spouse or child of a board member or member of board of controllers or of general director, director or deputy general director, deputy director and equivalent positions.
A bank must not extend credit to a borrower on the basis of security provided by any of the persons specified at (b);
(c) a bank must not extend credit without security or under preferred conditions to following persons: (1) auditing organization and auditor currently conducting an audit at such bank or inspector currently conducting an inspection at such bank; (2) chief account of such commercial bank; (3) major shareholders and founding shareholders of such bank; (4) companies of which more than 10% of charter capital is owned by one of the persons specified in (b); (5) people conducting appraisal and approval of loans; and (6) subsidiaries or affiliates of such bank or of an enterprise controlled by such bank.
The total outstanding credit balance extended by a bank to all borrowers specified at (1) to (5) must not exceed 5% of equity capital of such bank. Such outstanding credit balance includes the total of the investment and purchase of bond issued by the borrowers (if applicable).
The total outstanding credit balance extended by a bank to a single borrower specified at (6) must not exceed 10% of equity capital of such bank and to all borrowers specified at (6) must not exceed 20% of equity capital of such bank. Such outstanding credit balance includes the total of the investment and purchase of bond issued by the borrowers.
Decree 163 of the Government on logistics services was issued on 30 December 2017 (Decree 163/2017). It is going to take effect on 20 February 2018 and replace Decree 140 of the Government on logistics services dated 5 September 2007 (Decree 140/2007). Below are salient changes in Decree 163/2017.
Decree 163/2017 no longer requires the logistics services providers to meet the condition of adequate equipment and personnel. That condition was applied to some logistics services, but under Decree 163/2017, the logistics services providers have only to meet conditions specific to the logistics service that they provide.
Decree 163/2017 allows foreign investors to apply, at their discretion, investment conditions regarding logistics services under an international treaty where multiple treaties are applicable.
Decree 163/2017 classifies logistics services in accordance with Vietnam’s commitments to the WTO. By contrast, Decree 140/2007 has its own classification of logistics services which is not consistent with the description of logistics services under the WTO Commitments. And the investment conditions and foreign ownership limit provided in Decree 163/2017 are generally consistent with the WTO Commitments. Therefore, it is easier to compare the Decree 163/2017 with the WTO Commitments.
The table below sets out the applicable foreign ownership limit under Decree 163/2017, to the extent possible, in comparison with Decree 140/2007:
On 15 January 2018, the Government issued Decree 9/2018 on sale and purchase of goods and other directly-related activities by FIEs. Decree 9/2018 took effect immediately and replaces the outdated Decree 23/2007. Several issues arise from this Decree 9/2018. Unfortunately, most of these issues will likely make the operation and investment by FIEs in the sectors covered by Decree 9/2018 more (sometimes much more) challenging. In particular,