A closer look at Circular 6/2019 of the State Bank of Vietnam (SBV) reveals that it could create more problems than it solves. The key issue under Circular 6/2019 is the broader use of the “direct investment capital account” (normally referred to as DICA).
To understand the issue, one would need to know how DICA works. Under the foreign exchange regulations, DICA must be opened by a company in Vietnam, which has “foreign direct investment” (the FIE). Foreign investor/shareholders of an FIE will contribute capital to the FIE by transferring monies to DICA. Foreign investors/shareholders will get their monies back from Vietnam also by transferring monies from DICA to their own bank accounts (even in case the foreign investor/shareholder sells its investment to another investor). This simple arrangement works well for simple foreign direct investment activities in the 1990s where there is limited M&A activities and foreign investors are mostly foreign manufacturers who do not plan to sell their investment down the road.
But for a M&A transaction where a foreign investor buys/ sells equity interest in an FIE from/to a local investor, DICA is not suitable. This is because of the simple fact that the investment amount in a M&A transaction is usually owned by the seller or the buyer to such transaction but not by the FIE. Accordingly, from a operational point of view, it would be difficult for an investor to accept that its monies have to go through a third party’s bank account. In practice, the risk is not material where the FIE is under control of either the buyer or the seller. But for a transaction where both seller and buyer are not in control of the FIE, there is a real risk that the deal will not go through if the FIE (or indeed the controlling shareholder of the FIE) does not agree with the transaction and does not allow the purchase price to go through the DICA controlled by the FIE. Since there is no clear definition of FIE under the law, by tweaking the definition of FIEs, the SBV can change the scope of use of DICA.
Before Circular 6/2019, DICA is only mandatory for FIEs which have an Investment Registration Certificate. FIEs, which do not have an Investment Registration Certificate, do not have to use DICA. And direct payment between seller and buyer in these FIEs is permitted which is common sense. However, Circular 6/2019 broadens the mandatory use of DICA to include companies which are majority owned by foreign investors regardless of whether such companies have an Investment Registration Certificate or not. Accordingly, investors in these FIEs are now facing the difficulties caused by DICA (see more discussion at Part 2).
This post is written by Nguyen Quang Vu.