Barriers still hamper SOEs

November 28, 2018 | 14:00
(0) user say
Foreign investors often find it difficult to pour money into Vietnam’s state-owned enterprises due to the short timeline, a lack of clear available information and a low availability of shares. Sung Mee Hong, partner at Lee & Ko Law Firm, discussed the challenges.
barriers still hamper soes
Barriers still hamper SOEs, illustration photo

Decree No.126/2017/ND-CP and Circular No.40/2018/TT-BTC currently oversees the sale process of Vietnam’s state-owned enterprises (SOEs) for strategic investors. According to these legal documents, a Vietnamese SOE starts the selling process by setting up a list of criteria for potential investors and specifying the amount of shares put on sale.

The SOE then submits the equitisation plan to the related authorities for approval and announce the details of the plan in both English and Vietnamese. Twenty days following the announcement, the SOE will then start its selection process via auctions or negotiations. The entire process is expected to be complete within four months.

Previously, Decree No.59/2011/ND-CP allowed SOEs to seek strategic partners, either before or after the initial public offering (IPO). However, the latest Decree 126 stated that SOEs can only start the selection process after completing the IPO. When compared to other similar mergers and acquisitions (M&A) transactions from around the world, it becomes evident that four months is too short a time period for Vietnamese SOEs to find a suitable strategic partner.

Inaccessible information

Specifically, evaluating the Vietnamese SOEs and conducting the necessary due diligence is impossible for foreign investors to achieve in the incredibly short time frame of four months. Due diligence takes time and is a crucial aspect of any M&A deal in order to understand the financial, legal and operational risks related to the seller. The potential investor also needs adequate time to investigate the SOE in terms of their governance, human resources and documentation standards or conduct field trips.

To summarise, due diligence and evaluation, both standardised processes, are taken very seriously by foreign investors. Without sufficient time for due diligence and to assess risk evaluation, these investors cannot justify their interest in a Vietnamese SOE, and they may decline to take part in the share sale.

There is also a lack of accessible information that investors can obtain. Prior to 2017, the name of equitising SOEs and the amount of state-owned shares after equitisation were only available after the authorities approved the equitisation plan. This meant that strategic investors were only notified of the amount of shares they could buy after the announcement, which was usually too late.

This aspect has improved in recent years. Decision No.58/2016/QD-TTg has provided a list of SOEs up for equitisation between 2016 and 2020, as well as the state’s expected holding after equitisation. Similarly, Decision No.1232/2017/QD-TTg pointed out the names of SOEs earmarked for further state withdrawals between 2017 and 2020. However, the reality is that foreign investors still find it very difficult to access information about these SOEs, including the proposed timeline, shares available for sale or the terms and conditions of the transactions. This ambiguity has discouraged a number of potential investors from partnering with firms.

New barriers emerge

Recent regulations have relaxed some of the SOE equitisation rules. For example, strategic investors are now allowed to sell shares three years following their purchase (rather than the previous five years) and the IPO can be conducted following the book building process, which is a more market-based approach.

The book building process is expected to match the pricing expectations of the state with the investors. The government has also been divesting from major businesses in different sectors, paving the way for investors to join these industry giants.

However, difficulties remain. For example, strategic investors are now required to deposit 20 per cent of the expected purchase value, as specified in the SOE equitisation plan. The cap was previously only 10 per cent. Investors have complained that the 20 per cent deposit is too high for an M&A transaction. Besides, the law states that if there are more than two bidders, both of whom have registered to buy more than the shares available for strategic investors, the deal will instead be conducted via the stock exchange. Auctions on the listed market do not include due diligence, making it very challenging for potential investors.

Another problem is the low percentage of shares that strategic investors can buy. According to Decree 126, only SOEs that the state still retains 50 per cent of shares can seek strategic investors. Furthermore, at least 20 per cent of the outstanding shares at an equitising SOE must be sold via public auction.

This rule means a strategic investor is unable to hold more than a 30 per cent stake in a Vietnamese SOE. I have talked with various investors from South Korea, who expressed their wishes to have a majority stake in firms or at least a large enough holding that allows them to take part in the decision-making process. This is especially true for companies that operate in the same sector as the SOE in question.

Another point to consider is that the global M&A market is dominated by financial investors or investment funds. Financial investments within the Asia Pacific region reached $122.7 billion via 445 transactions in 2017, up by 37.7 per cent from the previous year.

However, Decree 126 appears to exclude financial investors, as it states that strategic partners must have turned a profit within the past two years and they must be willing to transfer technology, human resources and corporate governance skills to the Vietnamese SOE. The strategic partner should also provide raw materials and help the SOE to expand its markets. Financial investors consider these terms unsuitable.

What the stars mean:

★ Poor ★ ★ Promising ★★★ Good ★★★★ Very good ★★★★★ Exceptional

TagTag: