Vietnamese Institutional Setting And The Determinants

Published Date: 02 Nov 2017

CHAPTER TWO

VIETNAMESE INSTITUTIONAL SETTING AND THE DETERMINANTS OF CAPITAL STRUCTURE

Introduction

In this chapter, the institutional setting for listed companies in Vietnam will be clarified, along with the impact of the institutional environment on the determinants of capital structure. First, the process of Vietnamese economic reforms associated with enterprise reforms in 1986 will be reviewed in order to provide background context, then some general theoretical issues of economic reform will be discussed, followed by an overview of the Vietnamese stock market, and finally the Vietnamese Financial Market in the Regional Context will be explored.

The Process of Management in State-Owned Enterprises (SOEs) Before Doimoi (Renewal process) 1945-1986

Period 1945-1975

The Communist Party took power in Vietnam in 1945. However, in the period from1945-1975, Vietnam suffered from the wars with two foreign powers, the United States and France. The August Revolution in 1945 overcame hunger crisis, illiteracy, and lurking threat of foreign invaders. On September 2nd, 1945, the Democratic Republic of Vietnam was born but, after only a short initial time in peace, the whole nation had to struggle against foreign invasion which lasted nine years afterwards. With the victory of Dien Bien Phu on 07/05/1954, peace was restored but the country was temporarily divided into two zones of occupation. The north of Vietnam started the post-war period of economic recovery and development through a rapid restoration of agriculture and improvements in transportation. The economy in that time had two sectors, namely collective economy and state economy. Since 1958, the North has reformed into a socialist economy, which is the model of economic development focusing on public ownership of production, and planning of the national economy managed directly by the government. . This means that the capital structure decision of firms was definitely determined by the state. Meanwhile, also from 1954, the economy of South Vietnam was following the market economy model, but mainly the economic model for the war time. Therefore, capital structure decision of firms in the south zone was not only determined by internal and external contextual factors which impact on the basic concerns of risk and controls, but the values, goals, preferences and desires of managers are also important inputs to the financing decision.

From 1975 to 1986: The Central Planning Economy

After reunification in 1975, Vietnam was an ongoing central planning economy with five-year plans [1] . The government was the key player in deciding what, how and for whom to produce. However, most targets of these plans were not achieved. Production stagnated, only growing minimally at 0.4% per year (plan was for 13-14%), while the population growth rate increased annually at 2.24%. Consequently, these outcomes led to widespread shortages of food and other essential commodities; as evidenced by the fact that a million tons of rice was imported in 1980. Due to high budget deficits, prices rose at an annual rate of 20% and imports exceeded exports by 4-5 times. The lack of capital investment strongly affected the economy, causing many works to be abandoned, and essential consumer goods to go into scarcity. Concurrently, economic aid from China and the Soviet Union [2] were both discontinued and the U.S. imposed economic sanctions on Vietnam. Not to mention, efforts to expand cooperation in agriculture could not bring the desired results. Consequently, inflation accelerated, in the early 1980's it was up to about 30-50% annually, surging to 587.2% in late 1985 and hyperinflation reached its peak in 1986 at 774.7%. The downward spiral in the national economy, as a vicious circle, led to a severe economic crisis, and a catastrophic fall in the standard of living.

Enterprise management in this period

Before economic reform, all enterprises in Vietnam were state-owned (SOEs), which means they were owned, funded and managed by various levels of authorities. Under this system, all the earnings of state enterprises were obliged to be submitted to the government under the principle of "property rights in public" and the unified national budget, whereas the government had the responsibility to distribute the budget for the production plan and through the allocation of bank credit. Investment projects of state enterprises were required to comply with national plans, and all funds were allocated to companies under the national investment plan. In the socialist economic system, there was no distinction between capital and debt. Financing resources for firms came from the government. Thus, there were no financial institutions and financial markets other than the appearance of the central bank system (including the central bank and four state-owned commercial banks which made the capital allocation plans under the command of the government). As a result, the choice of capital structure of an enterprise was determined by the policies of the government rather than by any other factors specifically determined for the company, such as corporate finance, strategic business or corporate governance. In the institutional context of Vietnam during the 1975-1986 time frame, the state-owned enterprises developed in an economy without clear separation between ownership and management, the government was both the owner and manager. Specifically, the government completely financed businesses - acting as the sole owner of the business and performed acts of corporate governance through their representatives as the director or board of directors. Conflicting issues between the principal and agent still existed in the centrally planned economy because, despite no legal separation of ownership from management in SOEs, the owner was not in fact the direct manager. SOEs were actually managed by official representatives appointed by the government. The efforts of the government appointed management was not directly linked to the performance of financial companies. The government-appointed managers, as agents, may or may not act entirely in the interest of the government as the owner. Government was the owner who did not act as a profit maximizer in any sense similar to the market economy. The cost to the economy of the financial system, focusing on the state-owned enterprises, was enormous, and it was reflected in different forms of subtle problems. From the perspective of state-owned financial managers, they often did not have to take into account how the cost of financial resources could be minimized, or how effective the use of financial resources could be maximized, because the financial resources were allocated free from the government. In addition, the government budget decisions were not based on economic principles, but on the basis of politics or policy. State enterprise managers mostly had the motivation to seek as large financial allocations as possible to maximize their status, rank and over-investment which was a considerable indicator of the day. To examine the real demands of the SOEs was extremely difficult for the government. Once the capital had been allocated, the management of state enterprises was no longer interested in the effectiveness of using capital. Furthermore, the measures taken were not only limited, but also very costly for the central government to monitor. As a result, the inefficient allocation and use of financial resources led to the exacerbated level of economic growth. From the perspective of business strategy, management of state enterprises had less to worry about because they recognized that the inputs and outputs were pertaining to the governmental plan. Thus, managers of state enterprises did not face any market pressure (this was replaced by the plan), only the pressure of their superior guidance, orders and needs. This means that state-owned firms had to face serious problems in relation to capital budgets which resulted from lacking business strategies. From the corporate perspective, there remains a question about what happen to the relationship between a company owner and its agents. In the context of public ownership, the government acted as the principal of the company, and managers had been appointed by the government as its agents. Special issues include the soft budget, the resource waste, the false statements, and bureaucratic red tape. It is also worth mentioning that agents at all levels of companies often sacrificed the interests of government. All agencies represented the cost of state enterprises.

SOEs Management in the Reform Period from 1986 to the Present

SOE reform in Vietnam began in 1992 as a key part of economic renovation (Doimoi). The main focus of SOE reform was to enhance the efficiency, and reduce the number, of SOEs. This was achieved through various incentive schemes to overcome the afore-mentioned problems in the planning system. Reform has taken place in several stages, gradually and steadily, but not as specific or pre-prepared detailed plans. The reform measures in the later stages often developed in the face of, and overcame, the problems encountered in previous periods. Among other measures, equitization has been the main one to reach these objectives.

Equitization refers to the transformation of SOEs into joint-stock companies in Vietnam. In the early 1990s, it was based on the legal basis for the decision of 143/HDBT on 10-5-1990. Then, the Government has issued several directives and resolutions on the issue, such as Instruction No. 202 dated 6-8-1992; Directive No. 84 dated 4-3-1993 of the Prime Minister, Decree 28/ND-CP dated 7-5-1996 of Decree No. 25/CP dated 26-3-1997; Notice No. 63 TB/TW of the Politburo dated 4-4-1997; Decree No. 44/ND-CP dated 29-6-1998; Decree No. 64/2002/ND-CP dated 19-6-2002 ... and recently, Directive No. 45 dated 22-10-2004 of the Political Bureau accelerated the implementation of Resolution Central 3, IX of the arrangement, renovation and development and improvement in the efficiency of SOEs.

The goals of equitization are:

To convert SOEs which are non-strategic into enterprises with multiple owners and mobilize capital from domestic investors and foreign financial capacity, achieve innovation in technology and adoption of innovative management practices to improve efficiency and competitiveness of the economy.

To create conditions for enterprise employees and outside investors to own shares, play the role of real owners, and give new impetus to enhance each enterprise’s business efficiency.

To balance interests of the state, employees and shareholders in the equitized enterprises.

In each period, the state will identify the areas and industries which should be prioritized, to maintain the leading role of the state sector so that the Government could manage the national economy development in the right direction. The process of equitization of state enterprises has undergone several stages:

Pilot phase from 1992 to 1998

The equitization in Vietnam was carried out by the way of trying and fixing. During this period, there were 30 equitized enterprises, of which 5 were under Decision 202 of the Prime Minister. According to this Decision, SOEs selected in the pilot equitization programme should be small or medium-sized and profitable enterprises. Moreover, these SOEs to be equitized should not include the type of enterprise that the state needs to hold 100% equity in. From the experience of the five pilot cases, in 1996 the Government decided to implement the equitization process on a broader scale. For accelerating this process, the Government issued Decree 28/CP in May 7, 1996 which requested ministries, central agencies and the government of provinces to make a list of their SOEs that would be equitized as of the end of 1997. According to this Decree, for enterprises with capital from Dong 10 billion or less, the leaders of ministries and localities have the right to self-organize the equitization. Then, through Decree 25 in March 1997, the Government allowed the leaders of ministries and localities to have more authority in conducting equitization of selected SOEs. As a result, 25 SOEs were transformed into joint stock companies in this period.

Boosting phase

After the stage of pilot equitization, the Government of Vietnam decided to officially implement the equitization program. In June 29, 1998, the Government issued Decree No. 44/1998/ND-CP on transforming state enterprises into joint stock companies. This Decree provided that, for SOEs that the state still wants to maintain its dominant role, individuals are not allowed to buy more than 5% and legal entities are not allowed to buy more than 10% of issued shares. For enterprises which the state does not need to control, the dominant individuals are allowed to buy up to 10% and legal entities are allowed to buy up to 20% of the shares initially issued. Particularly for companies where the state no longer wants full ownership, individuals and legal entities are allowed to buy unlimited ownership interests. Funding from the sale of shares was used to retrain workers, arrange employment for surplus labor, and to provide additional funds for other state enterprises. Since Decree 44/1998/ND-CP was applied on December 31, 2001, there have been 548 equitized enterprises.

As of January 2004, the government decided to accelerate the equitization of state enterprises. In late 2004, the Government issued Decree No. 187/2004/ND-CP relating to the transformation of state companies into joint stock companies. As specified by Decree 187, member companies of state corporations, and even the state corporations that the state do not want to govern, may become subject to equitization. Another important new feature of this Decree is that providing for the sale of (initial public offering) IPO shares must be made by auction. It appears that the auction process is a sound solution through which the value of equities can be determined more accurately. For example, in the first shares auction of five equitized SOEs, namely, Vietnam Food Industries Joint Stock Company (VIFON), Post and Telecommunication Equipment Factory (POSTEF), Vinh Son-Song Hinh Hydropower Joint Stock Company, Khanh Hoa Power Joint-Stock Company, and Vietnam Milk Corporation; the Government collected 450 billion Dong more than the initial estimation. On the other hand, the auction of shares of the equitized enterprises is also regarded as a driving force for the development of the stock exchange in Vietnam. As a result, among the first 30 companies with listed shares on the securities trading centre in Ho Chi Minh City (now the Securities Exchange Ho Chi Minh City) on October 31, 2005, 29 companies were previously state-owned.

Phrase from 2005 to present

In this period, the 2005 Enterprise Law has marked a considerable transformation in the law on enterprises of Vietnam. The featured target of the 2005 Enterprise Law is to form a common and equal framework, which is applied consistently to all forms of businesses. The establishment of the statute also meets the requirement for equal treatment among businesses in the process of international economic integration.

The new fundamental points of Enterprise Law 2005 are presented as the following:

Enterprise Law is set as a general rule to govern forms of enterprises:

Enterprise Law 2005 replaces the 1999 Enterprise Law, the Law on State-Owned Enterprises 2003, and regulations for organizational management and operation of enterprises in the 2000 Law on Foreign Investment in Vietnam. The introduction of Enterprise Law 2005 has established a common legal environment for business activities in the territory of Vietnam.

Improving corporate governance:

There is no corporate governance code of practice for companies in Vietnam. In Vietnam, legislation, accounting and auditing standards, and the company constitution provide rules for corporate governance. Among corporate governance legislation, the Enterprise Law 2005 is the most important. Some corporate governance rules in the Enterprise Law 2005 are optional; thus, a company can pass the constitution that is suitable with its conditions, but in accordance with the law. They are more developed, and more transparent in order to better protect the rights and interests of minority members, and shareholders. By clearly defining the obligations of managers, the framework specifies conditions and standards to important management positions in a company, especially for members of the Board and directors, emphasizing the obligation to loyalty, honesty and prudence. Furthermore, the statute strengthens the demand for public and transparent requirements, especially for those in manager positions. The Law also aims to improve, strengthen, and specify roles, positions, and responsibilities of the Supervisory Board; as well as to promote additional regulations on capital management, while preventing the abuse of limited liability.

The regulations on equitization of State-owned enterprises:

The regulations specify time limits (at least a four-year period) to finish the conversion of state-owned companies into limited liability companies or joint stock companies, and manage and operate the organization in accordance with the Enterprise Law. The determination of a four-year period results from the requirement to speed up the process of restructuring, reorganizing, and improving management efficiency in SOEs and the demand to create a normal and non-discriminatory business environment among enterprises in all economic sectors; while taking into account the conditions and problems which should be handled in the duration for transformation.

Accordingly, the transformation process of SOEs has been legalized; as a result, the existing regulations on SOEs would only be applied over a period of four years since the date that Enterprise Law 2005 was taken into force. After that time, enterprises, regardless of economic sector, have operated in a common legal framework for business and investment.

Strengthening state management over enterprises:

State management over enterprises is strengthened and specified. This is reflected by the regulation on information provision between state agencies, in which the responsibilities of each agency and state government level are clearly defined in term of business management. Examples of these include the regulations specifying the circumstances and condition for dissolution of enterprises, specifying prohibited activities, as well as the case of revocation of the certificate of business registration. These are fundamental changes in implementing the mechanism of state ownership over enterprises, which separates the right of ownership from the function of state administration and management.

To concretize the regulation, the Government approved a list of 71 big state-owned business groups and corporations that must carry out equitization in the period from 2007 to 2010. These SOEs are large-amount-of-capital-corporations, and expand into areas which the Government formerly held 100 per cent equity, such as electricity, telecommunications, aviation, marine, petroleum, finance, insurance, and state-owned commercial banks. However, the Government still tries to hold dominant capital proportions in order to maintain the leading role in managing businesses.

According to the Steering Committee for Enterprise Renovation and Development, the equitization process has really begun steadily and more effectively. Up to 2005, the number of SOEs has significantly decreased, from 12,297 in 1991 to 3,200 (UNDP, 2006), while the number of equitized enterprises increased from 2 in 1993 to 2,242 (UNDP, 2006). The remainder of the enterprises, which were unable to equitize, could be transferred, sold, or bankrupted.

By the end of 2008, there were 9 state-owned corporations implementing the equitization process.

Table 2.1

The number of equitized corporations by the end of 2008

State-owned corporation

Shares owned by the state (%)

Vietnam Electronics and Informatics Corporation (VEIC)

88.00

Vietnam Construction and Import-Export Joint Stock Corporation (VINACONEX)

63.40

Hanoi Beer Alcohol And Beverage Joint Stock Corporation (Habeco)

81.79

Saigon Beer Alcohol Beverage Corporation (Sabeco)

89.59

Bao Viet Insurance Corporation

77.54

Southern Waterborne Transport Corporation

51.00

Hydraulic Construction Corporation No.4 Joint Stock Company (HYCO4- JSC)

60.60

Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank)

90.70

Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank)

80.00

Source: Annual reports of Ministry of Finance

The state-owned capital management in enterprises after equitization shall be carried out by representatives of state capital owners under the provision of the Law on state owned enterprises- 2003, and the Decree 09/2009/ ND-CP dated 05 February 2009 of the Government promulgating the regulation on financial management of state companies and management of state capital invested in other enterprises.

According to the regulation on financial management of state companies and management of state capital invested in other enterprises, owner representatives shall make decisions on investment, capital contribution, adjustment to increase or decrease capital investment in joint stock companies; selection and appointment, dismissal, reward, punishment; and issues such as salaries, bonus, commissions, and other compensations to representatives of owners of state companies. In addition to this, the owner representatives also delegate, direct representatives, and protect the rights and legitimate interests of the state; as well as monitor capital usage; and take responsibility for effective and efficient usage and development of contributed capital. The representatives of owners of state enterprises may participate in the election for administration and operational management of joint stock companies in order to exercises the rights of shareholders.

The process of restructuring, reforming, and consolidating the efficiency of state enterprises has contributed significantly to reduce the number of state enterprises, improving the structure of SOEs in a positive direction. In detail, SOEs only hold key sectors and areas, and do not necessarily account for large share in all sectors, and areas of the economy. It can be affirmed that the speed of equitization of SOEs has been increasingly accelerating due to sound implementation of this policy, and especially in recent years. In the structure of SOEs to be equitized, enterprises under the management of provinces accounts for 74%, those of ‘90’ corporations, which belong to ministries take up 20%, and those of ‘91’ corporations contribute 6%. Fifty-one percent of firms which have been already equitized are in the industrial and construction sectors; 32% are in the tertiary industry (trade and services), with the rest being associated with other sectors.

However, objectively it is proved that there still remain certain limitations in the equitization process of SOEs in Vietnam in recent years, namely:

The equitization process in SOEs remains closed. The majority of equitized enterprises are small and medium sized. It is shown in the annual reports of the Steering Committee for Enterprise Renovation and Development that 1,372 firms have working capital of less than five billion Dong, making up around 59.2% of equitized firms. In regards to shareholder structure, on average, the state holds 45.6% of charter capital; officers and employees hold 39.3% of shares; outside shareholders hold 15.1%; while the number of equitized enterprises where the state is the dominant shareholder (over 50%) accounts for 27.4%. These figures reveal that the participation of outside shareholders remains weak.

The equitization process is relatively slow. According to the Steering Committee for Enterprise Renovation and Development, the number of SOEs that have been equitized are lower than the target. For example, 1,056 SOEs were expected to carry out equitization in the three-year-period from 2000 – 2002, however, by December 2002, only approximately half of the target, or 532 enterprises, were equitized. In the first six months of 2004, only 20% of the planned equitized firms were completed.

Some after-equitization issues:

Accessibility to credit. When SOEs are transferred to joint stock companies, they shall not be considered as state economic entities. As a consequence, commercial banks hesitate, and question whether, to provide loans for those businesses. Equitized firms in the sectors of procurement and export-import no longer have advantages in conducting loans as before. In addition, when remaining as SOEs, enterprises are supplemented capital via basic investment channels, or additional working capital; receive debt relief, or guaranteed debt; as a result, they have reducedd risks of bankruptcy. SOEs are also given priorities in receiving investment projects, licensing import - export quotas, and joint-venturing with foreign partners. All of these advantages will be lost after equitization, therefore, a number of SOEs have deliberately delayed their equitization process, despite the fact of business losses, or even being on the brink of bankruptcy.

In the aspect of corporate governance. After equitization, the fundamental duties of businesses are to conduct robust reconstruction in order to determine their direction to operate more effectively. However, there is a fact that the equitization process in recent years is almost a closed process. The government still holds a dominant stake, the management mechanism remains the same, and managers remain the same. It is somewhat true to apply the old proverb "Old wine in a new bottle". According to survey data compiled by the Institute of Strategy and Policy on finance, after equitization, there was 81.5% of company directors still retained in their positions; and 78% of vice directors and chief accountants remained unchanged. There were only a few firms after equitization that used the mechanism of hiring outside executives. This fact can cause reduced creativity, stagnation in entrepreneurial spirit and, consequently, negatively affect the business performance.

Vietnam Stock Market

Since its first operation in 2000, Vietnam’s stock market has gone through 12 years of establishment and development. The first securities trading centre, the Ho Chi Minh City Securities Trading Center (HoSTC) opened in July, 2000; and The Hanoi Securities Trading Centre (HASTC) which was first launched in March, 2005, are the two pioneering operating models. The emergence of the stock market plays an important role in promoting the equitization process of enterprises in Vietnam. This section will briefly introduce the structure and operating mechanism of Vietnam’s securities market.

The State Securities Commission (SSC)

The State Securities Commission was officially established under the Government’s Decree75 CP on November 28th, 1996. SSC is an agency under the Ministry of Finance, and performs the function of advising and assisting the Ministry of Finance in managing in the field of securities and the securities market. Before 2004, the SSC belonged to the Prime Minister. However, in this period, the SSC could not operate well due to structural weaknesses. Therefore, SSC has been handed over to the Ministry of Finance in February, 2004. The SSC’s main tasks and duties are as follows: 

Designing and submitting to the Ministry of Finance, the Government, and the National Assembly legal documents of securities and securities market, the strategies, matrixes, long-term and annual plans, and specific important projects of securities and securities market

Proposing the Minister of Finance to set up, suspend the operation of, or disperse the Securities Trading Center, the Stock Exchange, the Securities Central Depository and other organizations related to securities activities and securities trading in his authorization, or proposing the Minister of Finance to consider and submit to the Prime Minister the plans to set up, suspend the operation of or disperse the above-mentioned entities;

Implementing the legal documents, strategies, matrixes, and plans on securities and securities market after their ratification;

Setting specialized standards, procedures and processes, economic and technical specifications to be applied in organizations and units under its management, as stipulated by applicable laws and decided by the Minister of Finance;

Issuing, extending, suspending or revoking certificates of registration of securities issuance, registration of securities trading, certificates of securities listing, certificates of securities business, certificates of securities practices and services, as stipulated by applicable laws;

Organizing and managing the Securities Trading Center, the Stock Exchange, other regulated securities markets, and the Center for Securities Depository, Registration, Clearing and Settlement;

Supervising the compliance of regulations of securities and securities market by organizations offering their securities to the public, organizations having their securities listed, securities business organizations and other ancillary organizations, as stipulated by applicable laws;

Implementing the inspection, examination and supervision of organizations and individuals participating in the securities market and applying sanctions for violations of regulations of securities and securities market, as stipulated by applicable laws.

The Securities Trading Centre (STC)

Vietnam has two securities trading centers in Ho Chi Minh City and Hanoi.

Ho Chi Minh stock exchange

Ho Chi Minh Stock Exchange (HOSE) was established in July, 2000, and manages the system of listed securities trading in Vietnam and is an administrative agency of the State Securities Commission. The index of share prices listed in a given period (transaction, transaction date) of listed securities at HOSE is called VN – Index benchmark. HOSE runs as a One member state-owned Limited Company with charter capital of one thousand billion Vietnam Dong.

On 8 August 2007, the Ho Chi Minh City Securities Trading Center (HoSTC) was renamed and upgraded to the Ho Chi Minh Stock Exchange.

Initially, there were two equity issues listed on HoSTC, namely, Refrigeration Electrical Engineering Joint Stock Corporation (REE) and Saigon Cable and Telecommunication Material Joint Stock Company (SACOM), and there were only two trading sessions a week. However, by 2009, there have been 177 companies, together with 3 fund certificates, listed on HOSE. At the present, trading sessions are opened five times weekly.

The collar of a stock in a trading day was limited to a margin of +/- 5% comparing to that from the previous day’s close. However, in the first trading day of a newly listed stock, the transaction price was set with the collar of +/- 20%.

Stock trading method

Session 1: From 8:30 am to 8:45, order-matching is determined at the opening price (At-the-open-order (ATO))

Session 2: From 8:45 -10:30, continuous order matching

Session 3: From 10:30 – 10:45, order-matching is determined at the closing price (At the Close Order (ATC))

Put-through: 08:30 -11:00 (Equity + bonds)

Method of trading: bonds

Bonds are only traded by deals/ negotiation

Conditions for listing securities on the Stock Exchange (the Decree 14/ND-CP dated 19/1/2007)

Conditions for listing shares:

The shareholding company must, at the time of registration for listing, have a minimum amount of paid-up charter capital of eighty (80) billion Vietnamese dong calculated at the value recorded in the accounting books. Based on the developmental status of the market, the Ministry of Finance may increase or decrease this amount within a maximum range of thirty (30) per cent after seeking the opinion of the Prime Minister of the Government;

Business operations in the two consecutive years immediately preceding the year of registration for listing must have been profitable, and there must not be accumulated losses calculated up to the year of registration for listing;

There must not be overdue debts payable for which a reserve has not been made in accordance with law; and there must be public disclosure of all debts to the company owed by a member of the board of management or board of controllers, the director or general director, the deputy director or deputy general director, the chief accountant, a major shareholder or an affiliated person;

At least one hundred (100) shareholders must own at least twenty (20) per cent of the voting shares in the company;

Shareholders, being members of the board of management or board of controllers, the director or general director, the deputy director or deputy general director, and the chief accountant of the company, must undertake to hold one hundred (100) per cent of the shares they own for a period of six (6) months from the date of listing and fifty (50) per cent of this number of shares for the following six (6) months, excluding any shares held by such individuals as representative of the state owner;

There is a valid application file for registration of listing shares as required by article 10.2 of this Decree.

Conditions for listing bonds:

(a) The shareholding company, limited liability company or state owned enterprise must, at the time of registration for listing, have a minimum amount of paid-up charter capital of eighty (80) billion Vietnamese dong calculated at the value recorded in the accounting books;

(b) Business operations in the two consecutive years immediately preceding the year of registration for listing must have been profitable, there must not be debts which have been overdue for more than one year, and all financial obligations to the state must have been discharged;

(c) Having at least 50 bondholders in any one issue tranche;

(d) There is a valid application file for registration of listing bonds as required by article 10.3 of this Decree.

Conditions for listing public fund certificates or shares of a public securities investment company:

Being a closed investment fund with a minimum total value of issued fund certificates (calculated at par value) of fifty (50) billion Vietnamese dong; or being a securities investment company with, at the time of registration for listing, a minimum amount of paid-up charter capital of fifty (50) billion Vietnamese dong calculated at the value recorded in the accounting books;

Founding shareholders and members of the committee of representatives of a securities investment fund; or members of the board of management or board of controllers, the director or general director, the deputy director or deputy general director, and the chief accountant of the securities investment company must undertake to hold one hundred (100) per cent of the certificates or shares they own for a period of six (6) months from the date of listing and fifty (50) per cent of this number of fund certificates or shares for the following six (6) months;

There must be at least one hundred (100) owners of fund certificates in the public fund, or at least one hundred (100) shareholders who own shares in the public securities investment company;

There is a valid application file for registration of listing public fund certificates or shares in a public securities investment company as required by article 10.4 of this Decree.

Hanoi Securities Trading Centre

Hanoi Securities Trading Centre (HASTC), founded in compliance with Decision No. 127/1998/QD-TTg, is a business organization of the State Securities Commission, functioning in organizing, managing, and monitoring securities trading activities at the Centre, as well as implementing a number of public services in the field of securities and securities market in accordance with the law. Since January 17, 2009, the organization has been transformed and restructured into HNX, operating as a state-owned single-member limited liability company with the charter capital of 1,000 billion Vietnam Dong.

Main duties:

To organize, and regulate trading activities at HNX

To manage and regulate the securities trading system

To provide support services for securities buying or selling, and securities depository

To license securities registration

Trading method:

The transaction of all listed stock at HNX is organized via trading system by two methods: continuous order-matching, and negotiation.

Unlike HOSE, HNX implements only one mode of transaction, namely continuous order-matching (8:30-11:00) from Monday to Friday. However, during the trading session, investors can negotiate with each other, and agree on trading conditions.

Collar and price unit

Since August 18, 2008, HNX has applied a new collar for a stock in a trading day as +/- 7% comparing to the reference price (instead of +/- 4% previously).

Unit price: VND 100

Conditions for listing securities on a Securities Trading Centre (the Decree 14/ND-CP dated 19/1/2007)

Conditions for listing shares:

The shareholding company must, at the time of registration for listing, have a minimum amount of paid-up charter capital of ten (10) billion Vietnamese dong calculated at the value recorded in the accounting books;

Business operations in the year immediately preceding the year of registration for listing must have been profitable, there must not be debts which have been overdue for more than one year, and all financial obligations to the state must have been discharged;

At least one hundred (100) shareholders must own voting shares in the company;

Shareholders being members of the board of management or board of controllers, the director or general director, the deputy director or deputy general director, and the chief accountant of the company must undertake to hold one hundred (100) per cent of the shares they own for a period of six (6) months from the date of listing and fifty (50) per cent of this number of shares for the following six (6) months, excluding any shares held by such individuals as representative of the state owner;

There is a valid application file for registration of listing shares as required by article 10.2 of this Decree;

Conditions for listing enterprise bonds:

The shareholding company, limited liability company or state owned enterprise must, at the time of registration for listing, have a minimum amount of paid-up charter capital of ten (10) billion Vietnamese dong calculated at the value recorded in the accounting books;

All bonds in any one issuing tranche must have the same maturity date;

There is a valid application file for registration of listing bonds as required by article 10.3 of this Decree.

Securities and fund management companies

Securities companies and securities investment fund management companies (here after "fund management companies") shall be organized in the form of a limited liability or shareholding Company in accordance with the Law on Enterprises.

The securities company shall be entitled to carry out one, several or all of the following business operations:

Securities brokerage;

Securities proprietary dealing;

Underwriting for issuance of securities; and

Securities investment consultancy

Meanwhile, the fund management company shall be entitled to carry out the following business operations:

Management of securities management funds

Investment portfolio management

Regulations on the minimum legal capital required for securities companies, and fund management companies, (according to the Decree 14/ND-CP dated 19/1/2007) are as follows:

Brokerage: VND 25 billion

Securities dealing: VND 100 billion

Underwriting: VND 165 billion

Securities investment consultancy: VND 10 billion

Vietnamese securities market performance

The size of market

After twelve-year of operation, Vietnam’s securities market has taken a great leap, and has been considered as one of the fast growing securities market in the world, particularly when regarding to the growth rate, and rising capitalization rate (Table 2.2). During the 2000-2005 period, market capitalization reached just around 1% of GDP. The market size was considerable enlarged up to 22.7% of GDP in 2006, and continued in the upward trend representing over 40% of GDP in 2007. However, affected by the world’s financial market crisis and a number of difficulties in the domestic economy, Vietnam’s securities price index fell continuously in 2008, while the market capitalization dropped by more than 40% to 19.76% of GDP. When the world’s economy and the domestic one slightly recovered from the second quarter of 2009, the securities price index began to rise again together with the rapidly growing number of listed companies. As a result, the value of stock market capitalization at the end of 2009 reached 37.71% of GDP. In the next 2 years, the market capitalization fell considerably to VND 535,673 billion in 2011, accounting for 21.3% of GDP.

Table 2.2: The growth rate of securities market capitalization

Time

Number of listed companies

Capitalization

(VND billion)

Rate of capitalization

(% of GDP)

One-year growth rate

(%)

2000

5

986

0.28

-

2001

10

1,570

0.34

59.23

2002

20

2,436

0.48

55.16

2003

22

2,370

0.39

-2.71

2004

27

4,516

0.63

90.55

2005

42

9,598

1.21

112.53

2006

195

237,276

22.70

2372.14

2007

253

492,900

40.00

107.73

2008

342

225,935

19.76

-54.16

2009

457

620,551

37.71

174.66

2010

646

718,894

36.31

15.84

2011

699

535,673

21.30

-25.48

Source: The State Securities Commission

As the market size grew significantly, this growth served as an important medium and long term capital conduit for businesses, in particular, and the whole economy in general. The development of Vietnam’s stock exchange and its vibrant activities in issuing shares bloomed in 2006. From Table 2.2, the number of listed companies increased from 42 in 2005 to 195 at the end of 2006; together with the value of issued shares from 813 to 1,858 VND billion (as shown in Table 2.3). The stock market experienced an extended boom in 2007 when 249 companies and 4 commercial banks implemented nearly 55,846 VND billion in share issuances. In 2008, due to the decline of the stock market, the total mobilized capital was just over VND 14,300 billion through more than 100 securities public offerings. However, the recovery of the market in 2009 has created favourable conditions for the issuance of shares in the securities market and, as a result, the total capital raised in 2009 by issuing shares has increased by 50% comparing to that of 2008, reaching VND 21,724 billion.

Table 2.3: Activities of issuance and auctions of shares

Unit: VND billion

Year

Issuance of shares

Equitization Auction

Total

2005

813

4,573

5,386

2006

1,858

14,255

16,113

2007

55,846

49,953

105,799

2008

14,341

7,809

22,150

2009

21,724

2,124

23,848

Total

94,582

78,715

173,297

Source: Compiled from reports of the State Securities Commission

Corporate bonds are mainly issued in the form of separate issues, therefore, the number of corporate bonds listed on Securities Trading Centres/Stock Exchanges remains limited.

The number of listed companies

In 2000, with the event of REE and SACOM (the two first listed companies) being listed on HoSTC, the securities market enjoyed a sharp growth in prices, and the VN Index continued to rise and peaked at 571.04 points on June 25, 2001. Afterwards, the securities market continuously fell during the three years thereafter, before rising sharply again in late 2003. In 2005, after HASTC went into operation, the number of listed companies on both markets was 44, with the total listed value being VND 4.94 trillion. However, it is clear that 2000-2005 was the gloomy period of Vietnam’s stock market development with market capitalization only being around 1% of GDP, while the number of listed companies engaged into the market was still modest, increasing from 5 in 2000 to 42 listed companies in 2005. The change in activity is shown in Figure 2.1, by the number of companies listed and trading on the stock exchanges since 2006. By the end of 2011, there were 699 listed companies on both Stock Exchanges and four public fund certificates listed, contributing a total market capitalization of VND 535,673 billion, which is 55.81 times higher than that of late 2005.

Figure 2.1: Scale of listed companies on the Vietnam’s stock market

Source: SSC

Along with the development of listed companies, an increasing number of securities have been traded on the HOSE and HNX. In the period from 2000-2002, the number of stocks, which are the main commodities listed on the HOSE, was 40 trading codes, and the annual average transaction value was very low, approximately 0.23% of the value of the listed stock market. From 2004-2007, the value of listed stocks to GDP increased significantly, up to 16.1% of GDP. Currently, on both stock exchanges, there are nearly 500 listed stocks, which is around 14 times greater than the initial time of the market. Similarly, the size of the corporate bond market also continues to grow. There were 15 corporate bonds in 2009, instead of just three businesses as in 2008. The total value raised was VND 20,000 billion, more than three times higher than in 2008, accounting for 10% of Vietnam’s bond market.

The stock market has grown in both scale of listed stocks and the liquidity of the market. Relating to the statistics for 2005, there were approximately 667,600 shares traded in each trading session; in 2006, this figure increased to 2.6 million units (3.93 times higher), then continued to rise to 9.79 million and 18.07 million shares traded per session in the following two years. The market turnover rate in this period increased continuously from 0.43 times (in 2006) to 0.64 times (in 2007), 0.68 times (in 2008) and approximately 1.13 times (in 2009). The value of the average securities transactions per session of the market by 31/12/2009 has increased 3,000 times compared with the average transaction value at the time of the initial market operation in 2005.

Figure 2.2

Value of transactions on average per session

      Source: SSC

In addition, the liquidity of the market has been enhanced as new rules were applied. During the beginning time, the HOSE traded just 3 sessions a week, which has changed to five sessions a week since August 1, 2002. The payment procedure has been improved; and the payment (settlement) time has been shortened from 4 days to 3 days. The value collar is adjusted following the exchange; in the initial time of implementation, the collar for a stock in a trading day was +/-2%, which was increased to +/-3% (01/08/2002), and at the present time is +/-5% at the HOSE and +/-7% at the HNXe, enabling investors to decide their price options. As for bond transactions, there is no restriction, and no limitation for foreign organizations and individuals to possess bonds; no collar for bond transactions; the use of a negotiation trading method; and a shortened payment period of T+1. Furthermore, through many upgrades to the trading system, an electronic transaction process has been applied on both exchanges, which is greatly convenient for investors. The subsequent appearance of the Central Securities Depository Vietnam in 2006 has greatly assisted with facilitating the registration procedures and clearing payment and securities transactions. As a result, the operation of these exchanges has become increasingly convenient for businesses and investors.

The system of intermediary institutions and securities services

When the Vietnam stock market was originally established, there were only four securities companies in operation. However, by June 30, 2010, SSC has licensed for 105 securities companies, with the total chartered capital of VND 30,000 billion, to undertake functions of brokerage, dealing, underwriting, and investment consultancy. The companies are focusing on strengthening, and expanding, their organization structure by opening more branches and transaction offices in provinces and cities such as Hanoi, Ho Chi Minh, Hai Phong, Binh Duong, Dong Nai, Long An, and Da Nang. Equally important, in order to facilitate the participation of foreigners in the securities market of Vietnam, the SSC has also licensed for six foreign banks to perform custody roles. Additionally, there have been 38 independent auditing organizations approved to complete financial statement audits for the issuing organizations and the securities trading organizations. The total depository membership of The Securities Depository Centre is currently 122 members, of which 8 depository banks and 12 organizations open direct accounts. The number of practitioners has also increased, consistent with the growth in the number and activity of securities firms. From 2007 to 2011, there were nearly 8,400 practitioners certified. Meanwhile, the number of fund management companies has increased eight-fold from 6 companies in late 2005 to 47 companies as of 30/12/2011. The fund management companies have set up and managed the securities investment funds, and also 200 investment portfolios for local and foreign organizations and individuals. The total value of property via the mobilization, and management, of these organizations is estimated at VND 66,000 billion (equivalent to USD 3.8 billion).

Table 2.4

Growth rate and the number of securities companies and fund management companies

Time

Number of securities companies

Growth rate

Number of fund management companies

Growth rate

2000

7

2001

8

14%

2002

9

13%

2003

12

33%

1

2004

13

8%

2

100%

2005

14

8%

6

200%

2006

55

293%

18

200%

2007

78

42%

25

39%

2008

102

31%

43

72%

2009

105

3%

47

9%

2010

105

0%

47

0%

2011

105

0%

47

0%

Source: SSC

The system of intermediary institutions has increase in both quantity and quality, with healthy competition acting as the driving force for these organizations to increasingly improve their operational efficiency and service quality provided to customers. The organizations have focused on improving management capacity, and the application of information technology for the business. Along with the deployment of electronic transactions, the increasingly diversified and qualified types of services provided, ensure publicity, transparency and egalitarianism in the market. For example, new models of investment, such as securities investment funds, repurchase agreements for bonds and shares repurchases, has been used in the market since 2005. The value added services such as linked accounts (with banks), stock quotes over the phone, online monitoring of stock trading; and placing orders by phone, and the internet have become more popular and practical.

When they first entered the market, securities companies mainly operated brokerage business, but most of the securities trading companies have now also diversified into activities such as finance consultancy, dealing, and underwriting. The financial capability of securities companies has increasingly improved and reached the level of charter capital, on average, of VND 150 billion each. These companies are active in continuously raising charter capital, expanding business activities and investment, and increasing market share, making the competition among securities companies more acute. According to the 2009 statistics, there were 10 securities companies with the highest level of charter capital of VND 500 billion, while 80 out of 105 securities companies generated profits.

The number of investors in the market

The stock market is experiencing an increasing number of investors participating, with participation rising 300 times within10 years from nearly 3,000 accounts in late 2000 to around 926,000 accounts in early 2010.

Furthermore, commercial banks, financial companies, numerous securities companies, fund management companies, insurance companies, and investment funds are actively participated in the stock market, contributing to form a system of professional investors. By the end of August, 2009, there are 21 securities investment funds in operation, among them, there are 4 public investment funds and 17 member investment funds established. The business activities of these investment funds have been considered to be effective, professional and steadily growing. The system of professional investors continues to be encouraged and facilitated to develop in order to ensure the stock market grows steadily and sustainably, as well as to be able to absorb and eliminate market shocks so as to ensure the national financial security and the safety of the economy.

Furthermore, policies encouraging investment and the provision of a friendly and open environment to invest have attracted a growing number of foreign individuals and organizations. At the present time there are more than 10,000 trading accounts of foreign investors, of which 1,000 accounts belong to foreign organizations and foreign investment funds.

Legal framework and policies for Vietnam stock market

The Securities Law, which was enacted by Congress on 6/29/2006, and has been effective since 01/01/2007, has marked an important turning point in the improvement of the legal framework for the securities market. The development of complete and unified legal documents on securities and securities market management has systematically phased out contradictions or conflicts with other legal documents (basically unified with the Enterprise Law and Investment Law). As this framework is also consistent with international laws and practices, this has created a foundation for the Vietnam Securities market to integrate into the international and regional capital markets; and also has increased transparency for the market and improved the market management and supervision capabilities of the state management agencies.

Despite certain limitations, the current legal documents have basically met the requirements and principles for the management of the securities market. Furthermore, the legal system has regularly been adjusted in order to improve the operational efficiency of state management in the securities sector, protect the rights and interests of investors; and create an open and friendly business environment for investment, in accordance with international practices.

Vietnamese Financial Market in the Regional Context

Chinese financial market

After the foundation of the People’s Republic of China in 1949, the Chinese economy followed the central planning economy system where all companies and financial institutions were owned by the state. In the 1950-1978 period, China’s financial system was centralized by a single bank - the People’s Bank of China (PBC). PBC served as both a central bank and commercial bank, controlling about 93% of the whole country’s total financial assets and handling almost all financial transactions. Its main responsibility was to allocate capital for production following the government’s commands. This is definitely similar to that of Vietnam in the 1945-1986 period.

In the next period from 1979 to 1984, the China two-tier banking system was formed. This system included the central bank and four state-owned commercial banks, namely the Bank of China, the People’s Construction Bank of China, the Agriculture Bank of China and the Industrial and Commercial Bank of China. However, these banks had almost no discretion in making loan-related decisions, as they were dependent on quotas being allocated by the PBOC. In addition, foreign banks’ branches were set up in 1985 with limited operations. In this period, the bank system was still a main capital conduit for the whole Chinese economy. Recently, commercial banks have still played a key role in allocating capital for enterprises, providing approximately 84% of funding requirements (CSRC, 2008). The remainder is obtained from financial markets.

Structure of China’s financial markets

The stock market

China’s stock market, born in 1990, was a remarkable event for the development of China‘s financial market. The stock market consists of two main stock exchanges on the mainland, namely, the Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange (SZSE). Two kinds of shares (A shares and B shares) are transacted on both exchanges. After the establishment of the exchanges, the number of market participants was minuscule; only 10 companies were listed in the stock exchanges. At the end of 1991, the SSE had 8 listed stocks and 25 members, while the SZSE had 6 listed stocks and 15 members.

As can be observed from Table 2.5, after 20 years of exponential growth, the China securities market has reached a considerable size. The number of listed companies rose from 14 in 1991 to 2,342 in 2011, while the total capitalization of all Chinese equities traded on the Shanghai and Shenzhen stock exchanges (including shares held by the government) grew from about USD 2,030 million in 1991 to USD $3,389,098 million in 2011. This is approximately 0.53% and 46.3% of the GDP in the two respective periods.

Table 2.5

Number of listed companies and market capitalization on China’s stock market

Year

Number of listed companies

Market capitalization of listed companies

(Million USD)

Market capitalization of listed companies

(% of GDP)

1991

14

2,030

0.53

1992

52

18,300

4.33

1993

183

40,600

9.22

1994

291

43,500

7.78

1995

323

42,055

5.78

1996

530

113,755

13.29

1997

745

206,366

21.66

1998

851

231,322

22.69

1999

949

330,703

30.53

2000

1,088

580,991

48.48

2001

1,160

523,952

39.55

2002

1,224

463,080

31.85

2003

1,287

681,204

41.51

2004

1,377

639,765

33.12

2005

1,381

780,763

34.59

2006

1,434

2,426,330

89.43

2007

1,550

6,226,310

178.20

2008

1,625

2,793,610

61.78

2009

1,718

5,007,650

100.33

2010

2,063

4,762,836

80.3

2011

2,342

3,389,098

46.3

Source: provided by www. Sinofin.com.cn and CSRC

Many listed firms on China’s stock exchanges are indeed former SOEs, approximately 80%. According to Allen, Qian, and Qian (2005), the state/central government still holds the majority stake that has enabled "control" of companies. The accessibility of equity markets of non-state firms has been much lower than that of former SOEs in practice due to the enforcement of the listing standards and process. As a result, the majority of listed firms are converted from former SOEs. The above authors also stated that the two groups of firms have some similarities in terms of the financial ratios; however, except for leverage, as firms which used to be state-owned have much higher leverage than the other group, partially due to the large amount of bank loans being accumulated in these firms prior to their IPO.

With a data set on 625 publicly listed firms during the period from 1993 through 2000, Fan and Wong (2004) found that almost one-third of the companies’ CEOs were either current or former government bureaucrats; consequently, the performance of these firms is significantly worse than other firms without politically connected CEOs.

Empirical evidence reveals that the ownership structure in listed firms affects firm value and share prices and, in particular, the government ownership stake negatively affects firm value. Based on a large sample of SOE-turned listed firms, Wei et al. (2005) find a significant negative relation between Chinese firms’ Tobin’s Q and the ownership stake of the government and legal institutions (non-tradable shares), while foreign ownership is significantly positive related to Q. Similarly, Bai et al. (2004) constructs a composite corporate governance index (ownership structure including shares held by the state, top managers, and foreign investors, and board independence) for listed firms, and find it to be positively associated with firms’ valuation (market-to-book ratio and Tobin’s Q).

Summary of the corporate bond market

The Chinese corporate bond market emerged in 1982. By the end of 1986, the value of trading bonds reached more than USD 2.9 billion in outstanding value. In 1987, the state council stipulated that further bond issuances would be subject to approval by the People’s Bank of China (PBC), and that the PBC, the State Planning Commission (SPC), and the Ministry of Finance (MOF) would set a limit on the total amount of annual enterprise bonds issued. A quota of USD 806 million was subsequently set in that year. In 1992, the total issuance reached a high record of USD 12.7 billion. However, in the fever of issuing enterprise bonds, numerous enterprises did not prepare to pay back the bonds on maturity, and many defaulted. Since 1993, a wave of defaults has led to a long period of decline in corporate issuance.

The size of the corporate bond market is minuscule: in terms of the amount of outstanding bonds at the end of 2001, the corporate bond market is less than one-fifteenth of the size of the government bond market. The primary explanation for the under-developed bond market is the higher risk of corporate bonds in comparison with other securities (Herring and Chatusripitak, 2000).

As Herring and Chatusripitak (2000) point out, the lack of a well functioning bond market reduces the overall efficiency of the financial markets, which is detrimental to the economy. In the absence of an efficient bond market, the economy will lack a market-determined term structure of interest rates that accurately reflects the opportunity cost of funds at each maturity.

As of 2007, the corporate bond market continued to lag far behind the government bond sector. Corporate bonds from listed companies were about USD 1.5 billion in value, amounting to only 4.2% of the bond market. The ratio of corporate bonds outstanding to GDP was only 1.5%.

Malaysian financial market

Malaysian