Defining smooth roads for FDI inflows

September 04, 2012 | 10:00
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While Vietnam is targeting to attract more foreign investment, opaque definitions of a foreign-invested company are causing big barriers for foreign investors to enter this market.

Mekophar is the one suffering the headache due to the unclear definition of a foreign invested enterprise in Vietnam

When Ho Chi Minh City-based Mekophar Chemical Pharmaceutical decided to list on Ho Chi Minh Stock Exchange, its director Huynh Thi Lan hoped the firm would call for investment from foreign investors who were interested in the profitable pharmaceutical sector. Her dream came true as foreign investors acquired 4.70 per cent of the company’s stakes.

However, at that time she did not know that the involvement of foreign investors in her company would bring trouble, as the city’s Department of Planning and Investment refused to give the firm a licence to distribute and sell drugs in the domestic market.

She sent out many SOSs to the Ministry of Planning and Investment (MPI), the State Securities Commission (SSC) and the Government Office, but nobody could help her. Finally, Mekophar decided to delist from the stock exchange floor in July 2012 to restructure its capital contribution, expecting that it could obtain a licence for distributing and selling drugs in the market again.

“They said that we were a foreign-invested company and we didn’t have the right to distribute and sell drugs in Vietnam. We are really a state-owned firm, why aren’t we allowed to distribute drugs?” Lan told a seminar on definition of foreign invested enterprises in Hanoi last week co-organised by VIR and MPI’s Legislation Department, attended by nearly 100 policy-makers from the National Assembly, the  MPI, the Ministry of Finance, the SSC, business leaders and lawyers.

Mekophar’s trouble highlighted the unclear definition of foreign-invested enterprises in Vietnam’s Investment Law issued in 2005. This law defines that a foreign-invested enterprise is one enterprise established by a foreign investor to conduct investment activities in this country or a Vietnamese enterprise in which a foreign investor purchases shares, merges or acquires. Of course, given this definition, Mekophar is a foreign-invested enterprise and so it is not allowed to distribute drugs in accordance with the Ministry of Industry and Trade regulation.

However, the Investment Law also regulates that the same investment conditions which are applicable to domestic investors shall be applied to foreign-invested enterprises where Vietnamese investors hold more than 51 per cent of the charter capital of the enterprises.

“Given this regulation, we can enjoy all the rights granted to a domestic enterprise. That was why we decided to list in stock exchange to call for foreign investment,” said Lan.

Mekophar is not the only firm facing this trouble. But its withdrawal from the stock exchange rung an alarm about the consequences of this unclear definition.

Dang Duong Anh, partner at Vietnam International Law Firm (Vilaf-Hong Duc), said he faced many similar cases as local authorities declined to grant business registrations to  foreign invested companies. Many lawyers at other law firms also shared this issue.

If an enterprise is 100 per cent foreign-invested, there is no problem. The problem will come to an enterprise in which foreign investors hold less than a 49 per cent stake like Mekophar.

The overlapping regulations in existing laws governing investment and enterprises embarrassed business registration authorities and in some case they denied to handle applications for establishing enterprises with less than 49 per cent of foreign capital.

“Local officers are confused about what a foreign-invested enterprise is, therefore they don’t know what procedure should be applied,” said Anh.

In fact, right after the Investment Law took effect in 2006, insiders realised this unclear definition and the consequences it brought to foreign investors. However, the obstacle has not been revolved.

“I don’t know exactly what the purpose of this definition is, to regulate administrative procedures or to limit foreign investments in restricted sectors. This is the reason why the definition is unclear,” Phan Vu Hoang, director of Tax and Advisory Service at Deloitte Vietnam, said.

He added the overlapping definitions deterred many foreign investors from investing in Vietnam, especially for foreign investors planning to invest in Vietnam through buying shares of domestic enterprises.

In the Mekophar case, Lan said, no foreign investor dared to buy the firm’s shares “even though we are one of the most profitable pharmaceutical companies in Vietnam. If they buy shares, we will not be allowed to distribute drugs, a profitable business,” she added.

“The overlapping definitions can be viewed as a lack of transparency and this perception can make Vietnam less attractive,” said Ronald Parks, director of tax and corporate services of KPMG.
He said the attraction of foreign direct investment (FDI) by its nature was competitive among countries and raised concerns that if Vietnam did not take steps to resolve this issue, fewer foreign investors may come to Vietnam.

In a bid to improve investment climate, the Vietnamese government proposed the National Assembly to revise the Investment Law which would help to remove this obstacle.

Actually, the definition of a foreign invested enterprise remains raising debate. Many lawyers and policy-makers agreed to define a foreign enterprise should be the one with at least 49 per cent of stakes held by foreign investors. Meanwhile, the others claim a foreign invested  enterprise should be the one where foreign investors take the control.

But Parks has another point of view. “Vietnam, like other countries, will have some restrictions on foreign investors because of national security and other important policies. But the actual wording of the definition may be less important than how they define specific regulations on implementation for each industry and special cases.” said Parks.

Even what the definition of  foreign-invested enterprises is, the new one will just come in 2014 when the National Assembly approves the amended Investment Law.

Lan said this would be a long time to wait and many enterprises would continue suffer the headache in the upcoming two years.

“We will come back to the stock exchange market right after the definition is clear because we still want to call for investment from foreign investors,” she said.

By Ngoc Linh

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