Stock Market: A Worrying Draft Guide

The Vietnam Association of Financial Investors (VAFI) has sent a document giving input and comments on the draft guide for the organisation and activities of fund management companies, stock investment funds and securities companies’ to the Ministry of Finance, the Governmental Office and the State Securities Commission. The main content of the document airs concerns about the Vietnamese stock market.

 

The State Securities Commission recently stated that with the existing mechanism, it was difficult to get information about foreign investors so it was necessary to develop a new mechanism to control foreign indirect investment (FII) capital. Paragraphs 1 and 2 of Article 82 of the draft guide state: “Only foreign-owned fund management companies and branches of foreign-owned fund management companies shall be allowed to provide trust services of capital and assets of foreign individuals and organisations (hereinafter referred to as foreign investors), capital and assets mobilised outside Vietnam by investment funds (hereinafter referred to as foreign investment funds). Only foreign-owned fund management companies and branches of foreign-owned investment management companies shall be allowed to act as trust representatives of foreign investment organisations and foreign investment funds...”

 

Also, paragraph 3 Article 89 stresses: “Foreign securities investment organisations, which want to establish branches of fund management companies operating in Vietnam shall have to meet the following conditions: having at least three years’ experience and having at least three consecutive years operating in fund and investment portfolio before the year of application for the establishment of branches; providing fund and trust management services, which shall have a total value reaching at least US$500 million in the current financial year.”

 

After studying the draft guide, by State Securities Commission, VAFI has expressed concerns about the possible negative impacts on the local stock market once it the Ministry of Finance adopts the guide.

 

A short comment on the draft guide argues the drafting board issues many groundless regulations apparently in conflict with the Law on Securities. Nguyen Hoang Hai, VAFI general secretary, said: “In the VAFI document sent to authorised agencies, we have focused on analysing shortcomings and incorrect understandings about the management of foreign investors.”

 

According to State Securities Commission statistics, more than 200 foreign organisations have invested in the Vietnamese stock market. Of the figure, according to a VAFI study, around 50 organisations operate in co-operation with foreign fund management companies with representative offices in Vietnam, and 150 foreign organisations have no trust relations with Vietnamese securities or fund management companies, or foreign fund management companies with representative offices in Vietnam. Of the 150 organisations, around 50 per cent have opened accounts but have not implemented investment activities yet. However, among the 150 there are some world leading giants such as City Group, Dutch Bank, Morgan Stanley and JP Morgan, which provide trust services for hundreds of investors in foreign countries.

 

Under the new regulations, all foreign organisations which want to provide asset and fund management services for investments in the Vietnamese stock markets must establish branches of foreign fund management companies or seek local partners to establish fund management joint ventures, or use re-trust services of local companies. The regulation is unfeasible, because:

Firstly, world giants consider the Vietnamese stock market the smallest market in the world with limited opportunities for investment, therefore they cannot establish affiliated fund management companies in Vietnam, or use trust services of less famous foreign organisations.

 

Secondly, the regulations limit the option of services for many foreign investors. According to VAFI, under the regulations, foreign investors do not have autonomy in investment decisions. Instead, they have to trust other organisations.

 

Thirdly, the regulations may result in an exodus of foreign organisations and capital to other countries, as they would no longer have full control to manage their capital. Consequently, foreign investment in Vietnam could fall significantly.

 

Also, under the regulation stating that foreign investors establishing affiliated fund management companies shall have to work with enterprises in operation for at least three years and managing assets valued at least US$500 million, more than 80 per cent of foreign investment organisations currently operating in Vietnam will have to end their operation, as they fail to meet the condition.

 

According to VAFI, the regulations will prevent foreign investment inflow, instead of creating a favourable environment for foreign investment attraction. The document states the measure is in contrast with international practice, when most stock markets allow foreign companies all measures including internet transactions, to attract capital. In its previous document, contributing input and comments to the draft guide, investors stated possible negative impacts of the regulations, but the drafting board did not pay any attention to the comments. VAFI states the Vietnamese stock market may collapse if such regulations are implemented. This would impact the assets of hundreds of thousands of individual investors.

 

It is necessary to build mechanisms and policies in accordance with international practice. Policies should be clear, so as not to cause any misunderstanding for investors and to avoid any violations due to unclear regulations.

 

Vietnam cannot manage the relations of foreign investors, developed outside Vietnam, as they are subject to foreign laws. Therefore, the content of the draft guide mentioned above should be removed.

 

The State Securities Commission should develop a pattern of information announcements from securities trading centres, securities depositing centres, banks, foreign investors who make regular transactions and securities companies, to continually provide updated information about foreign investors’ transactions.

 

Reports should analyze foreign investor activity and identify strengths, weaknesses and motivation.

 

Legal dissemination for foreign investors should be boosted in various ways. According to VAFI, most foreign investors have successfully implemented Vietnamese regulations as they do not want to harm their assets. To encourage this, there should be clear regulations on what is banned and supervision mechanisms. Equality should be guaranteed among foreign investors without constraining their legitimate interests.

 

According to VAFI, the State Securities Commission should be careful in building policies and mechanisms. Ministry of Finance and Commission leaders should organise dialogues with investors to learn about their ideas. Policies should not be issued when involved parties have not yet reached agreement.