Equitization of foreign direct investment enterprises in Vietnam

At the end of 2005, Law on Enterprises and Law on Investment are promulgated and come into effect from 1/7/2006, entitling the foreign investors to select the forms of investment, includ

UNIVERSITEÙ OUVERTE DE HCMV UNIVERSITEÙ LIBRE DE BRUXELLES

ECOLE DE COMMERCE SOLVAY MMVCFB

PROGRAMME DE MAITRISE EN MANAGEMENT VIETNAM-COMMUNAUTE

FRANCAISE DE BELGIQUE

VU THI ANH DAO

EQUITIZATION OF FOREIGN DIRECT

INVESTMENT ENTERPRISES

IN VIETNAM

MASTER DEGREE THESIS

In Management MMVCFB 6

Guidance Adviser: Dr Pham Dac Duyen

Ho Chi Minh City

2005 – 2007

Vu Thi Anh Dao

2005-2007

ACKNOWLEDGEMENT

Two years for this course was not considered such as long period of time but at least something, the course cover quite broad, therefore a self-taught without experience exchange and valuable guidance from the Professors will not drive

me to the today success

I would like to express my highly appreciation to all the Professor who conducted in this matter in management program for their hard works, valuable guidance on the lecture throughout the course

Many thanks the Professors “Pham Dac Duyen” for his enthusiasm who gave good counsel and advises on my understanding to complete this thesis

Next, I wish to thank you the Board of Director, Head of Investment Promotion Dept and all the colleagues of Southern Foreign Investment Center – Ministry

of Planning and Investment Who have provide useful supports in gathering of information and discussion to prepare this final report

I also thanks Ms Bui Phan Bao Tran and Mr Serge Bywalski for taking the time and providing constructive assistance, tutorship on the study and this thesis preparation

The last but not least, I would like to send my gratitude to all my classmate Especially, all Group 1 members who have accompany with me to all a long trip today

Vu Thi Anh Dao

2005-2007

TABLE OF CONTENTS

Page

PREFACE xii

• The imperative of the thesis xii

• The thesis purposes xiii

• Objects and scope of studying xiv

• The research methodology xiv

• The thesis contents xv

CHAPTER 1 1

OVERVIEW ON FDI & EQUITIZATION OF FDI ENTERPRISE 1

1.1 Overview on FDI 1

1.1.1 Basic conception 1

1.1.2 The role of FDI in developing countries 2

1.1.3 Characteristics of FDI in Vietnam 5

1.2 Equitization of FDI Enterprises 9

1.2.1 Characteristic of join-stock company 9

1.2.1.1 History of shareholding company 9

1.2.1.2 The concept about shareholding companies 10

1.2.1.3 Basic characteristics of shareholding company 10

1.2.1.3.1 The aspect of ownership 11

1.2.1.3.2 The aspect of finance 11

1.2.1.3.3 The aspect of management organization 14

1.2.2 Equitization of FDI enterprises 16

1.2.2.1 The concepts of equitization and privatization of SOEs 16

1.2.2.2 The implementation process of SOE’s equitization in Vietnam 18

1.2.2.3 Experiences in equitization in some countries 21

1.2.2.3.1 Privatization process in England 21

1.2.2.3.2 The privatization implementation in the Federal Republic of Russia .22

1.2.2.3.3 Equitization of SOEs in China 23

1.2.2.4 Particulars of FDI enterprises’ equitization 24

1.2.2.5 Experience in the implementation of FDI enterprises’ equitization in China 25

CHAPTER 2 28

THE PERFORMANCE OF THE EQUITIZATION 28

OF FDI ENTERPRISES IN VIET NAM 28

2.1 The policies and legal bases for FDI Enterprises equitization 28

2.1.1 Vietnam basic policies and the conversion from FDI Enterprises to FIS Companies 28

2.1.1.1 The policy of equitization 28

2.1.1.2 Contents of equitization 29

2.1.1.2.1 Conditions 29

2.1.1.2.2 Forms of conversion 31

2.1.1.2.3 Determination of the Enterprise’s Value 32

2.1.1.2.4 Operation of FIS companies 34

2.1.1.2.5 Procedures and formalities of the implementation of conversion 36

2.1.2 Legal grounds for and State management of the FIS company 38

2.1.2.1 Legal grounds for the FIS companies: 38

2.1.2.2 State management of FIS companies .40

2.2 Present situation of equitization of FDI enterprises 41

2.2.1 General situation 41

2.2.2 The situation through the study of 9 equatized FDI enterprises 41

2.2.2.1 The conversion model of Austnam Shareholding Company 43

2.2.2.2 The conversion model of Royal International Shareholding Company 44

2.2.2.3 Conversion model of Vietcans Shareholding Company 45

2.2.2.4 Conversion model of Full Power Shareholding Company 46

2.2.2.5 Conversion model of Tung Kuang Industrial Shareholding Company .47

2.2.2.6 Conversion model of Taya (Vietnam) Electric Wire and Cable Shareholding Company 48

2.2.2.7 Conversion model of Chang Yih Ceramic Shareholding Company .49

2.2.2.8 Conversion model of International Food Shareholding Company 50

2.2.2.9 Conversion model of the Taicera Industrial shareholding Company Ltd

51

2.2.3 The results, the limitations and the causes 52

2.2.3.1 The results: 52

2.2.3.2 Limitations and causes 55

CHAPTER 3 58

SOME MEASURES TO IMPROVE 58

THE EQUITIZATION OF FDI ENTERPRISES 58

3.1 The macroscopic measures 58

3.1.1 Viewpoints on the management policy of FDI enterprises 58

3.1.2 Perfecting the legal system concerning the conversion of FDI enterprises 61

3.1.3 To improve the stock market for pushing up equitization 62

3.1.4 To attract the international investment funds for accelerating the equitization process 67

3.1.5 To improve other barriers 68

3.1.5.1 The responsibilities of State management authorities 68

3.1.5.2 The policies on the workers and the converted enterprises 69

3.1.5.3 The dissemination of equitization knowledge 70

3.2 Concrete solutions 72

3.2.1 Solutions to the FIS companies 72 3.2.2 Solutions to other FDI enterprises .73 3.2.3 To flexibly apply the different methods to determine the enterprises’

value in the conversion 74 3.2.4 Solutions with regard to the share issuance of FDI enterprises when

converted to shareholding companies 76 3.2.5 The State should early decide on the opening of “room” for FDI

enterprises while the Law on Securities is already effective .77 3.2.6 To consolidate the foreign currency control over the FDI enterprises

in conversion to shareholding companies 78 3.2.7 The organization of implementation 79

CONCLUSION 81

• EPZ : Export Processing Zone

• FDI : Foreign Direct Investment

• FIA : Foreign Investment Agency

• FII : Foreign Indirect Investment

• FIS : Foreign Invested Shareholding

• GMS : General Meeting of Shareholders

• MOF : Ministry of Finance

• MPI : Ministry of Planning & Investment

• ODA : Official Development Assistance

• SGCs : State General Corporations

• SMEs : Small and Medium Enterprises

• SOEs : State-owned Enterprises

• SSC : State Securities Commission

LIST OF GRAPHS AND TABLES

Page

Table 1.1: Total investment capital by economic sector 6

Table 1.2: GDP structure by economic sectors 6

Graph 1.1: FDI statistics from 1988 to Dec.2006 7

Graph 1.2: FDI statistics by sector from 1988 to Dec.2006 8

Graph 1.3: Top Foreign Investors from 1988 to Dec.2006 8

Table 2.1: the FIS enterprises listed on the stock market 42

Table 2.2: Business situation of FIS companies in 2005 53

Graph 3.1: Vietnam Stock Market in the period 2000 – 2006 64

Table 3.2: Structure of transactions at Hochiminh City stock exchange in 2006.65

PREFACE

• The imperative of the thesis

In the initial stage of economic development, Vietnam has encountered a difficult matter: lack of capital due to low internal accumulation, thus restricting investment scale and equipment renewal After 18 years of attracting foreign investment capital, in 2005, foreign direct investment (FDI) capital covers 15.7%

of total social investment capital, 55% of export turnover, 16% of GDP, and over US$ 1 bil for national budget FDI capital also uses redundant labor force, creates jobs for over 1 million people, trains management teams, and forms the behaviors of industrial production In addition, FDI capital accelerates the process of industrialization and enhances Vietnam’s position in the world

With such results, the preservation and encouragement of FDI capital is a imperative matter in the economic development policy, especially when there is

a strong competition in the attraction of FDI capital

According to the previous provisions of Law on Foreign Investment, foreign investors operate in Vietnam chiefly in the forms of business cooperation contract, joint-venture and 100% foreign-owned All these forms are of limited liability company, thus restricting the capacity of mobilizing capital for production development…

Shareholding company is so popular in the world It is also provided in the Law on Enterprises (old) and applied for the local companies In April, 2003, the government promulgated the Decree 38/2003/ND-CP on the conversion of some enterprises to shareholding companies, by which, the form of shareholding

companies is applied on the pilot basis to some enterprises with the Prime Minister’s permission

At the end of 2005, Law on Enterprises and Law on Investment are promulgated and come into effect from 1/7/2006, entitling the foreign investors

to select the forms of investment, including the shareholding company

The form of shareholding company is rather new in Vietnam Many complicated matters on legality and finance are raised: how is it applied? How to solve the problems of capital, investment priorities, enterprises’ value determination, …? How to implement the conversion of the foreign invested shareholding companies to shareholding companies by the Decree 101/2006/ND-

CP dated 21/9/2006 on the re-registration and enterprises’ conversion? What entanglements in reality?

From the above matters, I decide to choose the topic: “EQUITIZATION

OF FOREIGN DIRECT INVESTMENT ENTERPRISES IN VIETNAM” as my thesis

• The thesis purposes

Equitization is rather new, and we are still lacking knowledge and experience in policy planning as well as in organizing the implementation, especially the legal procedures, enterprises’ value determination, ownership transfer, In reality, dependent on the history, the development level of a country, and the enterprises’ scale, the process of ownership transfer has its specific characters Therefore, there is no common formula on the equitization or privatization for all countries

Arising from such observations, the thesis, on the basis of privatization experiences in some countries in the world, tries to study the pilot equitization of

FDI enterprises and our economic characters Combining the theories on shareholding companies, the thesis presents the core measures to effectively implement the form of shareholding companies to the FDI enterprises in Vietnam at the time being as well as in the future

• Objects and scope of studying

The objects for studying are the FDI enterprises and the scope is the matters concerning the conversion of a FDI enterprises into shareholding companies and the formation of a new foreign company in the form of shareholding company in Vietnam

The thesis studies, first, the theories on FDI enterprises beside the forms

of shareholding companies such as: the concepts on FDI enterprises, operation system and financial mechanism,…

The problems regarding the conversion of some FDI enterprises to shareholding companies by the provisions – old and new- are also studied The thesis analyzes the entanglements and suggests the appropriate solutions In addition, the thesis focuses on the real situation of FDI enterprises in Vietnam and objectives set up for the application of shareholding company form to find out the basic matters for presenting the solutions

• The research methodology

In accordance with the topic, the approach is from the realities, in comparison with the theory The analysis is always based on the reality, and applies arguments, theories for suitable solutions

The methodology of dialectic materialism is applied throughout the thesis Many other scientific methodologies are also used such as: analysis, comparison, synthesis, logic & history, mathematics and statistics …

• The thesis contents

The thesis is composed of 3 chapters and the conclusion as follows:

Chapter 1: Overview of FDI and equitization of FDI enterprises

Chapter 2: The performance of the equitization of FDI enterprises in Vietnam Chapter 3: Some measures to improve the equitization of FDI enterprises in Vietnam

The Conclusion

CHAPTER 1 OVERVIEW ON FDI & EQUITIZATION OF FDI ENTERPRISE

1.1 Overview on FDI

1.1.1 Basic conception

Foreign Investment or International Investment is the investment activities beyond a nation and of two forms: foreign direct investment and foreign indirect investment

• Foreign Indirect Investment (FII or FPI: Foreign Portfolio Investment):

is a form of investment in which the capital investing people – foreign investors – and the capital using people are different entities That means the investors do not participate directly in the management of the investment activity

This investment form is carried out by way of the purchase of shares, share certificates, bonds, other valuable papers or through securities investment funds and intermediary financial institutions

• Foreign Direct Investment (FDI): means a form of investment whereby

the foreign investor invests his capital and participates in the management of the investment activity

This investment form is carried out by way of the establishment of economic organization 100% Foreign-Owned; Joint Venture; contractual forms

of Business Co-operation Contract (BCC), Operate-Transfer (BOT), Transfer-Operate (BTO) and Build-Transfer (BT); to invest in business development; to purchase shares or to contribute capital in order to participate in the management of investment activities; to invest in the carrying out of a merger and acquisition of an enterprise; to carry out other forms of direct investment

Build-1.1.2 The role of FDI in developing countries

FDI is a new activity in Vietnam, but in the world, it has appeared over 70 years together with the business activities of companies and economic groups The big companies get a role to authorize the business at many countries, being known with difference name: Multi National Corporation (MNC), Transnational Corporation (TNC) and Global Company

Although with different name, but reality companies mentioned above have the same characteristic of business implementation on the market of two countries and more

With respect to the countries receiving foreign investment, slow or developing countries, FDI plays the importance role in pushing up economic development and increasing national income FDI shall help the Government in those countries reach the greater economic development objectives The benefits brought by FDI bring to developing countries are included:

Ü Raising source of social investment

In the developing countries due to lack of state budget, international debt not yet payable, low internal accumulation.…, often do not have enough capital investment In such a condition, the source of FDI capital shall contribute to solve the problem effectively, because compared with ODA and international investment credit, FDI capital is more safer It neither influence over the capital managed by the Government nor raise Government debts and nor influence directly on the international balance of payments

Ü Job creation

The FDI projects, when implemented, will ensure jobs and stable income for local workers In fact, for the developing countries, FDI is put in with the main purposes of looking for resources and labor at low price or of suitable professional

Ü Receiving technology transfer

In the investment receiving countries, the worker in FDI enterprises can master the technology transferred and after that they can participate in the local enterprises Though in any form or at any level, the technology transfer has the tendency to increase labor output for those countries

Ü Encouraging local investment

Experience in many countries has shown that FDI will not encroach upon the local investment On the contrary, it will encourage Local enterprises have opportunities to become the suppliers or distributors of FDI enterprises In addition, FDI enterprises create the competition in a few economic sectors that are previously under the monopoly one or some local enterprises

Ü Contributing to increase of state budget

The FDI enterprises will create the significant source for state budget of investment receiving countries Although the Government applies tax holiday policy for foreign investors in a certain of time, it still has other revenue out of tax and revenue from foreign currency through export of FDI enterprises

Ü Pushing up economic development in the undergrown regions

Some countries encourage foreign investor to invest in the areas which are still in difficult socio-economic conditions To some extent, FDI has contributed

to push up the economic development in the backward regions

Ü Contributing to establish the Industrial Zones and Export Processing

Zones

With respect to developing countries, FDI plays the importance role to establish and promote efficiency of Industrial Zones and Export Processing Zones

FDI develops at high speed and becomes an economic relation form that has an important role for the development of country and international economy Most developed industrial countries as well as the developing ones have opened the door to attract FDI

The research of United Nations Conference on Trade and Development (UNCTAD) on FDI’s prospect over the world in period 2005-2008 has shown that FDI source tends to move from developed countries to some newly emerging countries, especially the countries in Asia-Pacific regions In 2004, FDI capital flow in this regions achieved US$ 148 bil., increased US$ 46 bil compared with 2003 The high speed of economic development together with improving policy environment and strategic commitments strategies of Transnational Corporations (TNC) in regions are the factors that push FDI capital to flow to this region in the coming year

China is typical of successful FDI mobilization among Asian countries Over two recent decades, China was successful in attracting FDI FDI source of capital in this country increases from US$ 3 bil in1990 to US$ 40 bil in 2000 and US$ 53 bil in 2005 FDI attends many China’s industries and contributes to the change of industrial structure Industrial production value of FDI sector has grown from 7% in 1990 to 28% in 2000 FDI’s enterprises have the highest productivity (twice compared with SOEs)

FDI contributes an important part in the whole investment capital of China, holding circa 3% GDP It also contributes in the ratio of value added tax

in China

In 1995, FDI’s enterprises in China accounted for 61% of garment and shoes export, creating many jobs, accounted for 3% urban employment and played the important role in privatization process The role of FDI is not strong if

we consider the financial contribution to the balance of payment, but it helps the balance of payment of China stronger in recent years and foreign currency provision (increased more ca US$ 50 bil, in 2001) higher

Among Asian countries, China and India are considered as the most attractive places for investment The following are Thailand, South Korea, Malaysia, Indonesia, Vietnam and Singapore

1.1.3 Characteristics of FDI in Vietnam

The main purpose of FDI’s mobilization in Vietnam is to perform the task economic industrialization, in which, mainly to strengthen investment capital, to attract foreign currency; to use the source of labour, raw materials, natural resources in Vietnam; to transfer modern technology; to expand export market;

to manufacture imported goods and goods for replacing the imported ones, and to build infrastructure …

In the initial phase of economic development, Vietnam has encountered a financial problem: lack of capital, due low internal accumulation, this restricting investment scale and equipment renewal After 18 years of attracting FDI, since the promulgation of Foreign Investment Law, this capital has contributed significantly to the increase of investment capital for the economy of Vietnam In

2006, FDI’s capital accounted for 16.3% of total investment capital in society

Table 1.1: Total investment capital by economic sector

State-owned Local private Foreign Investment

Source: General Statistical Office

Table 1.2: GDP structure by economic sectors

100

38,5 48,2 13,3

100

38,4 45,7 15,9

Source: General Statistical Office

According to Foreign Investment Agency – Ministry of Planning and

Investment (MPI), at the end of December 2006, Vietnam has 6,813 FDI projects

(in validity) with total registered investment capital of US$ 60.47 bil.,

implemented capital of operational projects reached US$ 28.78 bil., in which, the

FDI has mainly gone to industrial production and construction sectors The

countries and territories leads in investment in Vietnam are: Taiwan, Singapore,

Japan, South Korea, Hong Kong…

In year 2006, export value of FDI sector excluding crude oil reached US$

14.5 bil., increasing 30.1% compared with previous year; and if including crude

oil is US$ 22.6 bil., amounting to 57% of the country’s total export value Import

of FDI sector has reached US$ 16.35 bil., increasing 19.3% compared with year

2005

FDI capital contributes 37% of the country’s total industrial production value, 55% export turnover, 16% of GDP (statistics in year 2005) and more than US$ 1 bil to State budget

The number of people working in the FDI sector increased from 220,000

in 1996 to over 1,000,000 currently, with many well-trained workers and managers Besides, FDI also helps to quickly push the industrialization process and contributes to enhance the position of Vietnam in the world

Graph 1.1: FDI statistics from 1988 to Dec.2006

37 68

108 151

197 269

343 37

0.37 0.58

0.84 1.32 2.17 2.9 3.77

6.53 8.5

3.9 3.9

1.57 1.62 1.9

2.84

5.8 7.83

2.5 2.01

0

325 345

275 311

371 502

802 752 679

922 833

No of projects Total Inv Capital US$bil

Foreign direct investment from 1988 – Dec/2006

Source: FIA – Ministry of Planning & Investment

Graph 1.2: FDI statistics by sector from 1988 to Dec.2006

6.4%

FDI by sector from 1998 to Dec.2006

No of projects (%) Investment capital (%)

Source: FIA – Ministry of Planning & Investment

Graph 1.3: Top Foreign Investors from 1988 to Dec.2006

Top of Foreign Investors in Vietnam

No of project from

1988 – Dec/2006

Total capital from

1988 – 12/2006 (US$ bil.)

1.07 1.33 1.36 1.63 1.65 2.11 2.19 2.36 3.22 5.27

7.39 7.79 8.07 8.11

B.V Islands

Singapore

Japan South Korea Hong Kong

Malaysia Netherlands

Thailand

USA

UK Cayman Islands

China 407

142 79 19 201 306 178 74 275 375 735

1263

452 1550

France Taiwan

Source: FIA – Ministry of Planning & Investment

1.2 Equitization of FDI Enterprises

1.2.1 Characteristic of join-stock company

Shareholding company was born from the beginning of XV century in Europe In XVI century, under the influence of mercantilism together with huge development of international trade appeared the enterprises whose activities were based on capital contribution As from the first shareholding company established, this form developed more and more and proved its advantage over with other forms of business

1.2.1.1 History of shareholding company

There are two basic reasons leading to the formation of joint-stock companies in the world

The first reason is the capitalists’ need of capital centralization

The development of commodities production led to the severe competition among the enterprises, and in this process, the small enterprises are inferior to the bigger ones Therefore, in order not to be losing, bankrupt, or fail in the competition, the medium and small capitalists united together In addition, the development of scientific and technological revolution has led to the need of innovating technology as well as investing in the new profitable fields This requires the big capital Hence, the capitalists have allied to form the shareholding companies and distribute the profits

The second reason is the need to disperse the risks

The more the production develops, the bitter the competition among the enterprises is, and the risk of being losing, bankrupt becomes more popular Therefore, it is highly risky in case of mishaps if focusing only in a branch On

the contrary, it is safer and limits the big losses if investing in different branches,

or fields Then, the shareholding companies appear

It can be said that the market economy gives birth to the shareholding company

1.2.1.2 The concept about shareholding companies

Shareholding company is one of the forms of collective ownership, existing as a legal entity, in which the shareholders in the company are the co-owners of the company assets They have the right to be distributed the profit, to participate in the general meeting of shareholders, to have opinions on the company operations and to plan the company strategies… They also bear the risks from unprofitable operations as well The shareholding company is regarded as the most modern enterprise form at the moment

According to Investment Law No.60/2005/QH11 dated 29 Nov 2005 [2]

by National Assembly of Vietnam, shareholding company is regarded as an enterprise, in which charter capital shall be divided into equal portions called shares Shareholders may be organizations or individuals; the minimum number

of shareholders shall be three and there shall be no restriction on the maximum number Shareholder is the owner of share, they shall be liable for the debts and other property obligations of the enterprise only within the amount of capital contributed to the enterprise Shareholders may freely assign their shares to other persons Shareholding companies may issue all types of securities to raise funds

1.2.1.3 Basic characteristics of shareholding company

The differences between shareholding company with other forms of investment are due to the following characteristics:

1.2.1.3.1 The aspect of ownership

The Capital of the shareholding company is contributed by shareholders themselves It becomes the enterprise’s capital of ownership Consequently, shareholding company has so many owners, but most of them do not directly participate in the management of company, this work has been given to the management system of company to operate all business activities and trade relations

The shareholders only execute the right of their ownership on the sides:

- Receiving share’s income based on the result of company

- Participating General Meeting of Shareholders to decide the strategic matters

- Not withdrawing the contributed capital from the company They only can take it back through selling the holder shares (except voting preference shareholders) This makes the activities as well as financial status of shareholding company to be stable

There are 3 kinds of shareholder in shareholding company: founding shareholders, preference shareholder and ordinary shareholders

Shareholding company is attracting not only large shareholders’ capital but also able and experienced persons to the management operation of the company to push its activities more effectively

1.2.1.3.2 The aspect of finance

The basic point used to differentiate a shareholding company with other form is the aspect of finance It can be known in general as follows:

• Company capital (charter capital) shall be divided into equal portions called shares and showed in share certificate.The share certificate has its

value written, called par value of share Shareholder contribute to company with cash or assets by form of share buying Profit divided to shareholders is based on share capital contribution Share is a necessary and sufficient evidence to prove the member status

• Share of company are of 2 kinds: preference share and ordinary share

Ü Shareholding companies may have preference shares It is a kind of share that permit the owner of share to have special rights surpassing normal regulations Such as: paid dividend at a rate higher than that paid for an ordinary share or at an annual fixed rate

in case dividend preference share; be redeemed by the company at any time upon demand by its owner in case redeemable preference share; and carry more votes than an ordinary share in case voting preference share Owners of preference shares shall be called preference shareholders

Preference shares shall be of the following classes:

1 Voting preference shares;

2 Dividend preference shares;

3 Redeemable preference shares;

4 Other preference shares stipulated in the charter of the company

Besides the preferences above, they have some restriction: voting preference shareholders may not assign such shares to other persons; dividend preference shareholders and redeemable preference shareholders shall not have the right to vote, the right to attend General Meetings of Shareholders or the right to nominate candidates to the Board of Management and the Inspection

Committee… Preference shares may be converted into ordinary shares, on the contrary, ordinary shares may not be converted into preference shares

Ü Shareholding companies must have ordinary shares Owners of ordinary shares shall be ordinary shareholders They shall have the following rights: to attend and express opinions at the General Meeting of Shareholders and to exercise the right to vote directly;

to receive dividends at the rate decided by the General Meeting of Shareholders; to be given priority in subscribing for new shares offered for sale and freely assign their shares to other shareholders and to non-shareholders…

As Decree 187/2004/ND-CP, dated 16 November 2004 [16] promulgated

by Government: preference shares shall be sell to domestic strategic investors and employees of enterprise Domestic strategic investors are defined as producers and regular suppliers of raw materials to the enterprise; persons who undertake to purchase the products of the enterprise on a long-term basis; persons closely connected to the long-term strategic business interests and having financial potential and management capability

Strategic investors shall be permitted to purchase a maximum 20% of the number of shares for sale at discount of 20% of the average successful auction price Employees shall be entitled to purchase up to a maximum of 100 shares for each year of actual employment in the State sector at a discount of 40% of the average successful auction price in sales to other investors All of shares remain less than 20% of charter capital shall be sold at a publicly announced price to investors

1.2.1.3.3 The aspect of management organization

Management structure of shareholding companies in Vietnam included 3 parts:

• General Meeting of Shareholders (GMS): shall include all shareholders

which may vote and shall be the highest decision-making authority of a shareholding company GMS have rights to decide for almost the important problems of company, such as: the matter concerning capital, property; to elect, remove or discharge members of the Board of Management and members of the Inspection Committee; amendments of and additions to the charter of the company; re-organization and dissolution of the company…

There shall be a GMS at least once per year GMS will be convened at the decision of the Board of Management; or upon request

by a shareholder or a group of shareholders holding more than 10% of the total ordinary shares for a consecutive period of six months or more, or holding a smaller percentage as stipulated in the charter of the company; and some other cases

As regulations of Enterprise Law in currently: shareholders representing at least 65% of the total voting shares have the opportunity to control all of activities of company

• Board of Management: is the body managing the company and shall

have full authority to make decisions in the name of the company and to exercise the rights and discharge the obligations of the company which do not fall within the authority of the GMS

The Board of Management shall pass resolutions by way of voting

at meetings, obtaining written opinions, or otherwise as stipulated in the

charter of the company Each member of the Board of Management shall have one vote

The Board of Management shall have at least 3 members, and not more than 11 members The term of the Board of Management shall be 5 years A member of the Board of Management need not necessarily also

be a shareholder of the company

• Director or general director of the company: The Board of

Management shall appoint one of its members or employ another person

as the director (general director) who shall manage the day-to-day business operations of the company and obey the instructions and opinions

of GMS & Board of Management Where the charter of the company does not provide that the chairman of the Board of Management is the legal representative, the director (general director) shall be the legal representative of the company

The director (general director) shall be responsible to the Board of Management and before the law for the exercise of his or her delegated powers and the performance of his or her delegated duties They have duty and right in accordance with provisions of the law, the charter of the company and decision of Board of Management

• Inspection Committee: in case shareholding companies have more than

11 shareholders being individuals or having organizations owning more than 50% of the total shares of the company must have an Inspection Committee An Inspection Committee shall have from 3 to 5 members with the term of the Inspection Committee shall not more than 5 years; Members of the Inspection Committee need not be a shareholder or the employee of the company and they shall not hold managerial positions of

the company The members of the Inspection Committee shall elect one

of them to be the head of the Inspection Committee which rights and duties shall be stipulated in the charter of the company More than half of the members of the Inspection Committee must permanently reside in Vietnam and at least one member from them must be an accountant or auditor

1.2.2 Equitization of FDI enterprises

1.2.2.1 The concepts of equitization and privatization of SOEs

In recent decades, many countries of market economy have implemented the measures of converting the state-owned enterprises (SOEs) into the private ones or enterprises of mixed ownership of state and private persons or among

private individuals at different levels This process is called privatization

However, some countries do not want to privatize impetuously and thoroughly They just want to partly reduce the state ownership in the SOEs to improve the economy In these countries, the State tends to sell a part of assets

or shares in the important enterprises while still holding the controlling shares or

to transfer the complete ownership to private sector in the unimportant enterprises The shares are usually preferentially sold to the worker and there are also the provisions by which a private person or a group could not control the company operations Some other countries solve this conflict by hiring the

management personnel… The process of ownership transfer in these countries is

called equitization.

The difference in words expresses the different nuances in reducing the state ownership

Equitization is a concept showing the conversion of an enterprise into a shareholding company However, in recent time, the term “equitization” is usually used for the SOEs It rarely refers to the conversion of a private firm into

a shareholding company

Equitization, as a measure of SOEs reform, can take one of the following four forms:

1 Keeping state shares intact and issuing new share

2 Selling part of the existing state shares

3 Detaching and then selling parts of an SOE (a method mostly applied

• •Mobilizing social capitals including private persons, economic organizations, local and foreign social organizations to innovate technology, to create more jobs, to develop the enterprises and enhance the competitive capacity, and to change the SOEs’ structure

• •Paving the ways for the workers and the shareholders in the shareholding companies to be the real owners

• •Changing the management methods, and accelerating the business operations effectively

The SOEs after converted to shareholding companies will have many different owners including: the State, the personnel and workers in the company, private individuals, and other economic and social organizations Hence, these

partners have the rights, obligations and real interests closely linked with the company operations

Equitization brings about a significant change regarding the company structure, increases the workers’ responsibility and disciplinary spirits, allows the companies to overcome the difficulties in capital, technical innovation, output and quality, and operation results

1.2.2.2 The implementation process of SOE’s equitization in Vietnam

The equitization process in Vietnam can be divided into four period Each period is marked by the issuance of a State Decree

Stage 1 (from June 1992 to April 1996) Voluntary Equitization:

In 1992, the year Vietnam started its pilot equitization program, the country has about 6,500 SOEs The pilot program was designed to privatize small and medium size SOEs The result of this pilot program were minimal: in a five year period, from 1992 to 1996, only 5 SOEs were equitized

Stage 2 (from May 1996 to May 1998) Expansion of the Pilot Program:

In 1996, after evaluating the results of the pilot program, the government decided to expand this program and for the first time, showed a strong commitment to equilization The first legal framework for equitization in Vietnam (Decree No.44/1998/ND-CP, dated 29 June 1998 [16]) was introduced

to facilitate the equitization process However, once again the results were far below expectation: between 1996 and mid-1998, only 25 additional SOEs were equitized

Stage 3 (from June 1998 to May 2002) Acceleration of the Equitization Program:

In June 1998, the experimental program was replaced by a more ambitious equitization plan in which SOEs were no longer given the option to participate in the equitization program The government classified all SOEs in to

3 groups according to their level of importance

Group 1: consists of public enterprises that are strategically important and should therefore be keep under complete public ownership and control SOEs in this group are not subject to equitization (e.g the field of security defence, manufacture, supplying essential public services…)

Group 2: consists of SOEs in industries for which the government want to keep controlling shares if they are equitized

Group 3: consists of all remaining SOEs, which can be equitizied by one

of four the method discussed above

The progress of the equitizition program during this stage was more impressive Between June 1998 and May 2002, 845 SOEs were equitized To summarize, by May 2002 the Vietnam’s government had equitized 875 SOEs, circa 15% of the total number of SOEs, with capital amounting to about 2.5% of the total capital of all SOEs

Stage 4: Continuing Equitization Program:

Given the slow pace of equitization, in 2002 the government decided to jump start the equitization program by issuing Decree No.64/2002/NÑ-CP [16], replacing Decree No.44/1998/NÑ-CP, to improve the legal framework for equitization

There are several notable points about this new Decree

• First, equitization is further decentralized, with more authority given to

line Ministries, local government, and the general corporation

• Second, compensation funds are created for financial compensation

and retraining assistance provided to dismissed workers, and for facilitating equitizion

• Third, non strategic SOEs whose capital is under VND 5 bil Are

threatened with liquidation if they oppose equitizion

• Fourth, the upper share limit imposed on foreign individuals and

organization is increased from 20% to 30% for both Group 2 and 3 firms

• Fifth, the permitted methods of evaluating and selling SOEs are more

flexible

In November 2004, the government issued Decree No 187/2004/NÑ-CP [16], replacing Decree No 64/2002/NÑ-CP This Decree helps overcome problems related to SOEs’s bad debts (both receivable and payable) More importantly the Decree clears the way for applying market evaluation methods

of SOEs subject to equitizion (e.g public biddings and independent, even foreign audits)

In 2005, government was arranged and reinnovated 933 SOEs, in which,

693 enterprises were equitized At the end of 2005, Vietnam was privatized 2,935 SOEs, in which, 682 enterprises has state capital over VND 10 bil

As Ministry of Finance (MOF) statistical, there was equitized 125 enterprises in 8 months 2006 So, the equitization process after the acceleration period that begin to strong deceleration, especially in the end of year 2005 (only

in Dec.2005, there were 230 enterprises receive the Equitization Decision ) As data synthetictical from Ministry, local, State General Corporations (SGCs) 91, whole country has 2,176 SOEs with state capital nearly 260.000 bil VND in currently From now to the end of 2010, 1,500 SOEs will be converted into

equitized firms And in the end of 2010, whole country will have 554 SOEs, including: 26 cooperations, general companies with large scale; 178 enterprises activities in security, defence, manufacture, supply products and essential services; 200 farms and afforestation yards; 150 firms are member of corporation, general state company (source: National Electronic Media)

1.2.2.3 Experiences in equitization in some countries

Dependent on the history formation, the level of development and the objectives of a country, as well as the enterprises’ scale, the equitization and privatization in each country have the specific characters

1.2.2.3.1 Privatization process in England

It can be said that the United Kingdom of England is the first country to implement the privatization and it is also in this country where privatization is asserted as an orthodox measure to reduce the national budget burden and to bring about the relations between the state and private economic sectors

The privatization process in England can be divided into three stages:

• From 1979 to mid-1984: this is the stage of small privatization, that means, only small-scale SOEs are converted to private economic sector The main method is to sell the enterprises to reduce the need of loans in the state economic sector

• From mid-1984 to end of 1987: the privatization program is implemented by increasing the quantity of share-buyers

• From 1988 up to now: to sell the public economic branches, to enhance the competitive capacity of these branches

In order to realize the privatization program, the Government of England has carried out several forms simultaneously: to offer openly to the public, to sell

to the private individuals, Together with the determination of different kinds of shares at different prices, the State also decides the ratio of shares to be sold to whom and at what quantity

In addition, in the privatization process, the government of England applies the priority policy: the public could buy shares and pay gradually; those who really want to invest in the company shall be compensated, for example, 1 share is compensated for those who hold 10 shares in 3 years; especially for the workers in the privatized enterprises, they are distributed free a number of shares and could be allocated free another number of shares if they buy a certain quantity of shares…

Thanks to such priority, the privatization in England has increased the quantity of shareholders significantly Until 1991, there are 11 million shareholders (equal to 24% of the grown-ups, while only 7% in 1979)

The privatization process in England is not only a process of converting state ownership to private one but also a process of forming the mechanism of readjusting and controlling the privatized enterprises’ operations In order to implement this policy, the government stipulates the “gold” shares in some companies and forces them to provide in the company’s charter some specific articles and to be unable to change these articles without the agreement of those who hold these “gold” shares

The government holding of these special shares are for controlling the company structure, without intervening in the concrete management

1.2.2.3.2 The privatization implementation in the Federal Republic of Russia

Privatization in Russia is now considered as the central part of economic reforms in order to create a large stratum of private owners

To realize this policy, Russia has carried out an impetuous program with the main points as follows::

• To sell a majority of shares (51%) to the managers and personnel of the privatized enterprises at the much reduced price

• To sell a small part (29%) to the public reserved for the grown-up citizens

• To sell the remaining part (20%) under the forms of auction paid in cash or of investment bidding

The outstanding point of the program is that the State accepts a great concession to the managers and the personnel of the privatized enterprises However, this character has led to the prevention to mobilize new source of capital The new investors are reluctant to invest in these enterprises if they see the differences in action plans between the managers and other shareholders

In the Russian situation at that time, the economic reformists have accepted the privatization with the control of the managers and personnel rather than without privatization

Therefore, the privatization program in Russia is still being a catalyst for the widespread changes in the economy, in other reforms in the transition period

to the stability and the development of infrastructure and human resources

1.2.2.3.3 Equitization of SOEs in China

China has implemented the reform and pilot equitization of SOEs since the years of 1990, which allows the SOEs to issue shares/bonds and mobilize capital in the domestic securities market to convert into shareholding companies

In parallel with the equitization of the SOEs, China officially opens two securities markets in Shanghai (1990) and Shenzhen (1991) The capital

mobilization by issuing enterprise bonds registered at the local securities market has got the good results In 1999, Hong Kong was returned to China, and Hong Kong securities market has enlivened the activities of buying and selling shares

in China

To create the legal basis for the establishment of shareholding companies limited, in 1992, China promulgated two regulations: the Standard Opinions on Companies Limited by Shares and The Trial Measures on Share-Formulated Enterprises These two regulations are also applied for the joint venture companies According to the regulations, the joint venture companies are allowed to be converted into shareholding companies and to issue shares on the local or world securities markets (B-shares issued on Hong Kong and Shenzhen securities markets; H-shares on Hong Kong securities market; N-shares on New York securities market)

It needs to emphasize the point that China’s permission of the conversion

of SOEs to shareholding companies is a measure to mobilize capital and is not a privatization measure of SOEs

According to the above regulations, foreign investors could buy B-, H-, or N-shares issued by Chinese companies, irrespective of the issuing SOEs or joint venture companies Through such capital mobilization, the enterprises have converted into the foreign invested shareholding companies

1.2.2.4 Particulars of FDI enterprises’ equitization

Foreign invested shareholding company (FIS Company) is also a matching company, with the basic particulars of a shareholding company in general as presented in part 1.2.1 At the moment, the form of FIS company is stipulated in most countries of market economy Regarding the developed

capital-countries, shareholding companies are very popular, especially the large-scale and multinational companies

The conversion of certain foreign invested enterprises in Vietnam into Shareholding Companies aims to:

1 Increase the operational efficiency of foreign invested enterprises, improve mode of business management;

2 Mobilise capital from foreign and domestic investors into the investment in the renewal of technology, the creation of jobs and the development of enterprises;

3 Diversify investment forms and improve the investment environment

to further attract foreign investment;

4 Provide further product for the Vietnamese stock exchange, contribute

to impulse stock market of Vietnam more and more development;

5 Create condition for domestic investors have more opportunities to participate co-operation with foreign investors; contact and gradually learning business method in international rules

1.2.2.5 Experience in the implementation of FDI enterprises’ equitization in

China

FIS company is a mixture of a shareholding company limited liability and

a FDI enterprise In China, according to Provisional Regulations on the enterprise conversion to shareholding companies limited liability, the FIS companies shall enjoy the tax priorities and other priorities stipulated in the Law

on joint venture companies if the shares owned by foreign shareholders are not less than 30% (of the company issued shares)

To overcome the unclear legal state of FIS companies, in January, 1995, China promulgated the Provisional Regulations on FIS companies limited to form

a legal basis for the formation of this kind of company This regulation is set up

on the ground of Law on Enterprises promulgated in December, 1993 and other relevant laws on the forms of foreign investment

According to the above regulation, the FIS companies limited liability are established by the following ways:

• •To newly establish by one of two ways:

- To be formed by the founders, or

- To openly mobilize capital

• •To convert from the FDI enterprises;

• •To directly convert from shareholding companies limited liability by issuing shares to foreign investors

• •To convert from the companies issuing B-, N-, or H-shares

The FIS companies limited must meet the following requirements:

• •To have at least five founder, of whom there is at least one foreigner

• •The chartered capital must be at least 30 million Chinese currency unit (equal to USD 3.6 million), in which the foreign shareholders must buy and own at least 30% of chartered capital to ensure the state of FDI companies with the priorities granted for this object

• The assignment of founding shareholders’ shares could be done only after three years from the time point converted into shareholding company

From October, 2001, China allows FDI enterprises to be listed on China securities market if they are converted to shareholding companies

For the listed shareholding companies, foreign investors need to hold at least only 10% of chartered capital and without restriction on the maximum number It is noted that when listed, if the foreign investors’ capital is lower than 30% of chartered capital, the FDI enterprises must realize some necessary steps

to convert to local companies The converting steps include the change of tax and legal aspects such as tax priorities, the period of tax exemption or tax reduction,…