Walls set to close in on securities firms

According to the new Decree 14/2007/ND-CP, endorsed by the government on January 17, an organisation or individual, who owns 10 per cent or more of the equity or the capital share with voting rights in a securities company, and those related to that organisation or individual, are not allowed to own more than 5 per cent of the equity or capital share with voting rights in another securities company.
Decree 14 applies the same restriction to the case of a fund management company. An organisation or individual who owns 10 per cent or more of the equity or capital share with a voting right in a fund management company, and those related to that organisation or individual, are not allowed to own more than 5 per cent of the equity or capital share with voting rights in another fund management company.
In response, some foreign financial institutions have complained that the new regulations will directly affect their business rights in Vietnam, because potential investment areas such as banking, securities and fund management have been restricted.
As regards bank stocks, foreign financial institutions have been limited at the maximum of a 10 per cent of a local bank’s equity and the State Bank is considering reducing this rate to 5 per cent and disallowing a foreign financial institution, except from the strategic investor, to buy more than four types of bank stocks.
At present, the average capital scale of a Vietnamese securities company is VND77 billion ($4.8 million). Therefore, to reach the minimal capital scale of VND300 billion as stipulated by Decree 14, their capital expansion will take place over 2007 and 2008.
Normally, during capital expansion, securities companies will offer part of their new shares to existing shareholders at a preferred price. In this case, if an institutional investor has held a stake of 10 per cent of a securities company’s equity and 5 per cent of another securities company’s equity, they will not have the right to buy the preferred shares in case the latter securities firm expands its capital.
In this case, the interest of the investor has been badly affected, limiting the purchase of shares in other securities firms.
In response, a State Securities Commission official said the main goal of the investment restrictions is to prevent a holding company being a big shareholder (holding more than 5 per cent of the equity under the Securities Law) in many securities companies and fund management companies at the same time. In this situation, the holding company can manipulate stocks price and the stock market by influencing securities companies and fund management companies under its management.
The official also noted the regulations on investment restrictions had been constructed after consultation with international experts.
A representative of a big securities company said these are reasonable points because a shareholder holding more than 5 per cent of the equity of a company will be a member of its board of directors. Therefore, they will know the strategy and investment direction of that company clearly.
“With access to this important information, they can transfer the secret information from a firm with less shares to one with more of their shares so as to win a maximal benefit,” he said.
“Both securities companies and fund management companies are really worried about this situation because certain information of a project under investment consideration can bring a high interest.”
Under the investment restrictions of the newly-issued decree, small investors will not be affected but the large ones, or large financial institutions, are sure to be harmed.
One possible solution to this problem is the State Securities Commission giving them the right to sell back the right to buy preferred shares when a listed company expands its capital.
In addition, the concept of “related parties” should be clarified. The investment funds managed by independent individuals of the same fund management company should be considered as independent financial institutions so as to prevent these funds suffering from a similar investment restriction.



No. 798/January 29 - February 4, 2007