Foreign glee as cap on stakes look set to rise

Foreign investors will welcome news that they could hold up to a 60 per cent stake in listed companies

The State Securities Commission has just submitted a draft decision to the prime minister governing foreign ownership limits in listed companies.

If passed the decision would allow foreign investors to own up to 60 per cent of total voting shares of listed companies, though only by first getting approval from the prime minister.  

Alan Pham, chief economist of VinaCapital said it was a significant step forward in creating more opportunities for foreign investors to participate in the local market.

“The decision will open the door for foreign capital that should boost the market. It represents a more liberal and open attitude towards the role of foreign investors. Gone are the days of widespread concern among authorities that foreign capital might flood in and dominate or take over Vietnamese enterprises to the detriment of their best interests,” Pham told VIR.

The draft decision would replace Decision 55, passed in April 2009, which put a 49 per cent cap on both individual and institutional investors’ ownership of public and/or listed companies, investment funds, and securities and fund management companies.

Decision 55 limited foreign investors participation in the market as they could not buy up controlling stakes in securities firms or trade in blue-chip companies that already had high foreign ownership levels.

Previous draft decisions to replace 55 stipulated that only “strategic foreign investors” could hold 60 per cent of a listed company. The  draft submitted removed the word “strategic”.

Baker & McKenzie special counsel Jacob Nielsen said that “while the increase will stimulate activity, it is also unfortunate that it is limited to only listed companies.”

“There are so many unlisted (or delisted) companies that remain subject to the 49 per cent cap on voting shares and their only alternative is to issue additional non-voting shares to foreigners. But who wants to hold non-liquid, non-voting shares?,” he said.

Many unlisted companies are unable to list because there are no shares available and are not in contact with small shareholders. Often several hundred shareholders hold 2-3 per cent of a company and as there are no squeeze-out provisions under the Securities Law and companies are not in touch with them, they are in a deadlock.

Nielsen suggested the best solution would be to simply remove the cap on unlisted companies, or at least create a way to push out 10 per cent of inactive shareholders. “If they cannot be reached, the Vietnam Securities Depository can hold the payment for the shares until they want to collect.”

The new draft has done away with this classification and qualifies any foreign investor. It also includes the opportunity for eligible foreign investors to buy up to 100 per cent of an existing securities firm. At present they are only allowed to buy 49 per cent.

For unlisted public companies the draft stipulates that foreign investors can own up to a maximum of 49 per cent of voting shares but does not limit preferential non-voting shares.

The draft did cut out a few previous proposals such as preferential treatment for foreign-invested fund management companies with a long history in the country and which have made significant contributions to the financial market.