State actions ‘open secret’ to fuel bourse

Under Decision 238/2005/QD-TTg signed by Prime Minister Phan Van Khai last Thursday, the current 30 per cent limit on foreign ownership of a company listed or registered (for trading) on the local stock market will be raised to 49 per cent.
Shareholding foreign-invested enterprises (FIEs) that are established in accordance with Decree 38/2003/ND-CP are also subject to the new decision if they list or register their shares on the local stock market.
The decision will replace the government’s 2003 Decision 146/2003/QD-TTg, and will take effect 15 days after the decision is published on the the Official Gazette.
The raising of the foreign ownership limit to 49 per cent has been an ‘open secret’ for the past few weeks and has played a large part in the recent strength of the local market. Confirmation of the Prime Minister’s approval of such a move is likely to lead to renewed buying over the next few weeks ahead of the higher limit coming into force.
The VN-Index rose 13.38 points to 289.33 last Friday – the first trading session after the new rule was released. Market analysts predicted that the market will advance further, largely on speculative buying.
Vietnam’s stock market now has 30 corporate stocks and one equity fund certificate. The foreign ownership limit of 30 per cent has already been reached in nearly one-third of this number, including Agifish, Tribeco, Gilimex and Transimex Saigon.
Most foreign investors contacted by Vietnam Investment Review last week agreed that lifting the barrier was integral to encouraging more foreign investment in the stock market, but it would not have a positive effect on the market’s development in the long-term.
“Raising the foreign ownership limit to 49 per cent will be positive for the market in the short-term, but will have potentially negative effects on its long-term development,” said Kevin Snowball, managing director of Vietnam PXP Assets Management Ltd.
“We maintain our view that an increase to 49 per cent without the introduction of a foreign board, or similar mechanism, will prove counter-productive. Stocks which have reached the current 30-per cent foreign ownership limit thereafter exhibit little or no liquidity in their foreign-owned shares.
“Allowing foreigners to buy [and hold] 49 per cent of issued shares may well reduce rather than increase liquidity in the medium-term as 49 per cent of the shares [rather than 30 per cent] will cease to be traded,” he said.
Snowball predicted that no less than five stocks would be 49 per cent foreign-owned by the end of November.
Don Lam, managing partner of VinaCapital – the management arm of the London Stock Exchange-listed Vietnam Opportunities Fund (VOF) – shared the view, saying that the immediate effect might be a slight increase in the market in the next few weeks.
“Over the long-term, this will attract more foreign investors into the market, but this does not directly translate into higher share prices as most foreign investors are institutions and will be investing based on economic fundamentals. They will be looking at management and earning power as the key to making their decision,” he said.
Market analysts also said the move is likely to provide an important test of the State Securities Commission’s (SSC) market surveillance capacity, with certain opportunistic foreigners likely to continue to buy through Vietnamese nominees ahead of the move.
“It is hoped that the SSC will take steps to ensure that such foreigners are not able to gain an unfair advantage over those who choose to respect the rules of the market,” said PXP’s Snowball.
“This ‘level playing field’ approach is crucial for the long-term development of the Vietnamese stock exchange as it will be very difficult to attract new participants if they are effectively penalised for being ‘good citizens’ and following the rules.
“A foreigner is a foreigner. A foreigner creating a 100-per cent Vietnamese subsidiary, which buys shares and holds them on behalf of foreigners, must still be considered foreign. Otherwise, why have foreign ownership limits at all?” he said.