Equitisation alternatives in Vietnam

Equitisation (cổ phần hóa) is often considered the more preferable way to privatize a wholly State-owned enterprise (100% SOE). However, there are other alternatives to equitisation as follows:

  • Restructuring Equitisation: Equitisation can only be applied to 100% SOE which is organised in the form of a single-member limited liability company (LLC) and which has positive owner equity. If a 100% SOE which is a single-member LLC has negative owner equity then the 100% SOE could be put through a restructuring/equitisation process with the participation of the Debt and Asset Trading Corporation (DATC) and other creditors in accordance with Circular 194/2013 of the Ministry of Finance. The end result of the restructuring/equitisation process is also a new joint stock company established from the assets and liabilities of the 100% SOE.
  • “Sale” under Decree 109/2008: A 100% SOE which is a single-member LLC can be sold to one or more investors including foreign investors in accordance with Decree 109/2008, if the 100% SOE cannot be equitised or if the Prime Minister allowed the 100% SOE to be sold. In practice, few 100% SOEs have been sold in accordance with Decree 109/2008. It appears that a sale under Decree 109/2008 is an asset sale rather than an equity sale. 
  • Free grant under Decree 109/2008: A 100% SOE which is a single-member LLC and which has a total assets value of no more than VND 15 billion and has no valuable real property can be granted for free to the employees of the 100% SOE in accordance with Decree 109/2008, if the 100% SOE cannot be equitised or if the Prime Minister allowed the 100% SOE to be granted for free. Again, in practice, few 100% SOEs have been sold in accordance with Decree 109/2008.
  • Conversion into two members or more LLC: Under Decree 71/2013 and Circular 220/2013 of the Ministry of Finance, a 100% SOE which is a single-member LLC can also be converted into two members or more LLC by way of sale of equity interests to other investors. The conversion needs to be approved by the Prime Minister. Conversion into two members or more LLC seems to be a new alternative. 
Vietnam Business Law Blog

On 28 December 2018, the State Bank of Vietnam (SBV) issued Circular 42 amending current foreign currency borrowing regulations (in Circular 24 of the SBV dated 8 December 2015, as amended from time to time (Circular 24/2015)) (Circular 42/2018). Circular 42/2018 will take effect from 1 January 2019.

Changes to permitted lending purpose

Vietnamese banks only lend in foreign currency for a few limited purposes. Circular 42/2018 has following changes to these purposes:

On 20 June 2018, the Ministry of Justice issued Circular 8 on the registration and provision of information on security interest and contracts (Circular 8/2018). Circular 8/2018 will replace Circular 5/2011 on the same subject from 4 August 2018.

Name of the object of the registration

The object of registration under Circular 5/2011 is secured transactions (giao dịch bảo đảm), which is in line with the Civil Code 2005. However, the term “secured transaction” is almost removed from the Civil Code 2015 and the registration is now the registration of security interest (biện pháp bảo đảm). Circular 8/2018 adopts such approach and determined the object of registration is security interest to be consistent with the new Civil Code 2015.

The Ministry of Finance has released a latest draft amendment to the Securities Law 2006 (https://tinyurl.com/ydc44zyd), which is scheduled to be passed in the second half of 2019. It looks like that any major law in Vietnam will need to undergo major changes in every 10 years whether or not the changes are necessary. The draft amendments include the following major changes regarding capital raising process:

In December 2018, the Government issues Decree 163/2018 to replace Decree 90/2011 on private issuance of corporate by Vietnamese companies from February 2019. Decree 163/2018 introduces certain new important points as follows:

·        To be able issue bonds, a company is no longer required to be profitable in year before the proposed issuance. Instead, the company only needs to operate for at least one year and its financial statement is audited by a qualified auditor. Issuer who has undergone certain restructuring (e.g., merger, conversion or division) may rely on the historical operation of other related companies to meet the one year operating test;

·        Secondary trading of privately-issued bonds is limited within up to 100 investors excluding “professional investors” within one year from the issuance date. The new limitation seems to aim at the practice of issuing bonds privately at the first place and reselling the same to public investors in secondary market;

Vietnamese banking regulations do not provide for a clear definition of a financial lease (cho thuê tài chính). The lack of a clear definition may result in unnecessary legal risks for parties to a cross-border lease transaction (e.g., an aircraft lease). For example, if a cross-border lease is regarded as a financial lease, then the lease may need to be registered with the State Bank of Vietnam as a foreign loan.

Under the Law on Credit Institution 2010, the act of finance leasing is defined to be (1) the extension of medium and long-term credit; (2) on the basis of a finance leasing contract; and(3) satisfying one of the following conditions:

  • upon expiry of the lease under the contract, the lessee may take over ownership of leased assets or may continue to lease them under the agreement of the parties; or

  • upon expiry of the lease under the contract, the lessee shall have the priority right to purchase the leased assets at a nominal value less than the actual value of the leased assets as at the date of purchase; or

  • the minimum term of the lease of any single asset must equal at least 60% of the period necessary for depreciation of such leased asset; or

  • the total rent for any single asset stipulated in the finance lease contract must be equal at least to the value of such asset at the signing date of the contract.