Key developments for ID's at credit institutions

One of the cornerstones of improving corporate governance is the role of independent directors (IDs), who offer impartial oversight and strategic consultation to the board of directors.

Vietnamese law has provided a legal framework for IDs in various categories of companies, from non-public joint stock companies to public companies and CIs, the regulations for IDs vary among these types of companies.

Recently, the newly enacted 2024 Law on Credit Institutions (CI Law 2024) has brought significant updates to the regulations regarding IDs in CIs. Effective from July, these revisions are expected to elevate governance standards and bolster investor confidence.

Ngo Dang Loc, (left) associate, and Vu Pham Huyen My, legal assistant, Indochine Counsel

CI Law 2024 mandates a substantial increase in the minimum number of IDs and the presence of non-executive directors, or directors who do not concurrently hold executive roles such as general directors/CEOs, chief accountant/CFOs, and branch heads, on the boards of CIs, particularly by increasing the minimum quantity of IDs from one to two members, and elevating the proportion of the aggregate number of IDs and non-executive directors on the board from one-half to two-thirds.

These modifications represent significant changes compared to previous regulations, and are expected to enhance oversight, diversify decision-making, and mitigate potential conflicts of interest. With the new quantity requirement, IDs may not feel so isolated on boards. Furthermore, since the total number of IDs and non-executive directors now exceeds the number of directors concurrently holding managerial roles, the influence of executives on the performance of the board will be substantially reduced.

The 2010 Law on Credit Institutions was the first legal document specifying requirements for IDs, which were subsequently adopted by law on enterprises and securities. While major requirements for IDs in the previous law remained, CI Law 2024 provides additional restrictions to ensure the independence of IDs. Specifically, IDs are now prohibited from holding executives positions of CIs where they serve as ID; or as managers and executives of other CIs; or as managers of more than two other enterprises; or as inspectors or members of inspection committees of other CIs and enterprises.

The new rules mark a significant advancement in ensuring independence for IDs. Individuals holding managerial, executive, or inspector roles at other CIs or enterprises are no longer qualified to become IDs of a particular CI.

This regulation could be prompted by a case involving Van Thinh Phat (VTPGroup), Saigon Joint Stock Commercial Bank (SCB), and Tan Viet Securities JSC (TVSI), which occurred during the development of CI Law 2024. According to local press reports, Nguyen Tien Thanh held roles as an ID of SCB while also being board chairman and general director of TVSI, while maintaining a close relationship with VTPGroup. TVSI and SCB jointly participated in a bond issuance scandal involving a number of companies, including An Dong Investment Group, an affiliate of VTPGroup. TVSI acted as a consultancy and issuance agent while SCB introduced bond products to its clients.

Moreover, the prosecution authority recently determined that Mr. Thanh, as a board member of SCB, participated in the preparation of credit dossiers, and reviewed and extended credits to companies under the VTPGroup, contravening bank policies and leading to the misappropriation of funds. This situation highlights how Thanh’s relationship with VTPGroup and his leadership roles in TVSI compromised his impartiality and objectivity as an ID for SCB.

Despite new commendable updates, significant shortcomings persist. While the increase in minimum IDs is laudable, concerns arise over the ratio of IDs within a board. CIs may increase the overall number of board members to dilute the influence of the IDs. That is the reason why some argue for a proportional approach, akin to enterprises and securities laws, rather than a fixed number.

Moreover, some may find the new criteria for the independence of IDs as mentioned above overly stringent, especially considering scenarios where no direct economic relationship exists between the CI where an individual may serve as an ID and other entities where the same individual may hold a leadership or inspector role.

Additionally, explicit delineation of IDs’ rights and obligations remains lacking. CI Law 2024 vaguely mandates that IDs must uphold their independence while executing their duties, yet fails to delineate specific authorities. Clarifying these aspects would empower IDs to fulfil their governance roles more effectively.

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