Private Corporate Bonds: Ambiguity Concerning The Permissible Use Of Bond Proceeds
Decree 153/2020 (as amended), which governs private corporate bond offerings, creates ambiguity concerning the permissible use of bond proceeds, especially when parent companies aim to finance their subsidiaries.
Decree 153/2020 stipulates that bond proceeds can be used for implementing investment programs and projects, restructuring debts of the issuing enterprise itself, or for other purposes sanctioned by specialised laws. The ambiguity stems specifically from how the qualifier “of the issuing enterprise itself” applies to these permissible uses. This leads to two primary interpretations:
Interpretation 1 - This trailing qualifier applies solely to “restructuring debts” purpose. Consequently, an issuing enterprise could use bond proceeds for:
implementing any investment program or project (not necessarily of the issuing enterprise itself); or
restructure the debts of the issuing enterprise itself.
Interpretation 2 -This trailing qualifier also applies to the purpose of implementing investment programmes and projects. Consequently, an issuing enterprise could use bond proceeds for:
implementing any investment program or project of the issuing enterprise itself; or
restructure the debts of the issuing enterprise itself.
To illustrate the practical implications, consider a scenario where a parent company issues bonds to fund a project executed by its subsidiary (SubCo).
Under Interpretation 1, financing SubCo’s project in this manner would be permitted, given that such activity qualifies as a permissible 'investment program or project'.
Under Interpretation 2, this financing structure would be permitted if “investment program or project of the issuing enterprise itself” is interpreted broadly to encompass projects executed through a subsidiary. Conversely, a more restrictive reading—requiring that the issuer must directly use bond proceeds—would not permit such financing structure.
Notably, a previous draft amendment to Decree 153/2020 reportedly included an explicit prohibition against issuing bonds for the purpose of funding other enterprises (whether through equity investment or loan extension). However, this prohibition was not adopted in the final decree. While the removal of this explicit prohibition might weaken arguments for the restrictive reading of Interpretation 2, the underlying ambiguity still remains.
This post is written by Ha Thanh Phuc.