In pursuit of the goal of improving the legal framework for investment and businesses, the government adopted Decree 155/2020/ND-CP on 31 December 2020 (“Decree 155”), which came into effect on 1 January 2021.

Decree 155 introduces, among other things, new rules for foreign investment in the stock market. By these new rules, the government aims to promote foreign investment in the stock market while maintaining appropriate control over the inflow of foreign investment. This article highlights some of the key components of Decree 155.

1.Foreign Ownership Caps

After being fiercely opposed by the banking industry, the proposal of the State Securities Commission (SSC) to take away the right of a public company to set its own foreign ownership cap (the “Foreign Cap”) has been set aside. Decree 155 goes further than its predecessor by now explicitly recognizing the right of a public company to set its own Foreign Cap, at its discretion, lower than the statutory Foreign Cap.

2. Foreign Invested Entities (FIEs)

Foreign investment control does not merely target the investments of foreign investors1, but also the investments of FIEs.

Previously, an FIE was defined as an entity 51% or more of whose charter capital was held by foreign investors. Decree 155 now lowers the threshold to more than 50% (the “FIE Threshold”). This change means that (i) entities in which foreign investors hold more than 50% but less than 51% of the charter capital are now deemed to be FIEs and thus their investment will be captured by the rules on foreign investment control, and (ii) such new FIEs’ shareholding will be counted towards and cause a significant increase in the foreign ownership of public companies. Notably, investments by a subsidiary of an FIE are still not subject to the rule on foreign investment control.

Aside from the redefinition of FIEs, however, a long-standing problem in the determination of the FIE Threshold with respect to public companies is now resolved by Decree 155. Despite the fact that the actual foreign shareholding in public companies changes continuously due to the liquidity of shares on the stock markets, it is the foreign shareholding recorded in the shareholders register produced by the Vietnam Securities Depository and Clearing Corporation (“VSDCC”) for annual general shareholder meetings of public companies that forms the sole basis for determining the FIE Threshold of such companies. This means that the FIE status of a public company will be determined only once per year and presumably remain unchanged for the duration of such year.

Regarding public companies whose shares are not listed on a stock exchange, registered with UpCom, or deposited at the VSDCC, the actual foreign ownership ratio is the basis for determination of their FIE status. Any change to their FIE status must be notified and registered for issuance or cancelation of trading codes (which is required for foreign investors and FIEs to trade stocks on the stock market) within three working days from the date of change.

3. Re-calculating Foreign Ownership Ratio

Decree 155 now requires that the ratio of foreign ownership to domestic ownership in a public company be calculated based on the total number of shares (and not just voting shares, as previously required) held by foreign investors and FIEs leading to an increase in such ratio (and thereby moving closer to or even exceeding the Foreign Cap) of the public companies that currently have foreign investors and FIEs holding non-voting shares.

It is expected that this change will limit the number of shares in such companies that may be sold to foreign investors and FIEs, which suggests an end to the investment channel whereby foreign investors and FIEs could invest in non-voting shares, such as dividend preference shares, without any concerns about the Foreign Cap. However, NVDRs, as discussed below, may offer a suitable alternative for some foreign investors.

4.Excessive Foreign Investment

If the Foreign Cap in a public company is exceeded due to a change of the FIE status or other reasons, the following rules apply until the number of shares held by the foreign investors and FIEs in such company is brought within the parameters of the Foreign Cap: (i) the foreign investors and FIEs holding shares in the public company may sell, but not purchase, shares in the public company; and (ii) the public company must ensure no further increase in its foreign ownership.

Although it is not explicitly expressed, the rule stated in item (i) results in a restrictive situation in which, during the period of applicability, foreign investors and FIEs may not sell to, or purchase from, foreign investors and FIEs shares in such public company, but they may sell their shares in the public company to domestic investors. As such, the share price of such a company can fall as a result of the stock’s low liquidity.

Moreover, because the rule stated in item (ii) above prohibits public companies from issuing new shares to foreign investors and FIEs in the aforementioned situation, such public companies may be generally dissuaded from raising foreign funds despite their efforts to preserve their right to set a lower Foreign Cap (as discussed in item 1 above).

The rules above are necessary to maintain control over foreign investment on the stock market. However, given that excessive foreign investment may be caused by a sudden change of law, such as the lowering of the FIE Threshold or changing the way the ratio of foreign ownership to domestic ownership is calculated, as implemented by Decree 155, foreign investors, FIEs, and public companies may suddenly find themselves subject to the foregoing restrictions.

5. Foreign Caps and Conditional Businesses

In an effort to increase foreign ownership of shares in public companies engaging in certain businesses that, by law, are subject to conditions on foreign investment but for which no Foreign Cap is specified, the Foreign Cap was increased from 49% to 50%.

Further to this goal, the government has adopted a single, comprehensive list of the conditional businesses that is expected to solve a long-standing difficulty encountered by both public companies and foreign investors in identifying what businesses are actually conditional.

6.Non-voting Depository Receipts

For greater efficiency, flexibility and convenience of foreign investors, non-voting depository receipts (“NVDRs”) have been introduced under the Law on Enterprises and further detailed by Decree 155 as a new and alternative investment channel to attract foreign investment in conditional businesses.

Under Decree 155, subsidiaries of the Stock Exchange of Vietnam (“NVDR issuer”) will issue and sell NVDRs to foreign investors based on the underlying shares issued by listed companies or UpCom-traded companies. The NVDR issuer has the right to join, and vote on the delisting of the relevant companies at, the general shareholders meetings of the companies with respect to which NVDRs are issued, but the NVDR issuer does not have any other economic/financial rights. The NVDR holders, on the other hand, have the same economic/financial benefits and obligations as the holders of ordinary shares. NVDR holders may not, however, be involved in the decision-making regime of the relevant company as they have no voting rights.

Decree 155 appears to be a positive improvement to the foreign investment legal framework of Vietnam. Nevertheless, some uncertainties remain, such as enforcement and implementation of the remedies for excessive foreign investment as well as the regime for determination of FIEs status. Such kind of uncertainties will require further clarification and guidance from legislators.