New legislation to curb outstanding new year issues

The decrease in direct foreign investment and Moody’s and Standard and Poor’s downgrading of Vietnam’s credit rates also hurt. The reasons for the negativity may be due to a patchy legal system and its enforcement. With an attempt to address and solve the legal shortcomings, Vietnam in 2010 issued several important bits of legislation which took effect from 2011. One expects the new legislation to reinforce the platform for the country to overcome its economic issues in 2011.

New Law on the State Bank

The new Law on State Bank took effect from January 1, 2011 and replaced the old Law on State Bank of Vietnam of 1997, as amended in 2003. The new Law on State Bank introduced a number of major changes, addressing certain substantial issues existing under the current banking and financial regulatory framework including, inter alia, monetary policy, interest rate and foreign currency reserves.

Foreign exchange reserves

Under the new Law on State Bank, the Ministry of Finance (MoF) is only entitled to retain foreign currencies generated from the State Budget’s income for regular payments in foreign currencies from the State Budget at the ratio as provided by the prime minister.

The remaining foreign currencies must be sold to the state’s foreign exchange reserves located at and managed by the State Bank. This new provision would create a legal ground for more focused management of the state’s foreign exchange reserves, which will hopefully facilitate the State Bank to manage the exchange rates more efficiently.

Interest rates

Although its name remains unchanged, the nature of “basic interest rate” has been changed substantially under the new Law on State Bank. In particular, the basic interest rate ceases to serve as the basis for calculation and limitation of the market interest rates. Instead, the State Bank is entitled to decide the basic interest rate based on the market interest rates.

Consequently, even though the 150 per cent basic interest rate cap still exists under the Civil Code, credit institutions and clients are now entitled to widen the range of interest rates since the basic interest rate from now will follow the market thermometer, rather than merely the “administrative norm” as before.

Importantly, for the State Bank’s timely and flexible actions in case of the market’s unusual developments, the new Law on State Bank allows it to provide an ad-hoc mechanism for the management of interest rates applicable to credit relations. The business community is waiting to see how the State Bank will exercise its additional powers to hopefully deal more efficiently with the interest rate’s issue in the new year.

Monetary policy

The substance of the national monetary policy which was left unclear in the old definition is now expressly provided under the new Law on State Bank. That said, the national monetary means the monetary decisions at national level issued by the competent authorities, including decisions on objectives on currency value’s stabilisation as indicated by inflation-curbing targets and decisions on the mobilisation of the instruments and measures for attaining the specified objectives.

Based on that, the new Law on State Bank clearly determines the powers and roles of the competent authorities related to the national monetary policy, including the National Assembly, state president, government, prime minister and State Bank governor.

In particular, the State Bank governor will decide the use of instruments for implementation of the national monetary policy, including refinancing, interest rates, exchange rates, compulsory reserves, open-market operations and other instruments and measures provided by the government. These new provisions (as compared to the old Law on State Bank) are expected to create the legal basis for formulation and performance of the more effective and efficient national monetary policy in the years to come.

New Law on Credit Institutions

The new Law on Credit Institutions, which took effect from January 1, 2011, repealed the old Law on Credit Institutions of 1997 (as amended in 2004) and provided significant changes takes into account recent developments of banking operations and regulations in Vietnam.

The new Law on Credit Institutions regulates the organisation and management of credit institutions in much more details. Under the new law, an institutional shareholder is only allowed to hold (either directly or through an investment trust) 15 per cent or less of the charter capital of one credit institution, except for certain special cases.

Within five years after the establishment licence is issued, the founding shareholders are required hold at least 50 per cent of the total shares of the credit institution, of which the institutional founding shareholders are required to hold 50 per cent. Furthermore, during such five years, the founding shareholders are only allowed to transfer its shares to other founding shareholders, provided that the ownership percentage as mentioned above is satisfied.

The individual shareholders and institutional shareholders with a representative being the member of board of management, member of supervision board, and/or general director of the credit institution shall not be allowed to transfer its shares within the time of holding such position. Whilst this restriction is expected to prevent the inside deals which may artificially escalate share prices, it may cause problems for relevant shareholders in banks.

More licencing requirements are introduced under the new Law on Credit Institutions for both the establishment and operation of credit institutions. The timeline for issuance of establishment and operation licence of credit institutions has been substantially extended from 90 to 180 days under the old Law on Credit Institutions.

The new Law on Credit Institutions provides for further circumstances in which credit institutions and branches of foreign banks must obtain approval of the State Bank before making changes. These circumstances include transfer of capital contribution of members, transfer of shares by major shareholder, transfer of shares which results in the change of status of major shareholder, suspend from business operation more than one day, or listing of shares on the domestic or foreign securities market.

These new requirements would be expected to facilitate the State Bank to closely control the incorporation and operation of credit institutions. Being the side effect, this also means that bankers would have to incur more time and costs to deal with the licencing procedures.

Business operation of credit institutions

The new Law on Credit Institutions captures and regulates better the business activities of the credit institutions in practice. A new important point is that commercial banks must establish and/or acquire a subsidiary or an affiliate to conduct the following business activities, (i) securities issuing underwriting, securities broker, management and distribution of securities investment fund certificates, management of securities investment portfolios and sales and purchases of shares (ii) financial leasing and (ii) insurance.

In addition, a credit institution (together with its subsidiaries and affiliates) may not hold more than 11 per cent of the charter capital of an enterprise, investment fund, investment project or other credit institution.

The total amount of capital contributions and share purchase by a commercial bank to other entities may not exceed 40 per cent of the charter capital and reserve funds of such banks and the rate provided to the case of a financial company is 60 per cent. These provisions are expected to control the banks’ investments in areas outside its main business. However, the banking circle may be concerned about the adverse affects of these restrictions when those restrictions are tested in practice.

Limitation to ensure the safety in operation of credit institutions

The new Law on Credit Institutions sets out further limitations on providing facility in its business operation, including:

- Providing loans to institutional shareholders having its representative being the member of its board of management and/or supervisory board (in case of joint stock credit institutions), or providing loan to its institutional member and owner (in case of liability limited credit institutions)

- Providing loans to enterprises operating in securities section and being under its control

- Providing loans served for capital contributions to another credit institution, for the purpose of which the security assets are the shares of the contributed credit institution.

The credit institutions and branch of foreign banks are not allowed to grant a loan without security interest and/or under preferable conditions to its subsidiaries and affiliates. The total outstanding loan to a subsidiary or affiliate may not exceed 10 per cent of the equity of such credit institution, and to all subsidiaries and/or affiliates, 20 per cent.

Total outstanding loans to a customer may not exceed 15 per cent of the equity of the commercial banks, branches of foreign banks and to a group of related persons, 25 per cent. In the case of non-banking credit institutions, the respective limits are 25 and 50 per cent (except for the case which is approved the prime minister on case-by-case basis).

Law Amending the Law on Securities

The National Assembly recently passed Law No. 62/2010/QH12 on November 24, 2010 amending and supplementing a number of articles of the Law on Securities which will take effect from July 1, 2011.

The amendment to the Law on Securities supplements investment capital contribution contracts and other securities as defined by the MoF in the definition “securities.” By this, it is expected to provide more goods for the securities market and impulse the development of the market.

The amendment to the Law on Securities also provides some new important definitions such as “real estate investment fund.” Currently, investment into real estate by investment funds is limited. The appearance of “real estate investment fund” may allow real estate projects to attract more financing from the investors of the securities market. Nevertheless, it keeps silent on the open-ended funds which now attract attention from investors.

Securities offerings

The amendment to the Law on Securities provides a new definition and article on private placement. The main terms and conditions of a private placement provided under the amendment to the Law on Securities are similar to those provided under current Decree 01/2010/ND-CP dated January 4, 2010 regarding private placement.

Regarding the public offering, it is required under the amending law that public companies which register securities public offering must undertake to trade in their securities in the organised market within one year from the completion of the public offering. This requirement is to ensure the liquidity of the offered securities in the first year of public offering.

Public purchase offer

The amending law provides the exemption of the public purchase offer. The amendment to the Law on Securities further adds new circumstances where a public purchase offer must be conducted as follows:

- Purchase of voting shares/closed fund certificates resulting to the ownership from 25 per cent of the issued shares/fund certificates of a public company/a closed fund.

- Investors (whether organisations or individuals) together with their related parties holding from 25 per cent of the voting shares/fund certificates of a public company/closed fund continuously acquire from 10 per cent of the issued voting shares/fund certificate of such public company/closed fund.

- Investors together with their related parties holding from 25 per cent of the voting shares/fund certificates of a public companies/closed funds continuously acquire from 5 to less than 10 per cent of the issued voting shares/fund certificates of such public companies/closed funds.

New regulations on land rentals

The government recently issued Decree 121/2010/ND-CP dated December 30, 2010 amending a number of articles of Decree 142/2005/ND-CP dated November 14, 2005 of the government on collection of land and water surface rental. Decree 121 will take effect from March 1, 2011.

According to Decree 121, the subterranean land is now subject to the payment of rental at the rate not exceeding 30 per cent of the rental unit price of the surface land having the same land use purpose. These new provisions are issued in response to the recent changes in the real estate market in which there have been more projects in development of underground construction works such as car parks or malls.

Rental unit price

Decree 121 triples the land rental unit price applicable to the case of payment of land rental annually, which is now 1.5 per cent of the land price promulgated by a provincial people’s committee instead of the rate of 0.5 per cent as before. This increase may have bad impacts on attracting foreign investment into Vietnam as it will increase the invested capital of the investor. On the other hand, the positive effect is that the land price is now closer to its actual market price.

The increase of the rental unit price is not applicable to projects in which the land lease agreements have been signed and the lessees are paying the land rental at the determined rental unit price within the period of five years. Upon the expiry of this five-year period, the new rental unit price will apply.

With the new major legislations dealing with the most concerned issues encountered by the government and business circle last year, the government has expressed its efforts in solving the outstanding problems of the economy as soon as it can in the new year.

Nevertheless, it seems to be an old story in the country is more related to how those new laws to be guided in detail by the relevant regulators and if entrepreneurs in the relevant business fields find a way getting around new statutory restrictions, which were sometimes seen with respect to banks’ interest rates, foreign exchange and gold trading last year.