Vietcombank in equitisation fix

Vietcombank need their figures to add up prior to equitisation

Last year, the State Bank, which the government appointed to manage Vietcombank’s equitisation, decided to begin the equitisation of the giant financial institution by issuing preferred shares, that pay a higher dividend than ordinary shares, but grant no voting rights.
The central bank argued preferred shares would help mobilise a large amount of available capital from the public for Vietcombank to increase its total ownership capital and ensure an adequate financial status for the bank before it is finally equitised.
The State Bank sent the complete equitisation plan to relevant ministries for comment before its submission to the government for final approval.
The proposed strategy was quickly turned down by the MoF and MoIA, who said the plan would not work.
In a written document, the MoF said issuing preferred shares prior to equitisation was not feasible because international practices stipulate preferred shares can only be issued after a company has been equitised.
Vietnam’s Enterprise Law also states only equitised companies are allowed to offer preferred shares to the public.
Because an equitised company is established following the issue of ordinary shares, preferred shares can only be issued after the standard shares are distributed.
The MoIA added there is no legal document in the country that allows a bank to increase its ownership capital with income from preferred shares.
The ministry said the central bank’s proposal was completely illegal, although the bank argued the plan was experimental.
Both ministries asked the central bank to develop a more practical equitisation plan for Vietcombank, but they did not offer concrete suggestions.
In response, the State Bank offered two reasons for its decision to issue the preferred shares.
First, Decree 64 on the Equitisation of State-owned Enterprises (SOE) states an SOE can only be equitised after it eliminates all bad debts (unpaid debts that are not likely to be paid in the future).
Vietcombank is still swamped in bad debts, which are expected to increase sharply if international-standard accounting practices are adopted by the bank next year.
Experts predict that it would take years for the bank to finally clear these debts.
In addition, the current adequacy capital ratio of Vietcombank (risk-adjusted assets over total equity) is too low.
For equitisation, the required international standard is 8 per cent, and the state budget is not large enough to cover the difference.
The State Bank said the preferred shares would help mobilise available capital from the public quickly.
This would aid debt recovery and improve equity while leaving the management system and structure of the bank untouched, as preferred share holders would have no voting or management rights.
The State Bank’s governor, Le Duc Thuy, admitted the disadvantage of this strategy was the complete lack of legal framework in the country regarding such a move, but he stressed this was an exceptional case, and corresponding laws could be created.
Thuy announced publicly last week he still saw no significant barrier against issuing preferred shares for Vietcombank.
He said he would strongly defend the plan, regardless of the Ministry of Finance’s objections, in an upcoming meeting.
However, in a final document submitted to the government for consideration, the central bank did put forward two options for Vietcombank’s equitisation: either the issuing of preferred shares before equitisation or a direct equitisation process.
It is not known when the government will reply.