Vietnam To Remove 49% Foreign Ownership Cap On Listed Companies

HO CHI MINH CITY -- Vietnam plans to remove restrictions on foreign ownership of state-owned and listed companies by the end of 2019, as Hanoi looks to open its capital-hungry economy further in order to sustain rapid growth.

The Finance Ministry is drafting an overhaul for the nation's securities law, the first major amendment since 2010.

The planned amendments signal Hanoi's desire to see Vietnamese shares become part of the MSCI Emerging Markets Index, which would bring an influx of capital into local exchanges.

Foreigners would in principle be able to acquire a majority stake in public companies in sectors not considered critical to national security. These include privately owned listed companies and state-owned enterprises that were privatized, with or without listing on the stock markets.

The move is expected to open business opportunities in the world's 14th-most-populated country with over 92 million people and a median age of 30. PricewaterhouseCoopers forecasts Vietnam to be among the world's 20 biggest economies based on purchasing power parity by 2050.

The proposed change would leave decisions on foreign ownership in the hands of managers and shareholders. Foreign ownership is now capped at 49% in general, with some sectors such as banking and aviation limited to 30%. These latter sectors may also see caps raised, but they will remain on a list of so-called conditional businesses, which the government is not willing to let foreigners take full ownership of.

Removing the ownership cap "would be a very encouraging sign for foreign investors," said Thuan Nguyen, the CEO of StoxPlus, a local financial data provider.

"However, the impact will be limited as shareholders' approval at annual general meetings is still needed if a company wants to lift the [allowed ownership] ratio to 100%," the CEO said.

A pharmacy in Ho Chi Minh City. Drug distribution remains on the Vietnamese government's list of areas restricted for foreign investment.   © Getty Images

"Vietnam is in a competition with rivals such as the Philippines and Myanmar to be the next destination of investment in Asia, following China and Thailand," said Junya Ishii, senior analyst at Sumitomo Corporation Global Research, a Japanese think tank. "Opening up to foreign investment will give them access to advanced technology, which they believe will help them in that race."

The move is also expected to breathe new life into the privatization of state owned companies. "The draft amendments would help accelerate the SOE reform process, which has thus far received lukewarm responses from investors, falling behind the government’s equitization schedule," said Melinda Hoe, an analyst for Southeast Asia at the Eurasia Group. "The possibility of owning majority shares will make the SOEs significantly more attractive to foreign investors, many of whom have had concerns about their operations and poor performance."

Foreign investors owned 23.33% of Vietnamese stocks as of Sept. 30, compared with 21.6% at the end of 2017. Vietnamese authorities report that the value of foreign investors' portfolios reached $34.2 billion at the end of July.

Vietnam has around 1,500 public companies, including about 740 listed on the two main stock exchanges in Hanoi and Ho Chi Minh City. More than 780 public companies are listed on a second-tier market or remained unlisted.

As for initial public offerings, the planned amendments will require that at least a 20% stake of the company with charter capital of 30 billion dong ($1.29 million) be sold to a minimum of 100 investors -- those who do not own more than 1% of the company.

The ratio decreases to a 15% stake at companies with more than 100 billion dong in charter capital and 10% when this capital tops 1 trillion dong.

Market watchers say more needs to be done to lower barriers to investment in one of Asia's fastest-growing economies.

"The government needs to shorten the conditional list" of sectors considered sensitive or critical to national security to make the foreign ownership changes more feasible, said Phuong Hoang, an analyst at Saigon Securities Research. Local media report that Hanoi is considering relaxing foreign ownership in telecom companies.

A StoxPlus survey found the greatest anticipation for freeing up foreign ownership in the industries of health care, retail and food and beverages.

Vietnam's securities law was issued in 2006 and amended in 2010, but did not cite foreign ownership limits. The highest legal document providing for these limits was a Vietnamese prime minister's decision issued in 2009 to ban foreign investors from holding more than a 49% stake in a public company.

This decision, meant to protect domestic investors, remained in force until 2015 when Hanoi started relaxing foreign ownership rules to attract capital and support local companies going overseas.

A government decree let public businesses operating in unconditional sectors remove the foreign ownership limits if they do not conflict with the company's charter.

The move helped some listed companies gradually seek shareholders to remove the limit, led by Saigon Securities in 2015. Two dozen followed including Vietnam Dairy Products or Vinamilk, Domesco Medical Import Export, Bao Minh Insurance and DHG Pharma.

With the planned amendments, Hanoi aims to have Vietnamese shares become part of the MSCI Emerging Markets Index., an upgrade from the current MSCI Frontier Markets Index. Indonesia, Malaysia, the Philippines and Thailand are included in the emerging markets status, while Vietnam remains in the same classification as Bangladesh and Sri Lanka. 

The government began to work toward that goal in 2013 but missed a chance for an MSCI review in 2017, even as mainland Chinese A-shares moved onto the Emerging Markets Index this year.

Vietnamese financial authorities have been told by the government to accelerate work on modernizing the legal framework needed for an open and transparent stock market, in line with international standards.

(Nikkei)