Client Update: Asia - Banking & Finance - 14 January 2009
Foreign investment in Vietnam's securities market
After close to two years of deliberation, the Ministry of
Finance has issued a new decision to regulate the activities of foreign investors in
Vietnam. Partner Nigel Russell and Lawyer Minh
Duong look at some of the key issues for foreign investors.
Over the past two years, the Ministry of Finance
(MOF) and the State Securities Commission
(SSC) have been trying to determine how best to
regulate foreign investment in listed and unlisted securities, taking into
account inflation, currency and economic growth objectives.
Regulating the Activities of Foreign Investors in Vietnam's Securities
Market dated 24 December 2008 (Decision 121)
has removed much of the redtape that had been proposed in earlier drafts, including
additional SSC registration and disclosure requirements. Decision 121
limits the role of the SSC in monitoring foreign securities investment but has
elevated the role of the Vietnam Securities Depository
(VSD) in this
regard. In summary, Decision 121 removes some of obstacles to foreign investment in
the securities market and should therefore encourage more
investment in this sector. Decision 121 will be effective 15 days from the
date it is published in the Official Gazette.
Foreign investors include the following persons: foreign citizens,
including Viet Kieu (ie overseas Vietnamese); entities established offshore,
including their branch offices in Vietnam; 100 per cent foreign-owned
enterprises incorporated in Vietnam; offshore investment funds; and Vietnam
domiciled investment funds with 100 per cent foreign ownership.
Foreign investors who invest in listed and unlisted securities or
participate in securities auctions in Vietnam must:
- Obtain and register a securities trading code (the
Code) with the VSD a
foreign investor may have only one Code; and
- Open an indirect investment capital account at any bank that is authorised to
provide custody and foreign exchange services.
No foreign securities investor may transact without a Code. The
good news is that this is nothing new for many foreign investors as many would
already have met the above requirements. Decision 121 does not require
existing foreign investors who have a Code to re-register.
New foreign securities investors will need to
register for the Code and this process involves lodging an application
containing various prescribed documents in respect of the foreign
investor. This is simply a tick-the-box exercise. The time-consuming
part of the process is in relation to the notarisation and legalisation of the
required overseas documents.
If a foreign investor chooses to invest using a
local fund manager then that fund manager will apply and register the Code for
A foreign investor who currently does not have a Code must obtain one within
three months after the effective date of Decision 121.
A foreign investor's Code may be suspended or terminated if the
- Provides inaccurate or deceptive information in
relation to the application for the Code or other information as required by
- Engages in illegal practices such as collusion,
market manipulation or money laundering; or
- Breaches foreign exchange regulations.
Decision 121 sets out three ways for a foreign investor to make a
securities investment in Vietnam:
- The foreign investor directly carries out the transaction by instructing a securities
company to place the order pursuant to a standard form investment authorisation agreement
annexed to Decision 121;
- The foreign investor appoints a transaction
representative to place the order for the foreign investor; or
- The foreign investor engages a local fund manager to manage the foreign
investor's securities investment.
The last two methods are briefly discussed below.
Decision 121 also sets out obligations on local securities companies and fund
managers in respect of the services they provide to a foreign investor. These
obligations relate to such matters as resolution of conflict of interest,
carrying out of trading orders, investor reporting and compliance with foreign
A foreign investor may appoint
only one individual in Vietnam under a power of attorney in the form annexed to
Decision 121 to carry out permitted securities transactions. The attorney
may be a foreign individual. The attorney must hold a securities business
practising certificate issued by the SSC and must not be an employee of any
local securities company, fund management company or custodian bank.
Additionally, the attorney may only place orders for the foreign investor and
must not make any investment decisions or manage the investment for the foreign
investor. The power of attorney must be lodged with the SSC. The attorney
must report to the SSC on a periodic basis on the securities
transaction of the foreign investor and failure
to report may result in the suspension or termination of the investor's
A foreign investor may choose to engage a local fund manager under an
investment management agreement to carry out portfolio and asset management and
make investment decisions for the foreign investor (including decisions in
relation to the type of securities, volume, price and trading date) based on
agreed investment scope and policies. Decision 121 states that a foreign
investor may not engage any other individual or entity to carry out such
management activities for the investor. An implication of this provision
is that the Vietnam representative offices of offshore funds which are currently
carrying out these functions are doing so illegally.
In addition, there is a question as to whether offshore fund managers
are permitted to carry out management activities for offshore funds that invest
in Vietnamese securities. Our view is that offshore management
arrangements are extra-territorial and offshore fund managers are making the
securities investments in Vietnam on a direct basis. However, this an
issue which will need to be clarified by the MOF and SSC.
Securities companies, fund managers and transaction representatives are
required to report periodically to the SSC on the securities transactions of the
foreign investor using a standard form annexed to Decision 121.
Decision 121 indicates that
foreign investors must comply with the foreign ownership limit set by the Prime Minister. The current general foreign ownership
limit of 49 per cent for listed companies is based on
Decision 238/2005/QD-TTg of the Prime Minister dated 29 September 2005 (note, that banks
and other listed companies may have sector specific limits). However,
Decision 238 was based on an old securities law regime. The fact that such
regime has been replaced raises questions about the effectiveness of Decision
238. Additionally, the prime Minister has not yet stipulated any foreign
ownership level for unlisted companies although there has been some broad
legislation on this subject.
100 per cent foreign-owned funds management companies and
In April 2008, media reports suggested that the Government is willing to
approve 100 per cent foreign-owned funds management companies and branches
of offshore fund managers. However, it now appears that this was only
speculation and the Government is not willing to allow this form of commercial
presence earlier than agreed under Vietnam's commitments to the World Trade
Organisation. We can therefore expect that this will not be permitted
until January 2012.
This update is also a good opportunity for us to highlight two other key
changes to the securities laws.
Personal income tax
Local newspapers have recently reported proposals that the application of
the new personal income tax regime on securities transfers should be deferred
until next year. However, the MOF has recently issued Official Letter
22/UBCK-PTTT dated 6 January 2009 requiring securities companies to withhold tax
equivalent to 0.1 per cent of the value of the securities transfer which is
payable by the seller. This is applicable for securities transfers
occurring from 2 January 2009. Under the Law on Personal Income Tax, the
tax rate applicable in respect of a securities transfer is 20 per cent of the
net gain or 0.1 per cent of the value of the securities transfer if it is
difficult to calculate the net gain. Reportedly, this Official Letter is a
temporary measure until the National Assembly deliberates on whether to postpone
the application of this tax on securities transfer.
Hanoi Stock Exchange
The Prime Minster announced on 2 January 2009 in Decision 01/2009/QD-TTg
that the Hanoi Securities Trading Centre will be converted to a fully fledged
stock exchange and corporatised as a single-member limited-liability
company. The Hanoi Securities Trading Centre has traditionally been
Vietnam's secondary market and trades listed and unlisted securities.
Conversion to a stock exchange would mean that the listing criteria will be
stricter and match that of the Ho Chi Minh City Stock Exchange pursuant to
Decree 14/2007/ND-CP of the Government dated 19 January 2007. However, we
understand that Decree 14 is due to be replaced and that the new
listing criteria will probably make it easier to list in the Hanoi Stock
Exchange than in the Ho Chi Minh City Stock Exchange.
For further information, please contact: