The Vietnamese banking sector: revisions to foreign ownership limits and investment criteria

June 2014  |  EXPERT BRIEFING  |  BANKING & FINANCE

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On 3 January 2014 the Vietnamese Government issued Decree 01/2014/ND-CP (effective from 20 February 2014) on the purchase by foreign investors of shares of Vietnamese credit institutions (‘Decree 01) replacing Decree 69/2007/ND-CP on the purchase by foreign investors of shareholding in Vietnamese commercial banks (‘Decree 69’). The changes appear to be aimed at consolidating the banking sector, attracting capital into the sector and restructuring weak credit institutions. This article highlights the most significant changes introduced by Decree 01.

Scope of application widened

Decree 01 is broader in scope than Decree 69, as it applies to purchases of shares not only in Vietnamese joint-stock commercial banks, but also in Vietnamese finance companies and finance leasing companies. It does not apply to other types of credit institutions, such as joint venture banks or credit institutions established with sole shareholder ownership.

Definition of foreign investors clarified

Decree 01 has maintained the definition of ‘foreign investors’ as comprising ‘foreign organisations’ as well as ‘foreign individuals’ but has clarified that branches of foreign established entities operating both in Vietnam and abroad will be treated the same way as foreign organisations for purposes of the Decree.

In addition, entities established and operating in Vietnam with more than 49 percent of foreign ownership (including close-end funds, mutual funds and securities investment companies) are also included in the definition as foreign investors.

Foreign ownership limits revised

Decree 01 maintains the total aggregate foreign ownership cap of 30 percent of a commercial bank imposed by Decree 69.

Total foreign investment in a finance company or a finance leasing company will be subject to a 49 percent cap, which is the limit applicable to public (listed and unlisted) companies.

Decree 01 aligns the limits applicable to each type of foreign investor with Article 55 of 47/2010/QH12 on Credit Institutions which details ownership limits applicable to categories of investors, including Vietnamese investors.

Most importantly, the prime minister can lift the limits on foreign shareholders’ participation, but only for the purpose of: (i) restructuring weak credit institutions; or (ii) ensuring the stability of the credit institutions system. The SBV or other competent authority will determine which institutions fall into this definition.

The new ownership limits depending on the type of investor are as follows: (i) individual investors – 5 percent; (ii) organisations – 15 percent (may be lifted by the prime minister to restructure or ensure stability of credit institutions); (iii) ‘strategic investors’ (a ‘foreign strategic investor’ is defined as a foreign entity which has financial capacity and has provided a written undertaking from the competent person of the entity to ensure long term partnership with the Vietnamese credit institution and to assist the Vietnamese credit institution in modern technology transfer, developing banking products and services, raising financial, administration and management capacity) – 20 percent (may be lifted by the Prime Minister to restructure or ensure stability of credit institutions); (iv) related parties cap applicable to all categories of investors – 20 percent; (v) aggregate foreign ownership applicable to commercial banks – 30 percent (prime minister may lift to restructure or ensure stability of credit institutions); and (vi) aggregate foreign ownership applicable to finance and finance leasing companies – 49 percent (based on current regulations on foreign ownership of shares in Vietnamese public companies).

Required approvals

For acquisitions where the resulting shareholding is 5 percent or less, prior SBV approval is no longer required.

For acquisitions where the resulting shareholding is more than 5 percent, SBV approval is required in all cases resulting in the acquiring shareholder owning more than 5 percent of a credit institution’s charter capital.

For acquisitions where the resulting shareholding is more than 10, percent, where an investment will result in the foreign investor holding more than 10 percent, the following conditions must be satisfied (generally less stringent than those in Decree 69): (i) it is rated by international credit rating institutions (e.g., Moody’s, Standard & Poor’s, Fitch, etc.) as stable or higher or equivalent rating; (ii) it has sufficient financial resources to finance the purchase based on the audited financial reports of the year immediately prior to the year of the application; (iii) the purchase has no impact on the security and stability of the Vietnamese system of credit institutions; (iv) it has not committed any serious breach of home country and Vietnamese currency, banking and security laws within 12 months preceding the submission of the application; and (v) for the year immediately prior to the year of the application, the value of its total assets must have been the equivalent of at least US$10bn (if the foreign investor is a bank, finance company or finance leasing company) or the value of its charter capital must have been equivalent of at least US$1bn (for other types of entities). The requirement is lower than the current US$20bn in total assets required by Decree 69 (applicable to foreign credit institutions).

For acquisitions by foreign strategic shareholders, the following additional conditions apply: (i) it must be a bank, a finance company or a finance leasing company authorised to conduct banking activities by its home regulator; (ii) it must have minimum five years of international operating experience in the banking and finance sector; (iii) for the year immediately prior to the year of the application, the value of its total assets must have been the equivalent of at least US$20bn; (iv) it must provide a written undertaking on and clear plans for long term partnership with the target Vietnamese credit institution; (v) it must not own more than 10 percent of shares of any other credit institution in Vietnam (which is stricter than Decree 69 which prohibits a strategic shareholder to be a strategic shareholder of another commercial bank); and (vi) it must undertake to purchase or provide a statement of current shareholding of more than 10 percent of the charter capital of the target Vietnamese credit institution.

Management limitations

A foreign investor may nominate representatives to participate in operations of the board of management of only one Vietnamese credit institution, except where the representatives are appointed to credit institutions which are subsidiaries of the invested credit institution or which are weak credit institutions under restructuring approved by the SBV.

This rule is stricter than its equivalent in Decree 69, which provided that a foreign investor may not nominate representatives to participate in operations of the board of management of more than two Vietnamese banks.

Lock-up period

Decree 01 has maintained the following lock-up periods applicable to a foreign investor holding significant stakes in a Vietnamese credit institution: (i) three years if they own at least 10 percent of charter capital of the credit institution; or (ii) five years in the case of a foreign strategic investor. However, unlike under Decree 69, the above limitations do not apply to the investor’s related persons.

Samantha Campbell is a partner and Nasir PKM Abdul is an of counsel at Gide Loyrette Nouel. Ms Campbell can be contacted on +84 8 3823 8599 or by email: samantha.campbell@gide.com. Mr PKM Abdul can be contacted on +84 8 3823 8599 or by email: nasir.pkmabdul@gide.com.

© Financier Worldwide

BY

Samantha Campbell and Nasir PKM Abdul

Gide Loyrette Nouel