|Kojima Kazunobu* Daiwa Institute of Research (left), Sakakibara Takashi* Japan Vietnam Economic Forum |
In particular, the high proportion banks (FOL: 30 per cent) and former state-owned enterprises contributing to the total equity market capitalisation is possibly one of the reasons why FOL is evaluated as a serious obstacle for Vietnam. For foreign investors, technical obstacles such as the language of information, accounting standards, and market inefficiencies can be overcome but holding restrictions is a more fundamental issue.
We see some improvements in the new laws on securities, investment, and enterprises, such as a reduction in the number of industries with a statutory FOL and the provision of a non-voting depositary receipt that allows foreigners to have all shareholder rights other than voting rights without holding underlying shares.
However, the impact of FOL is still strong and it may once again emerge as a point of concern when Vietnam will be applying for the developed market status after becoming an emerging market.
Since 2019, our team has been engaged in the JICA’s 3-year Technical Assistance Project for improving fairness and transparency of the Vietnamese equity market. We have been providing advisory and working with the State Securities Commission (SSC) as well as the Hanoi Stock Exchange (HNX) and the Ho Chi Minh City Stock Exchange (HSX).
From our experience in the field, we would like to make two suggestions to promote the entry of foreign investors. The first is to create a “blue chip” market and a “growth market” in the future market restructuring under the Vietnam Stock Exchange (VNX). This would help Vietnam to meet foreign investors’ strong need to invest in either large-capitalisation stocks with high liquidity (blue chip) or emerging-growth stocks with large upsides (growth market). For the blue chip market, we propose to have listing requirements that include liquidity-based criteria such as “tradable” market capitalisation and higher quality-based criteria such as “corporate governance” and “disclosure”. These criteria should be basically applied to all stocks, including ex-state-owned enterprises. In the blue chip market, it would also be desirable to have a criterion that does not allow articles of incorporation with restrictions on the transfer of shares to foreigners.
The second suggestion would be to realise an integrated process of public offering and listing in line with international standards. To this end, it is important to develop an operational flow in which the securities companies underwrite the initial public offering (IPO) and execute it by book building to determine and agree the underwriting conditions with the issuer.
This practice is regarded as the international de facto standard and the prerequisite for IPOs in which many foreign investors and domestic retail investors can participate.
We believe the new Law on Securities incorporates provisions for integrating the public offering and listing processes. The next challenge is to develop the capability of underwriting securities companies to provide advisory, to perform due diligence, and to execute IPOs by book building.
The underwriting business requires high expertise and rich capital, but on the other hand it is quite an attractive business for major securities companies with high fees. In Japan, the IPO fee rate is around 5-8 per cent of the underwriting amount.
From the perspective of improving the international reputation for fairness and transparency of the Vietnamese equity market, it is important to strengthen the capability of the authorities and stock exchanges to monitor and detect unfair trade and promote preventive measures.
The new securities law has some desirable amendments, including stricter penalties on market manipulation and insider trading, and extended inspection authority for the SSC. We expect that the SSC and the exchanges will continue their ongoing system development, capacity building, and close cooperation involving securities companies.
Previously, media reported that the Vietnam Association of Financial Investors (VAFI) proposed to quickly equitise the VNX and the Vietnam Securities Depository so that these subsidiaries would be better facilitated with international standards.
Echoing the VAFI, we regard that future privatisation and share listing on the VNX – the parent company of HSX and HNX – is an option worth considering. Becoming a listed company will allow VNX to monitor the development of the whole Vietnamese market through dialogues with investors, while strengthening profitability through efficiency will enable capital mobilisation.
On the other hand, VNX, as an institution that operates highly public exchanges, must have strong self-regulatory function in order to maintain fairness and transparency in the market. The aspects of a profit-making entity and those of a regulatory organisation inevitably lead to a conflict of interests.
To assuage these concerns, Japan Exchange Group, which is the listed parent company of the Tokyo Stock Exchange and Osaka Exchange, concentrates its self-regulatory functions such as market monitoring, member management, and listing examination on the Japan Exchange Self-Regulatory Corporation (JPX-R) under its umbrella, and makes JPX-R independent.
We believe that the Vietnamese stock market has made a good start towards its development as an international market with the new Law on Securities and expected market reforms by VNX, HSX, and HNX. We are confident that it is one of the world’s most attractive potential markets for foreign investors, benefiting from Vietnam’s remarkable economic growth, a hardworking and educated labour force, and political and social stability.n
(*) Consultants from the Japan International Cooperation Agency’s Technical Assistance project to improve the fairness and transparency of the Vietnamese equity market.