In order to guide in detail Government Decree No. 69/2007/ND-CP of April 20, 2007, on purchase of commercial bank shares by foreign investors, and to replace regulations issued together with the State Bank of Vietnam Governor’s Decision No. 228/QD-NH5, permitting credit institutions to raise capital from foreign shareholders, which are no longer appropriate, the State Bank issued Circular No. 07/2007/TT-NHNN on November 29. The guidance in this Circular is considered feasible and practical and has been welcomed by unlisted domestic commercial banks and foreign investors as most of them can satisfy the guided conditions for becoming partners.
Specifically, the Circular sets forth the following conditions on a Vietnamese commercial bank that wishes to sell shares to a foreign investor:
· It must have charter capital of at least VND one trillion;
· It has a bad debt ratio of 3% or less by the time it requests the State Bank to consider and permit the sale of shares to foreign investors;
· Its business operation in the year preceding the year of sale of shares to foreign investors was profitable;
· The membership and structure of its Board of Directors and Control Board are in accordance with law and members of its Board of Directors and Control Board and its executive officers have committed no serious violation of regulations concerning its management, control and administration during their terms in office;
· Its inspection, control and internal audit systems perform their duties in strict compliance with State Bank regulations; and,
· It has not been administratively sanctioned with a fine of VND 5 million or more for a violation of State Bank regulations on safety ratios, classification of debts, or setting up and use of reserves to offset credit risks in banking operations over the last 24 months (for Vietnamese commercial banks having been in operation for 24 months or more) or during the period from the date it commenced operations to the date of its request for State Bank consideration and approval for a sale of shares to a foreign investor (for those having been in operation for less than 24 months).
A commercial bank that wishes to sell shares to foreign investors must come up with a plan on increasing charter capital or an equitization plan, clearly stating its intention to sell shares to foreign investors and detailing the following:
· Mode and expected time of selling shares to foreign investors; and,
· Criteria for foreign strategic investors to be selected.
For a foreign strategic investor, a written agreement between it and a Vietnamese commercial bank must contain its commitments to assisting the Vietnamese commercial bank in developing banking products and services, improving management and administration capacity and applying modern technology. Such an assistance commitment must clearly indicate its implementation schedule and set targets.
Credit institutions wishing to purchase shares of Vietnamese commercial banks are required to obtain an international credit rating agency’s written certification of their latest rating.
Easing around investment caps
Apart from the rights provided for in Article 14 of Decree No. 69 (to enjoy rights like other shareholders according to the charter of the bank in which the foreign investor has purchased shares; to convert into foreign currencies and remit to countries of origin earnings from the purchase or transfer of shares; to join the Board of Directors, the Control Board and the Executive Office of the Vietnamese bank; and to have their lawful rights and interests protected by the State), the Circular entitles foreign investors to:
For existing foreign shareholders already permitted to purchase shares on a pro rata basis, the current shareholding rate may be equal to or higher than that specified in Article 4 of Decree No. 69 which provides that the total shareholding proportion of foreign investors (including also existing foreign shareholders) and their affiliates must not exceed 30% of the charter capital of a Vietnamese bank.
The shareholding rate of a foreign investor other than a credit institution is limited to 5%, that of a foreign credit institution and its affiliates to 10% and that of a foreign strategic investor to 15% of the charter capital of the bank.
In special cases, the Prime Minister, at the proposal of the State Bank, may permit the shareholding rate of a foreign strategic investor and its affiliates to increase to between 15% and 20% of the charter capital of the bank.
If their current shareholding rate is lower than the ceiling rates specified in Article 4 of Decree No. 69, existing foreign shareholders may increase such holding rate.
For foreign investors that have been approved to purchase shares of a Vietnamese commercial bank in specific sums of money, these sums would be converted into percentages of that bank’s charter capital.
One issue of concern among existing shareholders, especially strategic investors, who may have made important contributions to and have considerable interests in the development of commercial banks of which they are shareholders, is whether they are protected from having (the value of) their shareholdings, followed by proportional claim on dividends and voting rights, diluted due to additional share issued by the banks. This issue is not yet addressed in Vietnamese law. The 2005 Enterprise Law only gives existing shareholders the pre-emptive right to purchase additionally issued shares in proportion to their holding rates, leaving them with two choices: pour more capital into purchasing shares or see their ownership proportion diluted by new shareholdings. Therefore, Vietnamese law should, as proposed by foreign investors, prescribe a mechanism giving them a right to negotiate anti-dillution provisions in agreements on purchase of Vietnamese commercial banks’ shares, thus helping maintain their shareholding rate in these banks by receiving or purchasing a certain number of shares at the nominal price.
Obligations of foreign investors
Foreign credit institutions wishing to purchase shares in Vietnamese commercial banks must satisfy such conditions as owning total assets of at least VND 20 billion in the year preceding the year of registration for share purchase, having experience in worldwide banking operations, and being rated by an international credit rating agency as capable of fulfilling financial commitments, etc.
Foreign strategic investors and their affiliates will be allowed to transfer shares under their ownership to other organizations or individuals in Vietnam or abroad five years after they become foreign strategic investors.
A foreign credit institution and its affiliates that owns up to 10% of a Vietnamese commercial bank’s charter capital may only transfer their shareholding to other organizations or individuals in Vietnam or abroad 3 years or more after they gain the ownership proportion of 10% of that bank’s charter capital.
Shareholders that are foreigners bearing Vietnamese nationality may exercise rights and perform obligations like domestic shareholders.
Also under this Circular, foreign investors, within 30 working days after obtaining the State Bank Governor’s written approval, are obliged to remit full sums of money registered for share purchases into Vietnam-dong indirect investment accounts opened at payment service-providing organizations operating within Vietnamese territory and commit to bear responsibility for the lawfulness of remitted sums of money.
Expectations of both sides
At present, Vietnamese commercial banks find it altogether easy to increase their capital through offering shares to domestic investors and what they really want from foreign strategic partners is advanced knowledge of corporate governance and worldwide brands, and not necessarily capital from big financial institutions. Therefore, Vietnamese commercial banks and their potential foreign strategic partners look forward to selling and purchasing shares under more simplified and practical procedures. For instance, the current provision that subjects any foreign stake in a Vietnamese bank exceeding 15% of that bank’s charter capital to approval by the Prime Minister upon the request of the State Bank would set an obstacle to both sides and should be revised.
Many believe that this problem can be solved if the Government only specifies conditions for share sale and purchase and total shareholding proportion of foreign investors in a bank and permits the shareholding rate of a single foreign investor to be increased to 20% without Prime Minister’s approval.-