With Pacific and European Union free trade pacts on the horizon, Vietnam’s government is stepping up reforms to kickstart its $184 billion economy, including a revamp of its investment law that sees the scrapping of ownership limits across many listed firms. Lawyers talk to Ranajit Dam about the impact it might have. With additional reporting by Mai Nguyen and Martin Petty

Vietnam is no stranger to inbound investment. According to the official Foreign Investment Agency, the country netted $21.92 billion of FDI in 2014, accounting for a sixth of the $128 billion that made its way into the ASEAN’s “Big Six” economies (Singapore, Malaysia, Indonesia, Philippines and Thailand being the others). Industry watchers think that this figure could be greater, given Vietnam’s vast potential, but foreign investors ended up being shackled and frustrated by ownership limits.

Now with the Trans-Pacific Partnership (TPP) and European Union free trade agreements in the offing, the country has gone ahead and taken a step that could make Vietnam’s market one of the region’s most open and similar to Indonesia, which has limits only on certain sectors. Earlier this year, Prime Minister Nguyen Tan Dung approved the scrapping of a 49 percent foreign ownership cap across many listed firms. It is being hailed as one of the boldest reforms to the country’s $184 billion economy so far, although some sectors will remain restricted.

According to the decree, a 49 percent foreign cap would still apply to areas where “conditions” were placed on foreign investments, except for sectors governed by separate ownership regulations such as banking, where total foreign stakes are limited to 30 percent. All other equities would have no foreign limits, unless restricted by the companies themselves.

Long criticised for protectionism, the decree is just one of the things that shows that it is keen to lure foreign capital to boost local companies and position Vietnam as a manufacturing centre.

IMPORTANT FEATURES

Vo Ha Duyen, chairperson of Vietnam International Law Firm (Vilaf), cites three important features in the new decree. “First, they reduce certain procedural burdens on investors,” she says. “For instance, the requirement to obtain an investment registration certificate for a local investor has been removed. In an M&A transaction involving a foreign buyer, the government approval is no longer necessary if the target company would have less than 51 percent foreign equity as a result of the transaction and the target company does not operate in any ‘sector conditional for foreign investors.’ If the above conditions are not satisfied and the government approval is still required, the new laws help shorten the licensing process as the local licensing authority no longer has to consult with various ministries as in the past.”

Secondly, she says the new laws lend clarity to foreign investors’ rights by adding the concept of “foreign-investor-equivalent,” which is defined as a company incorporated in Vietnam with 51 percent or more of its share capital held by foreign investors and/or other foreign-investor-equivalents. “When a company incorporated in Vietnam acquires shares or incorporate a new subsidiary, it will be treated as a foreign investor if it is a ‘foreign investor- equivalent’, while it will be treated as a local investor if it is not a ‘foreign-investor equivalent,’” Vo adds. “Lastly, the most important change that I would like to highlight is the Government’s recent decision to lift the 49 percent foreign equity cap for public companies. This change allows foreign investors to hold 100 percent of the share capital in a public company except in the cases where the public company is subject to a lower foreign equity cap based on its business sector under other relevant Vietnamese laws.”

Oliver Massmann, a partner with Duane Morris Vietnam says that the law is considered “the most investor-friendly investment law ever” in Vietnam. “It provides a clearer investment procedure timeline, consolidates conditional business sectors, defines capital ratio to be qualified as foreign investors, which in turn determines what licensing procedure applies. Notably, it explicitly states that there would be no investment registration certificate required for M&A transaction,” he says.

Massmann expects the law to make the country’s investment environment more attractive. “Investors would face less burdens and unexpected statutory requirements,” he says. “A new wave of M&A is expected to come. However, the real effectiveness of this law would need to be assessed at a later stage, after the implementing decrees are issued. As long as these documents have not been adopted, positive changes that the new investment law is said to bring are just theoretical.”

Vo says that while the strong intention of the law is to encourage foreign investment, the possible difficulty lies in implementing the same at the sub-law regulation level, considering its impact on existing companies and licenses. “It would probably take time to sort out confusions. Nonetheless, there is no question that the new laws make investment easier for small and medium-size projects as well as for small and medium-size M&A deals,” she says.

GOOD TIMING

Debate on raising the ownership cap has dragged on for nearly two years, with the initial plan calling for the foreign ceiling to be raised to 60 percent. Investors have complained that foreign shareholdings in Vietnam’s most attractive firms are perennially at the ceiling. Companies in which foreigners have their maximum share include Vinamilk, tech company FPT and Ho Chi Minh City Securities.

Massmann says that this decree has come at a time when Vietnam is making great efforts to integrate into the world economy. “The EU-Vietnam FTA is at the final stage whereas the TPP is also expected to be concluded soon,” he notes. “The government is fiercely improving the business and investment environment and making great attempts to achieve key economic indicators of top regional countries until 2016.” In particular, he cites a resolution issued in March that “has set out the Government’s strong commitments and positive changes to improve the business environment and strengthen the economy’s ability to compete in 2015 and 2016 by pushing for reforms to reduce time-consuming and burdensome administrative procedures; enhancing governmental offices’ transparency and accountability; and adopting international standards. These positive changes could be seen clearly in the tax, insurance and customs-related sectors.”

Vo says that she hopes the next steps taken by the government will be to issue sub-law regulations in a manner that would effectively implement the spirit and intent of the recently passed laws, along with more decisive regulations to boost the privatisation of state enterprises. “One example of the possible impact of sub-law regulations is the list of ‘sectors conditional for foreign investors,’ which has not been issued to date. The new laws as mentioned above lift the 49 percent foreign equity cap for public companies with the reservation that the 49 percent cap would still apply if a public company operates in a sector ‘conditional for foreign investors’ where the laws are silent on a specific foreign equity cap. Additionally, under the new laws, a foreign investor’s acquisition of shares is not subject to the approval requirement if it does not render the target company to have at least 51 percent foreign equity and the target company does not operate in a sector ‘conditional for foreign investors.’ Apparently, what will be on the list of ‘sectors conditional for foreign investors’ may have an impact on how effective the laws are to investors.”