SOE Restructure: More Practical

On June 26, 2007, the Government issued Decree 109/2007/ND-CP on the transformation of wholly state-owned enterprises (SOEs) into joint stock companies, replacing Decree 187/2004/ND-CP (issued on November 16, 2004). This decree is described as more practical in enterprise transformation in the current context and synchronous with the newest provisions of the Enterprise Law 2005 and the Securities Law 2006.

 

Under the new provisions of the new decree, strategic investors will not be given the rights to buy shares of equitised companies at preferential rates. This has been highly controversial for a long time. Under the replaced Decree 187, SOEs were allowed to put aside at most 20 per cent of shares in initial public offerings to sell to strategic investors at preferential prices, with discounts up to 20 per cent from average winning price. This decree was suitable in the first phase of the equitisation process, because it encouraged investors with strong financial capacities, technologies and human resources to invest in equitised enterprises. However, this decree has become obsolete and irrational because it created many loopholes for investors to seek mercenary gains. In reality, many enterprises joined hands with so-called strategic shareholders to raise funds to buy preferential stocks, which were then sold to individual investors to take gains.

 

Under the new regulations, the underwritten or negotiable selling price for strategic investors will not be lower than the average winning price at public auctioning. In addition, strategic investors must deposit 10 per cent of share value based on the starting price. Regarding the definition of strategic investors, Decree 109 also adds foreign investors onto the strategic investors list. This is a practical requirement, especially in the equitisation of enterprises in important fields like finance, banking and insurance.

 

The new decree also adds more types of enterprises to the equitisation list, including holding companies (parent companies) of economic groups, holding companies of parent-subsidiary consortiums and limited liability companies with 100 per cent State equities.

Under the decree, new forms of IPO will be applied, including underwriting and direct negotiation. The ruling will also apply the public auctioning method. Enterprises with share offerings under VND10 billion can auction at intermediary financial organisations, and if the value exceeds VND10 billion auctions will be at stock exchanges or securities trading centres. Economic groups and corporations have to organise separate auctions for strategic investors, based on the Prime Minister’s decision.

 

This decree also requires enterprises eligible for listing shares on the stock market to list and register for transaction at stock exchange/securities trading centres during the process of equitisation.

The regulations aim to associate the equitisation of SOEs with stock market development, increased quantity and quality of listed companies, and improved publicity and transparency under market principles.

 

One outstanding point of this decree is the detailed provisions on determining the value of enterprises, to end inaccurate evaluation of enterprises and losses of State assets. During equitisation, the evaluation of enterprises can cause great losses to the State if land use rights are not correctly calculated. Decree 109 clearly stipulates the basis to compute land value when enterprises go public. Land price will be based on the area, location and purpose, which will be then submitted to competent organs for consideration.

 

With existing land area, enterprises have two options: leasing the land or owning the land in accordance with the Land Law. If the land is transferred to the enterprises, the value of land use rights will be added to the value of the enterprises in accordance with the price set by provincial and municipal authorities. If enterprises prefer the land leasing option and pay rent annually, the land value will not be counted in enterprise value. If enterprises pay all rent for the leasing duration, the rent is counted into the value of the enterprises and the rent will be based on the rate provincial and municipal authorities set for the period concurring to equitisation.

 

Another new point in Decree 109 is that the business advantage of enterprises and long-term investment of enterprises into other enterprises will also be taken into account. Particularly, the value of long-term investment capital is defined by the amount of capital enterprises pour into other companies. If long-term capital is an investment into listed companies, the value of contributed capital will be calculated by the transaction price on the day of measuring the value of the enterprises.

 

Another notable point of Decree 109 is that the Board of Directors has the authority to decide all issues related to equitisation, such as share-selling methods, evaluation of enterprises, financial settlement and liabilities settlement. Previously, such activities had to be reported to competent State organs for consideration. This new rule speeds up enterprises’ equitisation process, but also gives heavy responsibilities to the Board of Directors.