Vietnam lifts the cap on foreign ownership of public companies
20 July 2015
The Vietnamese government has given a major boost to foreign direct investment by permitting foreign investors to take a majority ownership or to wholly own Vietnamese public companies. From 1 September 2015, the previous foreign ownership cap of 49% will be lifted in a number of business sectors in accordance with the issuance of Decree No. 60/2015/ND-CP on 26 June 2015 (the New Regulation). This long-anticipated change in the law presents a range of new investment opportunities for foreign investors in Vietnam and increases the attraction of the Vietnamese stock markets as a source for investment and liquidity.
At present, foreign investors are restricted from taking an equity interest in a Vietnamese public company (including those listed on either the HCMC or Hanoi Stock Exchanges) which amounts to more than 49%. The New Regulation lifts this restriction and entitles foreign investors to acquire a 100% interest in a Vietnamese public company, save for the limits that remain in certain service sectors, including without limitation:
*Vietnam is currently a signatory to certain international treaties and has certain commitments to the World Trade Organisation (WTO), each of which mandates foreign ownership restrictions in certain business sectors.
In addition to the above, individual companies may also have foreign ownership restrictions included in their charter documents. If a Vietnamese public company engages in several business sectors with differing foreign ownership thresholds, the lowest threshold applicable to the relevant business sector(s) will apply to that company as a whole.
There are existing conditions imposed on foreign investment in certain business sectors and where no specific ownership threshold is set, the default position will be a threshold of 49%. At present it is not clear what conditional sectors will apply this rule and we await further guidance from the Vietnamese government.
Foreign ownership restriction in Equitised State-owned Enterprises
The foreign ownership limits applicable to an equitised State-owned Enterprise (Equitised SOE) is subject to the relevant equitisation regulations applicable to each Equitised SOE, save for where no foreign limitations are provided, in which case the New Regulation will apply. There are currently four groups of business sectors in which the Vietnamese government is required to hold a minimum percentage of shares in an Equitised SOE, and where special approval from the Prime Minister is required to lower this threshold.
• First Group (100% government ownership required): This comprises 16 business sectors including the manufacture and supply of toxic chemicals and industrial explosives, electricity transmission, the management of railway systems, irrigation systems and air terminals that are important to national defence and security, banknote and coin production, public postal services and the national lottery.
• Second Group (at least 75% government ownership required): This comprises 7 business sectors including oil, gas and large-scale mineral exploitation, the provision of telecommunication infrastructure and the management of inland roads and waterway systems, sea ports and air terminals (to the extent not included in the First Group).
• Third Group (65%-75% government ownership required): This comprises 8 business sectors including petroleum and natural gas processing, cigarette production, coffee and rubber planting and processing in mountainous and strategic areas, petroleum, gas, food and medical drug wholesaling, finance and banking, electricity distribution and aviation transportation.
• Fourth Group (50%-65% government ownership required): This comprises 9 business sectors including public services for urban lighting, water supply and drainage sewerage, environment protection and waste collection, international sea and railroad transportation, production of basic chemicals, chemical fertilizers and insecticides and coffee and rubber planting and processing in areas other than those in the Third Group.
Calculating a Foreign Ownership interest
Under the New Regulation, foreign ownership is calculated as a ratio (expressed as a percentage) of the number of voting shares held by the relevant foreign investor to the total number of the relevant company’s voting shares (while at present the current regulations provide that the percentage is calculated as ratio of both voting and non-voting shares). The New Regulation does not impose any foreign ownership restrictions on non-voting shares, which would allow foreign investors to hold an unlimited number of non-voting shares in a Vietnamese public company as, for example, redeemable preference shares or dividend preference shares, and hence have an enhanced economic interest in excess of their voting interest.
What is a Foreign Investor?
For the purpose of determining a foreign ownership interest, a foreign investor is defined as: (i) an individual with non-Vietnamese nationality: (ii) a company incorporated outside Vietnam; and (iii) a company incorporated in Vietnam with 51% of its charter capital held by those foreign investors listed under (i) and/or (ii).
The New Regulation is a very promising step that could lead to a significant increase in foreign investment in Vietnam, enhanced opportunities for liquidity for existing foreign and domestic investors, greater potential for strategic M&A and consolidation, a potential glut of stock market listings and an international stage for the Vietnamese securities markets. The true test will come once the associated rules to the New Regulation are published in full and ultimately interpreted and applied by the relevant authorities in relation to specific transactions, but for now the New Regulation is an exciting development that will significantly enhance Vietnam’s attraction to foreign investors.