By Fred Burke, Seck Yee Chung, Nguyen Hoang Kim Oanh and Tran Manh Hung.
Vietnam dramatically simplified procedures for investments in a broader variety of local joint stock companies in May with the issuance of Decision No. 260 on Sales of Shares to Foreign Investors1. Although the full impact of this document is not yet clear, it will open new sectors to foreign participation with minimal formalities.
Most foreign investments in Vietnam to date have been direct investments in the form of a joint venture company or a 100% foreign-owned enterprise under the Law on Foreign Investment of Vietnam ("LFI"). The scope for portfolio investment in local shareholding companies has been fairly narrow under the 1999 Regulations on Share Sales to Foreigners2. Under the 1999 rules, foreign investors were allowed to buy up to 30% of the registered capital of a Vietnamese joint stock company or a State-owned enterprise ("SOEs") in the process of equitization. However, such investments were limited to only twelve sectors/industries. Furthermore, each investment needed approval from the Prime Minister.
Decision No. 260 improves the situation in two ways: (1) it opens more interesting areas for foreign investment, and (2) it replaces the burdensome requirement for Prime Ministerial approval with a simple local registration procedure.
Specifically, it expands the number of permitted sectors/industries to thirty-five. Broadly speaking, there are five main sectors, and under each is a list of specific businesses. The broad categories and some examples for each are:
- Tourism, Hotels and Restaurants: doing business in hotel and restaurant services.
- Agriculture – Forestry – Fishery: plantation of food crops, animal husbandry, aquacultural services, etc.
- Industry and Processing: production of textiles, beverages, chemicals, equipment, or furniture; repair of household effects; construction, etc.
- Transportation, Warehouse and Communication: land-way and river-way transportation; production of telecommunication equipment.
- Science, Technology, Health and Education: production and consulting services for computer software; hospitals and clinics; production of school tools and equipment, etc.
Many of these areas remain restricted for direct foreign investment under the Law on Foreign Investment. Foreign investment in restaurants, for example, is limited to projects in which the investor is also constructing a hotel or other large facility. So Decision 260 provides a means for foreigners to invest in some businesses that would otherwise be closed to foreign participation.
Second, Decision No. 260 is based on Document No. 4293, under which the Prime Minister had authorized the MPI to issue a list of business that are granted automatic approval for the sale of shares to foreigners, which suggests that it is no longer necessary to seek the Prime Minister’s approval for investments in the sectors/industries listed in Decision No. 260. Additional clarification of this interpretation would be desirable, but the emerging consensus among the relevant officials is positive.
Decision No. 260 appears to allow foreign investment not only in joint stock companies, but also on more closely held limited liability companies under the Enterprise Law. Formerly, such companies were precluded from taking foreign partners.
However, Decision No. 260 does not apply to investments in SOEs.
The most important question arising out of Decision No. 260 is just who qualifies as a "foreigner" eligible to take advantage of the new opportunities it offers. The ambiguity arises out of the term itself, which is not defined, because "foreigners" can either mean "foreigners residing in Vietnam"4 or simply foreign nationals and companies wherever domiciled. If the former definition applies, very few foreigners would be able to advantage of Decision No. 260 as "resident" status in Vietnam is rarely conferred.
Other issues that remain to be clarified include the degree to which foreign minority shareholders will be allowed to use veto rights and other mechanisms to protect their interests such companies, whether the companies will be allowed to issue different classes of shares and how burdensome listing on the Vietnamese securities exchange will be. At present, most of the companies listed on the Vietnam Securities Exchange have some foreign participation, but the maximum ratio of foreign participation in a listed company is only 20%, whereas Decision 260 allows foreigners to acquire up to 30% of unlisted companies.
1 Decision No. 260/2002/QD/BKH Regarding the Issuance of the List of Industries where Foreigners are Allowed to Buy Shares in Non-State Enterprises under the Provisions of the Law on Encouragement of Domestic Investment, issued by the Ministry of Planning and Investment on 10 May 2002 ("Decision No. 260").
2 Regulations on Sales of Shares to Foreign Investors, issued by the Government with Decision No. 145/1999/QD-TTg on 28 June 1999 ("Regulations on Share Sales to Foreigners").
3 Document No. 429/CP-DMDN Regarding the Delegation of the Authority to Announce the List of Industries where Foreigners are Allowed to Buy Shares in Non-State Enterprises, issued by the Prime Minister on 22 April 2002 ("Document No. 429").
4 Decision No. 260 is also based on Decree No. 51/1999/ND-CP Providing Detailed Regulations for Implementing the Law on Encouragement of Domestic Investment, issued by the Government on 8 July 1999, which applies to "foreigners residing in Vietnam" - defined as foreign nationals residing, working or living permanently in Vietnam.
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