Equity regulation to deter investor plans

The move could safeguard local banks from being left out of pocket

The proposed regulation is part of a  Ministry of Planning and Investment’s (MPI) draft decree guiding the implementation of the Investment Law. The draft decree would amend and supplement Decree 108/2006/ND-CP issued five years ago and might land on Prime Minister Nguyen Tan Dung’s desk for approval next month.

Under the draft, investor equity must not be lower than 30 per cent of the total investment capital of one project. If the investor fails to meet this requirement, local authorities will not rubber stamp his application for an investment certificate. The regulation arrives in the wake of growing concern over bad debts made by foreign investors at local banks. The latest case involves Taiwanese furniture maker Kenmark Investment and Development Company in northern Hai Duong province, which said it was having trouble repaying $50 million to three Vietnamese banks.

Do Nhat Hoang, director of MPI’s Foreign Investment Agency, said the regulation would help ensure foreign investors would bring full wallets to Vietnam rather than drawing on the funds of local banks.

Last month, the MPI urgently asked local authorities to send in reports on loans and bad debts of foreign investors at local banks and the ministry plans to use these documents as grounds for approval of the regulation.

Nguyen Thanh Ha, managing partner at BD Lawyers and also a member of the bi-annual Vietnam Business Forum, said this regulation would staunch foreign direct investment inflow into the country. “If the investor is forced to take time to prepare enough equity, he may lose out on a business opportunity,” said Ha. The regulation has also met with fierce opposition from foreign  investors. Shutoh Norita, chairman of Japanese Business Association in Vietnam, said he felt upset about this new plan by policymakers.

But the policy is not actually new. The 30 per cent legal capital regulation was applied for joint venture companies set up in Vietnam from 1987 to 2005, prior to the introduction of the existing Investment Law. “Now if Vietnam returns to the 30 per cent regulation, we will have to recognise that the Vietnamese legal framework lacks consistency,” said Norita.

Meanwhile, Nguyen Mai, chairman of Vietnam Association of Foreign Invested Enterprises, was against the regulation because “it is against a market economy mechanism.” He blamed a failure on the part of local banks for the rising bad debts of foreign investors in the country.

“Banks must be responsible for appraising investment projects as well as financial ability of investors, not the government,” Mai said.