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.
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.