Recently, an updated draft new Law on Securities (the "Draft Law") has been released by the Ministry of Finance for public comments, with a view to further improve the regulatory framework for the securities market in Vietnam. The Draft Law if adopted will take effect from 01 January 2021, and shall replace the existing legislation, Law No. 70/2006/QH11 on Securities dated 29 June 2006 as amended in 2010 (the "Current Law"). This article discusses some major changes under the Draft Law as compared with the Current Law.
New Criteria for Public Companies
According to the Current Law, a private joint stock company (shareholding company) will become a "public company" if it has conducted a public offering; it has shares listed on a stock exchange or a securities trading center; or it has 100 shareholders excluding professional securities investors, and a charter capital of VND10 billion or more. Under Article 31.1 of the Draft Law, a private joint stock company will become a "public company" if it has a paid-up charter capital of VND30 billion or more, and at least 10% of its voting shares are owned by 100 or more investors who are not major shareholders in such company (a major shareholder is a shareholder owning 5% or more of the voting shares in a company); or it has successfully conducted an initial public offering.
In general, the Draft Law increases the criteria on capital size and the shareholding structure of public companies. In the future, companies without large charter capital, or without smaller shareholders, will fail to become a "public company".
Relaxation of Foreign Ownership Limit
Under the current law, the foreign ownership limit (FOL) by foreign investors in a public company shall be subject to a general cap at 49% of the total voting shares of the company. For some sectors like banking, the FOL is 30% only. As per the Draft Law, foreign investors are allowed to hold up to 100% of the total shares in a public company in Vietnam, except for restricted sectors as provided under the domestic specialized laws or international treaties of which Vietnam is a member. When a public company operates in various sectors, then the FOL may not exceed the minimum threshold of all these sectors.
Also, under the Draft Law, there will be no restriction on the maximum number of investment fund certificates, shares of securities investment funds, non-voting shares of public companies, derivative securities, custody certificates and warranty certificates, which foreign investors are allowed to invest in, unless otherwise provided by the charter of the relevant issuing organisation.
The proposed FOL relaxation is expected to make the market more open to foreign investors and better attract foreign capital flows into the country. The change is also to meet the MSCI's criteria of "Openness to Foreign Ownership", help improving the foreign room level and making equal rights to foreign investors, so as to upgrade Vietnam from the frontier-market status now to an emerging market.
Initial Public Offering and Subsequent Offering
Under the Current Law, a public offering is the offering to sell securities (i) by means of public information channels, (ii) to 100 or more investors excluding professional securities investors, or (iii) to an unidentifiable number of investors.
The Draft Law separates the public offering into initial public offering ("IPO") and subsequent public offering and sets out different conditions for each case. Some new criteria of an IPO of a company are as follows:
- It has at least VND30 billion of paid-up charter capital (as compared to VND10 billion under the Current Law);
- It must be profitable for the two years preceding the year that the company registers the IPO (as compared to one year under the Current Law);
- At least 15% of the company's voting shares must be [sold/offered] to 100 or more investors who are not major shareholders; if the company's charter capital is VND1,000 billion or more, the minimum threshold is 10% of the company's voting shares;
- Major shareholders of the company before the IPO must commit to together hold at least 20% of the company's charter capital within at least one year from the completion date of the IPO;
- As of the date the company submits its IPO application dossier to the State Securities Commission ("SSC"), the company is not being criminally prosecuted and does not have an un-expunged criminal record on violation of economic management order; and
- Shares of the company must be listed or registered to be traded at the Securities Exchange after the end of the IPO (as compared to one year after the end of the IPO under the Current Law).
Some new criteria of subsequent public offerings are as follows:
- Criteria applied to IPO in Item (a), (b), (e), (f) above;
- The total value of shares issued at par value must not be greater than total value of outstanding shares at par value, unless the company has an issuance guarantee with strong commitment to purchase all shares of the company to re-sell or purchase the remaining shares of the company that have not been fully allotted; and
- If the public offering is for the purpose of raising capital for a project, the public offering is successful if at least 70% of the total offered shares are purchased. The company must have a plan to make up for the deficient capital to continue to implement the project.
New Rules for Private Placement of Shares
Under Article 4.21 of the Draft Law, private placement of securities is an offering of securities to less than 100 investors excluding professional securities investors. The element of "without using the mass media of the internet" has been removed from this definition.
Per the current law, the types of investors that can participate in a private placement of a public company, shall be considered and passed by the General Meeting of Shareholders of that public company. However, under the Draft Law, the types of investors that can participate in a private placement of a public company will include (a) strategic investors and (b) professional securities investors only.
Strategic investors are investors having financial capability, technology expertise, and long-term partnership with the company, and who have been selected by such company in accordance with the criteria approved by its General Meeting of Shareholders. While professional securities investors or institutional investors are those investors having financial capability and professional ability on securities.
The transfer lock-up period of shares issued through a private placement by a public company is now one year under the current law. However, the Draft Law requires this lock-up period to be at least one year for institutional investors and at least three years for strategic investors.
Establishment of Securities Companies and Fund Management Companies
Currently, securities companies and fund management companies are required to obtain the establishment and operation license from the SSC as the regulator, which also serves as their enterprise registration certificate for establishment of the company. However, under Article 72 of the Draft Law, securities companies and fund management companies will be required to obtain the operation license first from the SSC, and then obtain an enterprise registration certificate from the local Department of Planning and Investment (i.e. the Company Registrar) like any other company in Vietnam in accordance with the 2014 Law on Enterprises.
Better Investor Protection
Finally, to better protect investors and curb the widespread and detrimental collusion, insider trading and flawed information, the financial penalty will be raised under the new law for market violations. The maximum fine is now VND2 billion (about US$85,106) for institutional investors and VND1 billion for individual investors. Under the Draft Law, the maximum fine will be increased to VND3 billion for institutional investors and to VND1.5 billion for individual investors, which are considered strong enough to deter investors from breaking the law.
In conclusion, after 12 years of implementation, it is time for the securities law to be overhauled, with a new approach to make it more suited to the market conditions and overcoming the shortcomings of the current law. The Draft Law is one of the efforts of the Government of Vietnam to improve the legal framework to make the market more transparent, open and equal for the investors, giving a boost to the development of the securities market and the capital markets in general.