Bigger slice of credit institution pie for foreign appetites

Their ability to hold up to a 20 per cent stake in a local credit institution without seeking prime ministerial approval is a highlight of the latest State Bank draft decree to replace Decree 69/2007/ND-CP on the purchase of shares by foreign investors in local credit institutions, tabled last week for public comment.

Under the existing Decree 69,  foreign strategic ownership is capped at 15 per cent of a local bank’s chartered capital. Pursuant to the State Bank’s proposal, the prime minister will consider allowing the investor to raise its ownership to 20 per cent on a case-by-case basis.

The proposal, if approved by Prime Minister Nguyen Tan Dung, means Deutsche Bank, for instance, just needs to go through the central bank if it wants to expand its interest in Habubank from 10 to 20 per cent.

The draft decree is silent on conditions for purchasing less than a 5 per cent stake, while presenting a list of conditions for purchasing a 5 per cent stake or more. This indicates administrative procedures for obtaining less than 5 per cent ownership are cut.

Lawyers said the moves reflected the central bank’s attempt to ease the administrative burdens associated with investing in local credit institutions.   

However, the 30 per cent ceiling on foreign investors’ aggregate ownership in a local credit institution as specified in Decree 69 is maintained in the draft decree.

So is the regulated maximum 5 per cent ownership for a foreign individual investor and the requirement that foreign credit institutions, for enrolment, must not be a strategic investor in another credit institution in Vietnam.

While relaxing the rules on ownership of less than 5 per cent, the draft decree tightens regulations on foreign ownership of 5 per cent or more.

Besides profit earning requirements, other conditions (Box below) might present investors with paperwork headaches to satisfy the licencing authority, such as private equity funds.

Simon Taylor, special counsel at Baker&McKenzie, said the control on ownership forms of shares showed the central bank’s determination to control foreign investors’ over bearing participation in the management and administration of local credit institutions to avoid potential conflicts of interest.

“The purchase of shares by foreign credit institutions which do not directly operate in Vietnam or are separate from their subsidiaries in Vietnam would be more preferable than the purchase of shares by domestic credit institutions,” he said.

While defining “foreign credit institutions” being a “strategic foreign investor” as “foreign institutions operating in the fields of finance and banking including foreign banks, foreign finance companies and foreign financial leasing” which Decree 69 fails to make it clear, the draft allows for a different kind of strategic investor - information technology (IT) firms.

In a report lodged with the prime minister explaining the draft decree, the central bank said IT firms could be strategic investors as their technology tool kits could help “improve banks’ governance capacity and development of modern products and services”.

On the supply side for partial acquisitions, notably, the draft decree implies a broader governing scope. It covers the sale and purchase of shares in credit institutions, including commercial banks, non-banking credit institutions such as finance companies and finance leasing companies, micro finance companies and people’s credit funds, while Decree 69 only governs equitised state-owned banks and joint stock commercial banks.

Foreign strategic investors currently hold stakes in more than ten Vietnamese banks with HSBC enjoying 20 per cent ownership of Techcombank, Standard Chartered with an interest in ACB, Commonwealth Bank partnering Vietnam International Bank and BNP Paribas with Orient Commercial Bank.

Japan’s Mizuho bank is reported to soon acquire a 20 per cent stake in Vietcombank, one of the top five Vietnamese banks. Such a deal would represent the biggest purchase by a foreign investor in a listed local firm.