Summary of the equitisation process of a Vietnamese State-owned Enterprise

November 19, 2012 Nguyen Quang Vu

Below is a quick summary of the process to equities a wholly State-owned enterprise (SOE) in Vietnam. The summary is taken from my book “Equitisation of Vietnamese State-owned Enterprises”, which is currently available in the Amazon Kindle Store. I will make this book available for free download on 15 December 2012. Anyone interested in the book should open an Amazon account (credit card is required) and download it. Kindle books can be read by Amazon Kindle e-reader or free Kindle reading apps on smartphones, tablets, web browser, PC or Mac computers.

· Definition: Generally, equitisation is the process of privatising an SOE (the Equitised SOE) by (1) setting up a new joint stock company (the Equitised JSC), (2) transferring assets and liabilities of the Equitised SOE to the Equitised JSC and (3) selling shares in the to-be-established Equitised JSC to private sectors in the meantime.

· Authorities involved: Various Government authorities will be involved in the equitisation of an Equitised SOE, including (1) the Equitisation Authority, who decides the most important issues relating to the equitisation, (2) the Valuation Authority, who determines the valuation of the Equitised SOE, and (3) the Steering Committee, who is in charge of the day-to-day operation. The law does not clearly provide powers and responsibilities of Government authorities with respect to an equitisation, as such, it may sometimes be difficult to determine the powers or even identity the Government authorities involved in the equitisation.

· Investors: Investors purchasing shares during the equitisation of an Equitised SOE may be classified as (1) Vietnamese or foreign investors; (2) Strategic Investors or Non-strategic Investors; or (3) employees of the Equitised SOE and “outside” investors.

· Preparation for sale of shares: During this step, various preparatory tasks need to be completed to commence the equitation and to prepare for next steps. This step includes (1) establishment of the Steering Committee, (2) appointment of Equitisation Advisors, and (3) collection of information and documents regarding the Equitised SOE.

· Valuation of the Equitised SOE: During this step, the Equitised SOE must (1) take an inventory of its assets and liabilities, (2) restructure its assets and liabilities and (3) determine the value of the Equitised SOE. Through the restructuring of assets and liabilities, the Equitisation Authority and the Equitised SOE will do their homework in shaping and, potentially, cleaning up the balance sheet of the Equitised JSC and, to the extent possible, resolving any past issues or mistakes before making the Equitised SOE available to the public. The Equitised SOE can be valued by the following valuation methods: assets method, discounted cash flow method or other valuation method. However, the valuation result obtained from the assets method is the minimum threshold. The valuation of a Special SOE may need to be verified by the State Auditor.

· Equitisation Plan: Based on the valuation result, the Equitised SOE will prepare an Equitisation Plan, which covers many important issues regarding the Equitised JSC, including the Minimum Offer Price, the proposed capital and shareholding structure of the Equitised JSC.

· Sale of shares - investors: During this step, the Equitised SOE will arrange to sell shares in the Equitised JSC to (1) public investors through a public auction (Equitisation IPO), (2) Strategic Investors either directly or through a strategic sale auction, and/or (3) employees and trade unions of the Equitised SOE. The shares to be sold during this step could come from the State’s existing capital in the Equitised SOE (equivalent to existing shares) and/or through new shares to be issued by the Equitised JSC at a later stage.

· Sale of shares – sale conditions: The number of shares in the Equitisation JSC that an investor is allowed to subscribe to during the equitisation will depend on the proposed shareholding structure of the Equitised JSC set out in the Equitisation Plan. A public investor purchasing shares in the Equitisation IPO or a Strategic Investor purchasing shares before the Equitisation IPO must pay a price higher than the Minimum Offer Price. A Strategic Investor purchasing shares after the Equitisation IPO must pay a price higher than the lowest successful auction price. The shares purchased by a Strategic Investor cannot be transferred in the first five years of incorporation of the Equitised JSC unless otherwise approved by the General Meeting of Shareholders of the Equitised JSC.

· Sale of shares – allocation of proceeds: Normally, when an existing shareholder sells its shares in a joint stock company, the existing shareholder will keep all profits, including the difference between the sale price and par value of the shares sold. Similarly, when a joint stock company issues new shares, the company will be entitled to profits arising from such issuance, including any premium paid for the shares. However, under equitisation regulations, where new shares of the Equitised JSC are issued, the State and the Equitised JSC will “share” the aggregate sale premium obtained from the sale of both new shares and existing shares in proportion to their respective percentage in the charter capital of the Equitised JSC.

· Sale of shares – delay in delivery of shares: The Equitised SOE is not a joint stock company and therefore cannot issue shares of its own. As such, shares in the Equitised JSC can only be issued after the Equitised JSC has been incorporated. This results in a substantial delay between the time of payment for shares by the investors participating in equitisation of an Equitised SOE and the time when the shares are actually issued to investors.

· Conversion and hand-over process: During this step, various tasks are taken so that the Equitised JSC can be up and running, including (1) holding the first General Meeting of Shareholders, (2) incorporating the Equitised JSC, (3) issuance of shares, (4) re-evaluating the State’s capital in the Equitised JSC, (5) preparing an Opening Account of the Equitised JSC, and (6) handing over the assets and liabilities of the Equitised SOE to the Equitised JSC.

· Conversion and hand-over – potential adverse effects: The actions taken by the Equitised SOE and the equitisation authorities during the hand-over may have an adverse effect on investors purchasing shares in the Equitised JSC. These actions include (1) tax finalisation of the Equitised SOE and (2) revaluation of State’s capital in the Equitised JSC.

· Timing: The law does not provide a clear timeline for the equitisation process, but does stipulate certain time limits for specific steps. The Prime Minister, however, is given broad authority in determining the schedule and process for the equitisation of a special SOE.