FII and Its Impact on Vietnam Stock Market

During the nine-year history of the Vietnamese stock market, foreign indirect investment (FII) capital has flowed in with various intensities, depending on market contexts. The partaking of FII capital has attributably quickened the development of the Vietnamese stock market as well as other financial systems.

 

In the first years the Vietnamese stock operated, the number of foreign-led funds in Vietnam was very few with a combined capital of less than US$100 million. The size of each fund was less than US$10 million. However, at present, according to the Vietnam Association of Financial Investors (VAFI), some US$5 billion of FII capital has been injected into the stock market of Vietnam. Foreign investors, which are called foreign strategic investors, have injected some US$1 billion in commercial banks, insurers and large-scaled enterprises while foreign fund management companies and non-resident financial institutions have invested some US$4 billion in Vietnam.

 

VAFI says foreign investors are now spending nearly US$8 million in Vietnamese equities a day. Currently, more than 1,000 foreign institutions registered to open securities trading accounts in Vietnam, including many multinational financial groups. However, only some 30 per cent are trading Vietnamese equities while the rest are waiting for a better time.

 

The gradual expansion of FII capital flows is the most persuasive evidence to new foreign investors. The presence of foreign investors requires the highest transparency from listed companies.

 

At present, according to VAFI, FII capital flows do not play decisive roles as in previous years. In fact, if there was not much FII capital in 2006, 2007 and 2008, Vietnamese banks would not have such large scales as now. In the past three years, Vietnamese banks grasped the golden chance to raise funds for expansion. The banking system enjoyed a good chance to mobilise dozens of billions of US dollars, mainly from direct foreign investors, but FII is a stimulant.

 

Furthermore, FII capital flows have also changed the Vietnamese bond market. The Government issued and sold out sovereignty bonds on international markets. Then, foreign investors came to Vietnam to purchase local bonds.

 

Many wondered whether foreigners entered the Vietnamese stock market to launder money, especially since FII capital flows surged.

 

According to VAFI, foreign financiers invested in Vietnamese shares to seek margins. Strategic investors (having the same business lines with listed companies) expect to expand their markets to increase profits in addition to gain from the rise of share prices.

 

Tracking FII flows in the past 15 years, VAFI confirmed no money laundering case has been found because all transactions on the listed market are recorded by securities companies, depository banks and the Vietnam Securities Depository (VSD). On the other hand, each foreign investor is allowed to open only one transaction account at a commercial bank. Thus, according to VAFI, money laundering is very difficult.

 

So, do foreign investors want to acquire Vietnamese listed enterprises? According to VAFI’s analysis, the Vietnamese laws allow a foreign investor to own at most 49 per cent of shares in a non-bank enterprise. With 49 per cent of shares held by a foreign investor in a public company, he can hold controlling power if the State or founding shareholders are the minority.

 

However, a foreign financial investor does not prefer one company, but a list of 10 - 40 companies, because of fears of corporate governance risks. A big foreign investor usually wants to keep some 5 per cent of chartered capital in a company. As a result, the foreign investor has to manage his capital in many companies and he can hardly hold controlling shares to manage enterprises. The acquisition will also cause negative impacts on investment funds.

 

Into the bargain, not all listed enterprises are attractive to foreign strategic investors. They usually weigh their options carefully before investing. Meanwhile, strategic investors can cooperate with local enterprises to establish new joint ventures companies like real estate and seaport companies as they bring in more benefits than controlling shares.

 

On the other hand, it is not easy to purchase shares from managers of targeted companies or from shareholders on the market because this depends on room for foreign investors. Consequently, the acquisition will be unlikely to happen.