Foreign-invested firms listing pros and cons

The Ministry of Planning and Investment (MPI) launched a pilot legal framework which allowed foreign-backed firms to transfer from limited liability companies (LLCs) into joint stock shareholding companies (JSCs).

To date, fewer than 10 foreign-invested enterprises have converted and have listed shares, including Chang Yih Ceramics (CYC), Full Power (FPC), Mirae (KMR), Taicera Enterprise (TCR), Tung Kuang Industrial (TKU), Taya Vietnam Wire and Cables (TYA), Sucrerie De Bourbon Tay Ninh (SBT), Royal International (RIC) and Interfood Shareholding (IFS).

Why the slow take up on the local listing option? Years ago, many foreign investors thought that having the option to list on local securities markets would give them both a way to raise capital for their intended projects and a way to “exit” or sell down their stakes as time went by. Listing also seemed like a good way to develop profile in the local market, literally getting “buy-in” from the general public. For local punters, the idea seemed attractive as it gave domestic investors a channel for betting on the success of companies with good links to export markets and technology. But the current trading ranges for these shares are “sickly” and there is little enthusiasm among issuers for more such offerings, especially from good quality foreign-invested enterprises. What’s the problem? Is it merely due to the weak market, or is there something more to this story? Specifically, what legal impediments and disadvantages are there that might be remedied in order to stimulate more foreign listings?

Certainly the market itself has something to do with it. No one wants to sell their shares into a down market and compared to its highs two and a half years ago the market is still very low. Those who issued during the hot periods have seen their share prices go down, sometimes even below the par value. For those contemplating exits, or partial exits now, they feel they would have to sell their stock too cheaply, and many prefer to wait for the market to pick up again. If the purpose is to raise capital, again, there may be other sources of funds that are less costly for enterprises to access.

But, there are also legal considerations that make both the conversion and the listing something that many investors think twice about. First, LLCs and JSCs are very different forms of doing business. The LLC form is intended for closely held enterprises with just a handful of investors or “members”. As such, it does not have to comply with the same standards of corporate governance, checks and balances as a JSC, which is intended for widely help and public companies, in which there may be many investors who do not have an active role in management or access to corporate information.

Listing introduces a whole new set of compliance burdens in terms of disclosure of material information and compliance with listing rules, which impose their own administrative costs. These are normal and this distinction between private companies, which can operate more nimbly, and public ones, which are subject to stricter regulation to protect the investing public and the integrity of the market, can be found in markets all over the world. But foreign-invested companies in Vietnam do face some special limitations on listings that discourage the practice.

First, for any company to be listed, no more than 49 per cent of its shares may be held by foreign investors. But, the majority of the companies who have already listed have a problem because they were originally wholly foreign-owned and they did not list all of their shares. Since the 49 per cent cap came into effect under Decision No.55 after they had already listed, they were grandfathered and allowed to keep their majority foreign ownership, but they can not sell shares exceeding the 49 per cent cap to other foreign investors, only to the local market.

So by listing their shares, they automatically reduced dramatically the potential field of co-investors they may attract, since they could sell to either foreign or domestic investors if they remained private.

Finally, based on the MPI’s decision in the Mekophar case (reported in the VIR Issue 1029), even a listed company with minority foreign ownership is going to be held to the market access restrictions agreed in Vietnam’s 2007 accession to the World Trade Organization, so that investing in a company with any foreign investment may be unattractive because the foreign company will be systematically disadvantaged in terms of the scope of business it can conduct in comparison with purely “local” companies.

In the end, the market remains the most important driver for listings and with the government’s ongoing measures to control inflation and control imports, including restrictions on margin trading and debt, objective economic factors will continue to discourage issuers from listing. But working out some of the legal issues and removing the discrimination between foreign-owned and domestic companies would at least created a more level playing field where the foreign-invested enterprises are concerned.