Toward a well functioning securities market in vietnam

LIST 0 F ABBREVIATIONSATSs: Automated Trading Systems CEO: Chief Executive Officer CFO: Chief Pinancial Offícer CEPD: Council for Economic Planning and Development Taivvan CSRC: China Se

BOCÌGRÂL DIB SRTATĨON

Y k ' Ỵ' ” ' * V y ' ~ í r • •/•

a _ Ậ L Ị M á V E E â _ _ _

DOCTORAL IÌISSERTATION

Nguyen Thi Anh Van

SUBMITTED IN FULFILLMENT 01- THE REQUIREMENTS

FOR TI 1E DEGREE 0 F DOCTOR 0 F LAWS AT THE NAGOYA UNIVERSITY

G R A D U A T E S C H O O L 0 F L A W April 2 0 0 0 - M a r c h 2003

ACAOEMIC ADVISKR: PROKKSSOR 11AMADA ìMICIIYO

.IAPAN

D e c e n ì b c r 2 5 , 2 0 0 2

DOCTORAL niSSERTATION

TOWARD A WELL FUNCTIONING SECURITIES MARKET IN VIETNAM

Nguycn Thi Anh Van

SUBMITTED IN KULPILLMENT OF THE REQUIREMENTS

FOR Tỉ 1E DEGREE OF DOCTOR OF LAWS AT THE NAGOYA UMVERSITY

GRADUATE SCHOOL OF LAW April 2000 - March 2003

ACADEMIC ADVISKR: PROPESSOR HA MA DA MICHYO

S UB-ACADEMI C ADVISERS:

ASSOCIATE PROPESSOR NAKAHIGASIII MASAPUMI

& ASSOCIATE PROFESSOR PRANK 1ĨENNETT

research guidance \\ hicli enables me to develop the theses o f the đissertation, for her time reading its earlier versions, and for her discussions and comments I am also indebted to Professor Nakahigashi Masaíumi for his comments on the earlier drafts of

the paper, and his classes on Corporale Law where I acquired knowledge of the

Japanese and American law of corporations, which vvas very much helpful for my rcsearch I am gratetul to Professor Prank Bcnnett for his guidance, which enabled me

to shape the thesis statement and lay dovvn its basic plan at the time ỉ was altcnding his

class on Law and ỉts Social Context, and also for his comments on the earlier drafts of

the dissertation I am ihankíul to Professor Morigiwa Yasutomo and Professor Mastuura Yoshiharu for their classes from which my paper vvas benefited I would also like to thank Mr John Francis Drennan for his assistance with the linguistic aspects of the paper All errors and omissions remain those of mine

Science, Sports, and Culture (Monbukagakiisho) for their sponsorship of my research I

YVOuld a l s o l ike to I h a n k t he V i e t n a m c s e .lusti ce M i n i s t r y a n d Ma noi L a w U n i v e r s i t y íor iheir support, which enabled me to complctc my research I am greatly indebted to the Poreign Student Advisor, Ms Okuda Saori, ỉbr the advice and Help 1 received from her írom time to lime, so lliat I could overcome diíTiculties during my stay in Japan I am

a l s o g r a t e í u l t o t h e l n \ Y L i b r a r y S l a l T l b r i h c i r k i n d n c s s a n d p a t i e n c e i n g u i d i n g m e a s t o

how to makc use of reíerence malerials and olher library íầcilities when I fist came to the Građuate School ol Lavv Abovc all, I vvould 1 ike to thank my parents, my husband, daughter, and sisters, \viihout vvhose continued lovc and support this thesis would never have been vvritten

Ngu ven Thi Anh Van

Nagoya University

Graduate School oi’ l.a\v

-lapan

Dccember 25, 2002

TABLE OF CONTENTS

AcknowIedgcment ii

List of A b b re v ia tio n s ix

INTRODUCTION 1

CHAPTER I: The Economic System and the Nccd for a Sccuritics Markct in Victnam 6

I An Overvievv of the Historical Devclopmcnt of the Economic System in V i e t n a m 6

1 The Economic System before the Open Door P o lic y 6

2 The Economic System aíler the Open Door P o licy 10

II The Nced for a Securities Market in Victnam 15

1 A Securities Market and Long Term Pinance for Businesses 15

2 A Securities Market and the Promotion of the Equitization Process 17

3 A Securities Market and the Mobilization of Funds from Domestic and Poreign S avings 19

III The Devclopment of Sccuritics Regulation in Victnam 20

1 The Introduction ofSecurities Regulation 20

2 An Overall Appraisal of the Corner Slone of the Securities Rcgulation; Dưcree 4 8 /1 9 9 8 23

CHAPTER II: VVhcther llie Disclosure Rcquircmcnts Promotc Cood lnformation FIow 28

I Public OlTcring and Listing Proccss Iindcr tlic Currcnt Securitics Rcguíation 29

1 Public OtTering 29

2 Listing P ro cess 33

II VVhcther the Currcnt Disclosure Requircmcnts cnsurc the Availability, Timclincss, and Adcquacy of Inĩormation 35

1 Iníòrmation Disclosure Requirements under the Existing Regulation 35

a Disclosure bv IssuiníỊ C om punies 36

a ì Public ()/ferinq D isclosiire 36

(1.2 P e r i t ì d i c D i s c l o s u r e 3 9 U.3 Timcly D isclosiire 4 0 U.4 Discỉosure ul the Request tìf Eilhcr the s s c or u Securilies TrculiniỊ C e n ter 42

b T n i d i n ạ I n / o r m c i l i o n D i s c l o s i t r c R ư q itire m e n l.s xvith R e s p e c l lo S e c u r i í i e s T raclinịỊ C ơ n i c r s 43

c ỉn /o n n a lio n D iscỉo su re in Tciulcr O Ị ỳ c r s 4 4

2 Whether the Accounting and Auditing Regulation Well Supports the

CI Whether or noi the Existing ỉnỊormaúon Disclosure Requirements

have been adequately en/orced 57

b What are the Altitudes o f the 'Trading-Fỉoor-Ready Companies ’

Towards the Current Information Disclosure R e g im e? 61

4 How Does the s s c R e a c t? 64

III Whether the Scopc of the ỉnformation Disclosure Regime is

2 What Might be the Consequences of the Narrow-Scope-Disclosure

R egim e? 67

IV What should bc donc to Achievc bettcr Outcomes 1’roni the

Inibrmation Disclosurc Regulation? 70

1 A Call for Improvement of the Disclosure Requirements applying to

2 The Necd for Disclosure Requirements Applying to Companies

Whose Securities OiTerings do not Fall Inlo the Purvievv ofthc “Public

3 The Need to adopt Comparable Accounlinu Rules and Independent

A uditing 75

CHAPTER III:

VVhethcr tlic Anti-lVaud Kcgulation can Fostcr a Hcalthy Markct 79

I The Currcnt Auti-iVaud Rcgulation and the Prcvention ()f

Manipulativc and Dcceptive Practices 80

1 Insider Trading Regulation and the Prevention of Short-swing

T ra d in g so

3 Misinibrmati on Regulation and the Prohibilion o f O m i s s i o n o f

I n lb r m a t io n 8 9

II The Existing Anti-fraud Regulation and the Promotion of a Liquid

and Healthy Markcl 91

1 Should Short Sales be Totally Prohibited? 91

2 Should Extension of Credit and Lending Securities (Margin Trading) be Entirely B an n e d ? 97

III The Lack of Lcgal Bases for Investors’ Rights of Aetion and for Meaningfully Dctcrrent Sanction against Violations 99

1 No Concrete Legal Bases for Rights of Action against Wrongful C o n d u ct 99

2 Only Administrative Sanctions against Violations 102

IV The Future of the Anti-fraud Regulation 103

1 Strengthening the Antiữaud Regulation and Enhancing the Eníbrcement M echanism 103

a Short-swing Trading should be Put under C o n tro l 103

b Stabilizing Activiíies should be L eg a liie d 104

c Omissions o f Moterial InỊormalion should be P ro h ib ited 105

d Concrete Rights o/Aclion and Meaningfully Deterrent Sanctions for Violations should have Legal Bases in the Securities R egulalion 105

2 Providing the Market with more Supporting Instruments 107

(I, Shorl sale shtìiild nol he totally p ro h ib ited 107

b MaríỊÌn Tracliní' shouỉd be cilltìxvetl within a cerlain ihreshơld 1 0 7 3 Eliminating Technical Deiìciencies 108

a C r e a lin iỊ D e f i n i t i o n s un a N u n ib e r ()fS iỵn iJ ìccm l T e r m s 1 0 8 b Eliminalinq Inconsistencies in DìỊịcrenl Legal T e x ls 108

CHAPTER IV: \Vhethcr Securitics ProfcssionaIs arc Adcquately Regulated 110

I Regulation of Conllicts of Interest and the Safc(y of Pubic Invcstors 110

1 Securities Firms in General 110

2 Brokerage and Dealing Activities can be combined into One Securities Firm in the Absence oTNecessary Regulalion of Contlicls oi' I n t e r e s t 114

II Regulation of the Involvcmcnt of Banks in the Securities Markct 121

1 The Involvement of Banks in Securities Markcts: Overseas Experience - Lessons for V ietnam 121

a The u s E xperience 121

b The Eỉiropean Expcriencc 127

c T h e Jci/)cin E x p e r i e n c e 128

2 Whether an Entire Prohibition of Direct Involvement o f Banks into

the Vietnamese Securities Market will Result in Good O u tcom es 130

III Future Regulation of Securitics Professionals 132

1 The Need for Concrete Provisions Regulating Conílicts of Interest betwcen Securitics Firms and Their C u stom ers 132

2 No Need for Indirect Involvement of Banks in a Number of Securities Business A ctivities 133

3 The Need for More Concrete Provisions Regulating Banks and Securities Subsidiaries 134

CHAPTER V: Whethcr the Exchange Markets arc Well Organizcd 135

I Stock Exchanges and the Securitics Industry: Past and Present 135

1 Mutual Form oíS to ck Exchange 135

2 Corporate Forin of Stock Exchange 137

3 Reasons for Demutualization 138

4 Matters o f Concern about the Consequences of DemutuaIization 142

II The Lcgal Structurc of thc Victnamcse Exchange Markets in Rclation to an Effcctivc Market 145

1 S c c u r i t i e s T r a d i n g C e n t e r s a s N o n - p r o l l t O r g a n i z a t i o n s t h a t B e l o n g t o the s s c 145

2 The Uncertain Legal Structure oi'the Planned Slock Exchanges 150

III A Dcsirable Motlcl for Futurc Cxchangc M ark ct s 154

CHAPTER VI: Whcther the Markct Rcgulatory System can Ensure that thc Sccuritics Regulation vvill bc Wcll Enĩorced 157

I Sccuritics Rcgulatory Systems: A Tlicorctical Analysis 157

1 Securities regulatory system in general 157

2 P u b lic r e g u l a t i o n 159

3 Selí-regulatory System 160

II Employing an Appropriate Rcgulatory System: the Experience of the u s and Japan ; 164

1 The u s Securities Regulatory S y s te m 164

2 T h e J a p a n ' s S e e u r i t i e s R e g u l a t o r y S y s t e m : P a st an d P r e s e n l 168

I I I T Ỉ 1 C C u r r e n t V i e t n a m e s e U c ị Ị u l a t o r v S y s t e m : 11 D c p e i u i c n t P u b l i c

Regulator acting in the Abscnce of an Important Sclf-regulatory

System 171

1 The Absence of an Important Self-regulatory S y ste m 171

2 The SSC: Lack o f Independence, and Being Inadequately empowered 172 a The s s c Structure and P ersonnel 172

b The s s c P o w e rs 173

b.l Rules-making P o w e rs 174

b.2 Administrative P o w e rs 174

IV The Future Rcgulatory System over the Vietnamese Securities M a r k e t 182

1 A Single Public Regulator or a Self-regưlatory System or a Combination of the Two: Which Model should be Chosen for the Future Regulatory S y ste m ? 182

2 What Should Constilute a Self-Regulatory System over the Vietnam Securities M ark e t? 184

CI Stock Exchanges as Self-Regulatơry O rg a n iza tio m 1 8 4 b Other Self-Regulotory Organizations Necessary fo r a Healthy M a rket 185

3 A n i d e a l S S C 186

a IVhat Funn o fS S C is besl fo r Vi e í n a m ? 186

b The s s c Roỉe.s in Enfoixin g S ccu rities Ỉ M W 187

CHAPTER VII: Suggcstions for a Bcttcr Opcrntional Sccuritics Market in Victnam 189

I Pcasiblc Schcdulc for Law Rcform 189

II Enhaneing the Effcctiveness o f a Future Information Disclosurc Rcgimc 190

1 Future Disclosure Requirements Applying to those Who Make a Public OlTering and to Li Steel C om panies 190

2 New Iníbrmation Disclosure Regime Governing Those Whose Securilies OíTcriims do not fall into the Purview oi'the “ Public OỉTering” and Non-listed C om panies 191

3 The Neeci for Comparable Accounting Slanciards and Adequate Auditing ỉlegulation 191

4 Ansvvcrs to the Practical Problems ol'Non-Compliance vvilh Ihe Current Disclosure Retĩim e 192

III Strengthcning the Anti-frau(J Regulation 193

1 Puture Antiíraud Regulation and Entbrcement M e ch an ism 193

a New Regulcition o/S h o rt-sw ing T r a d in g 193

b New Legcil Basis fo r Stabilizing A c íiv ilie s 194

c Prohìbition o f Omissions o f Matcrial Information 194

d New Legaì Bases for Righls o f A ctkm cmd for Sonctions against V iolations 1 94 2 New Supporting Instruments for a Future M a rk e t 196

a Margin Trading should be allo\ved wiihỉn a Certain Threshold 196

b Short Sale shouỉd not be totally p ro h ib ite d 196

3 Eliminaỉing Technical D eíiciencies 196

IV Completing Future Regulation of Sccurities Profcssionals 196

1 Conílicts of Interest Iss u e s 196

2 Banks and the Securities M a rk e t 197

3 Banks and their Securities Subsidiaries 197

V Institutional Rcĩo rni 198

1 A Desirable Model for Puture Exchanue M ark ets 198

2 An Ideal s s c 199

a The Fonn tíf CI Fulure s s c 199

b The s s c 's Powers in the Fulurc 199

3 The Need for a Selí-regulatory System 200

Bibliography 201

LIST 0 F ABBREVIATIONS

ATSs: Automated Trading Systems

CEO: Chief Executive Officer

CFO: Chief Pinancial Offícer

CEPD: Council for Economic Planning and Development (Taivvan)

CSRC: China Securities Regulatory Commission

ECNs: Electronic Communication Networks

E ư : European Union

HCMC: Ho Chi Minh City

IASC: International Accounting Standards Committee

IOSCO: International Organization of Securities Commissions

LSE: London Stock Exchange

NASD: National Association of Securities Dealers

NASDAQ: National Association of Securities Dealers Automated QuotationNYSE: New York Stock Exchange

OTC: Over the Counter

PSE: Philippines Stock Exchange

SEC: Securities and Exchange Commission (United States)

SESC: Securities and Exchange Surveillance Commission (Japan)

SIB: Securities and Investment Board (United Kingdom)

SOEs: State Owned Enterprises

SROs: Selí-regulatory Organizations

SSC: State Securilies Commission (Vietnam)

TONVARD A W E L L FU NC 1ỈONING SECU RIT IES M A R K E T IN V I ET N AM

I N T R O D U C T I O N

In the year 2000, Vietnam witnessed a remarkable event - the birth o f the first securities trading center in Ho Chi Minh City

In fact, the very íìrst legal basis for the issuance o f securities w as created as

early as 1990 by the passage o f tw o legal texts, namely the C o m p a n y A ct and the

O rdinance on Banks, C redit C ooperatives a n d F inancìaỉ C om panies These laid

the legal íoundation for the establishment o f shareholding com panies and shareholding banks In the following years, the governm ent has continuously passed oíher legal rules, in the form o f decisions and decrees that permit the issuance o f shares and bonds by various legal entities The texts implied an intention by the Vietnamese G overnm ent to erect a securities market for the country in face o f the abscnce o f a m inim um legal framework for the operation o f such a m arket at that time

Such an intention was explicitly revealed in 1995 w hen the Preparatory Com m ission for the Establishm ent o f a Securities Market vvas formed One year later, in 1996, ihe iìrst market vvatchdog - the State Securities Com m ission (SSC) - was íbunded, \vilh a manđate lo establish and foster a securiiies market in

the birth o f the slock trading centers - an initial síep in prom oting the (ormation o f íormal stock exchanges in the future Imm ediately after the governm ent had

passed its D ecree 48/'1998 - the core lee.al rules for the operation o í a securities market - the s s c issued D eclsion 127/1998A [Q enable the erection o f securities

trading centers and planned stock exchanges Since the passage o f these governmental lcvel documenls, various rules have been promulgated to give further miiđance in connection vviih them All o f these m ake up the current securities regulation oí Vietnam

Although during thc 1990s, a m inim um leaal basis for the ibnnalion and operation o f thc market had been available, a íormal tradins, center could not be

1 See D e c r e ơ 3 6 1 -T T ạ dated June 20, I 995.

2 See D e c r e e 7 5 - C P dated N o v e m b e r 2 8 , 1996.

' n e Cull naine o f tliis leual text is D ư crce 4tì- I99 8/N D -L ' l \ issucd 0 1 1 J111V 1 I 1998.

1 11 c l'u!l Iianic o l l h i s lciial tcxt is D e c isio n 1 2 7 - 1 9 9 H /O D -Ĩ T , passed 011 J LI ly I 1, 1998.

formed The reasons for Ihat lay in the shortage o f com m odities for the markets5 and in the Asian financial crisis.6 T hus, until the date the first trading center saw the light o f day in July 2000, it had taken almost ten years since the adoption o f the íìrst legal bases for the issuance o f shares in Vietnam.

To date, although the iìrst securities trading center has only been operating for a short period, rules regulating various aspects o f the markets have already been revised several times A num b er o f issues that n eed to be taken into consideration can still be found in the current securities regulation Such issues lie

in the iníorm ation disclosure requirem ents, in the anti-fraud regulation, in the regulation o f securities professionals and in the m arket structure, as well as in the

m anagem ent apparatus o f the markets A nalyzing these problem s and proposing possible solutions are the goals o f this paper To achieve such goals, the paper will

be divided into seven chapters

Chapter 1 includes an introductory discussion on the historical development

o f the econom ic system in Vietnam before and after the 1986 Open D oor Policy in order to argue that a fully-fledged securities m arket is indispensable to economic development in Vielnam First, that is because Ihe increasing nuinber o f newly established enterprises in the last few years, and even the banking system, all demand a fully-fledged securities market as a means to enable them to be well (ìnanced Secondly, a íormal securities m arket is also required to provide market liquidity tor sharcs, vvhich in turn \Vi 11 specd up the equitization process Thirdly, such a market vvill allovv V ietnam to mobilizc íuncỉs from both domestic and

rinally the chapter proceeds lo an overall appraisal o f the current securities regulations and dravvs out mạịor problems thai need to be dealt \vith to achieve a wcll operalional market

securi-ics regulations, vvhere both existina, and potenlial problem s can be found Problcms that stem (rom the regulation, and also those that stem from ihe practical implementation o f such regulation, will be carefully analvzecỉ and evaluated in

Since iníbrmation disclosure requirem ents and anti-fraud provisions are the

m o st signiĩicant com ponents o f securities regulations, these will receive first and second priority am ongst the problem s needing to be dealt w ith in đetail Thus

C h ap ter 2 argues that the current iníorm ation disclosure regulation cannot guarantee that public investors vvill be adequately inform ed The reasons are

tw ofold One is that the disclosure regime fails in ensuring the availability, tim eliness, and adequacy o f iníorm ation The other is that the regulation leaves a

h u g e num ber o f com panies unregulated: com panies w hose securities offerings do not fall within the purview o f the “ public offering”, and non-listed companies

T h ese shortcomings have led to the fact that a large pool o f public investors has faced the danger o f being uninform ed

Chapter 3 argues that Ihe existing anti-íraud regulation cannot foster a tầir and healthy market Thai is b ecause it cannot avert m anipulative and deceptive practices vvhile it deprives the m arket o f instruments that support it well It also íầils to lay down concrete legal íoundations for rights o f action \vhich w ould equip

co m pan y shareholders with necessarv m easures to protect their ovvn interests and those o f their companies Purtherm ore, the sanctions against violations adopted by the regulation are not drastic e n o u e h to ensure that the regulation will be well

en lbrced

Ilegulalion o f securities proíessionals and the lcgal structure o f the exchange

m arket can be seen as the third and fourth m ost important am ongst the said issues and vvill be discussed in Chapters 4 and 5 C hapter 4 studies the current regulation

o f sccurilics proíessionals ll argues thai the deíĩciencies in the regulation oí' conílicts o f interest bet\veen securúies íìn n s and their custom ers vvill put public investors at risk, and that a strici segregation between banking and securities business is nol alvvays wise and rish i

Chapter 5 cxam ines the leaaỉ form oí' the V ietnam ese exchange m arket in rclation to those in other countries and their recent m ovem ents It points out that the ovvnership structure o f the current securilies trading centers and the planned stock cxchanoes m ish l not be appropriate in ensuring an effective market

The m anagem ent apparatus ov er the securities m arket vvill be discussed in Chapter 6 This chapter cựgues tha: Victnam lacks an adequate resulatory system

to enlorce securities lavv; that in thè absence o f a self-regulatory system, a single and dependent public reạulator car.not en sure that securities reaulations vvill be vvell eníorced

Pinally, Chapler 7 will sum up all the suggestions proposed in earlier chapters for improving the existing securities regulation.

While discussing these issues a com parative ap p roach will be employed from time to time, in order to find out acceptable solutions for Vietnam As such, the paper will be presented as a co m parative study betw een the above-mentioned legal issues in Vietnam and those in other ịurisdictions such as the United State (US) and Japan The ways such pro b lem s have been dealt with in these countries vvill be discussed A question w h ich m ight arise is that both these countries are

m uch more advanced compared w ith V ietnam in term s o f socio-economic circumstances, and possibly their leaal cultures also differ from that o f Vietnam,

so why should they bc chosen for com parison? Juslification o f this choice can be made, hovvever, on at least the follo\ving two grounds

First, it is vvell documented that today there has b e e n a tendency towards a convergence o f securities laws in various countries.7 It se em s hard for Vietnam to keep avvay íVom such a tendency That is because the V ietnam ese securities market wi 11 be isolated ỈVom and incom patible with other m arkets that are ready or approaching readiness for an increasingly s,lobalizina trend if its law and regulation are not standardized and harm onized with the olobal tendency This would also mean that the Vietnam ese securities m arket will not be abỉe to compete with other tbreign markets in attracting iìnancia! resources for economic devclopmení in thc country Learniiiíi the way to develop a tailored set o f laws

7 S e e M a r k G i l l e n and P i t t m a n P o t t e r , " T h e C o n v e r g e n c e o f S e c u r itie s L a w s a n d I m p l i c a t i o n s f o r

D e v e l o p i n g S e c u r i t i e s M a r k e t s ” ( 1 9 9 8 ) 2 4 North C a r o ỉ i n a J u u r n a l o f International L a w &

C o n u t u r c i i i l R e g u l a l i o n 8 3 , 9 5 - 1 09 H e r e i n a f t e r , M a r k G i l l e n a n d P i t t m a n P o t t e r

In this A r t ic le , the a u tlio rs c o lle c t d o c u m c n ta ry and e v id e n c e th a i th ere lia v e been a num ber

o f s im ila ritie s beUveen the s e c u ritie s lavvs o f d iffe re n t c o u n trie s ; that a c o u n try 's se c u ritie s la w often lo rro vvs statu to ry p ro v is io n s íYom s c c u ritie s lavvs o ío t h e r c o u n trie s ; and tliat the so u rces for

b o rro v in g seem to be v e ry lim ite d In ịu s tiíy in o su ch s im ila r it ie s and b o rro vvin g s, tlie authors

g iv e a n u m b e r o f re aso n s: (1 ) the lavvs e m p lo y s im ila r s o lu tio n s s in c e t h e r e are no m ore p ractical

s o l u t i c n s ll i an t l i ese; ( 2 ) v v h e r e v e r s e c u r i l i e s m a r k e t s o p e r a t e s i m i i a r i n t e r e s t g r o u p s t h a i s t e m íro m the m a rk e ts can result in p o lilic a l p re ssu re s tliat lead to s im ila r la w s ; ( 3 ) co m p etitive

p re s s ire s to attract in ve stm e n t C a p i t a l can a lso re su lt in s im ila r it ie s in the lavvs; ( 4 ) pressures from the us re g u la to rs vvith respect lo o llie r c o u n trie s vvliere the u s m ie h t se e k to im p ose u s style

securilies la\vs; (5) Ihe g e o gr ap h i c al p r o x i m i t y o f c ou n t r i e s t h e i n đ i í ĩ e r e n c e in l a n g u a g e , o r c l o s e

business o r e d u catio n al contaờts; (6 ) and s im p le c o in c id e n c e s T h e a u th o rs also m a in ta in tliat the conveĩgence o f securities laws from diíTerent juri sdi ct ions ii an ine\ ítable tendency, especially in the in c re a s in g ly globalizini> trend o f s e c u rilie s m a rk e ts a r o u r d the u o r ld

S e e a l s o M a r c 1 S t e i n b c r g , ỉ n l c n ư i l i o i i d / S c c u r i l i e s L ư '■■■ A C o n r e n i p o r a r v a m l C o m p c i r a t i v e

A n a ỉ y ũ s , ( I s t e d 1 9 9 9 ) 2 - 3 T h e a u t l i o r a r g u e s t h a i in a n e x p a n d i n t ì g l o b a l m a r k e t p l a c e ,

s la n d a x li/a tio n o f re g u la to ry rc q iiire m c n ls am o im c o L D ir ie s vsould strengthen investo rs

p ro tec io n; that cro a tin g ureater lia rm o n y in a Ir u ly g lo b al m ir k e t p la c e is re q u ire d

regulating the securities industry from other countries vvi 11 thus save time and energy for V ietnam in its law -m a k in g process.

Secondly, the two countries, ư s and Japan, have the m ost vibrant securities

m arkets in thc w o r ld 8 T h e se markets should be models for other countries, especially for those in the process o f establishing and p ro m o tin g a securities

m arket H ere again another issue that might arise is that both the American and the Japanese stock markets are so big com pared with that o f V ietnam that it m ight not

be a p p ro p ria te to im p o rt re g u la to ry e x p e rie n c e from th o s e tw o countries I-Iowever, one m ight also argue that securities markets, regardless o f their size and location, often trigger sim ilar interest groups, which m ig h t result in similar problem s that need to be dealt vvith by law and regulation F o r example, obviously investors in all big and small markets are all in desperate need o f statutory protection from market abuses and fraucỉ That is because o f the fact that, owing to their ovvn interests: (1) issuing com panies and listed com panies tenđ to conceal material iníorm ation that m ight be harmful to their reputation, which in turn might

fírms tend to use their position o f advantage in accessing inside iníbrm ation and in having better knovvlcdge o f the area, to enter securities transactions to the detrim ent o f outsiders (in the case o f insiders) and custom ers (in the case o f securities íìnns) For these reasons, securities lavvs in m o st o f countries often contain iníbrm alion disclosure rcquirements, antilVaud provisions, and provisions for regulating confìicts of' interest bctvvecn securities ĩirms and their customers

ÍTcqucntly invokcd in this paper, that is not its only source Where it appears relevant to securities lavv reỉbrm in Vietnam, some other jurisdictions such as United Kiníỉdom, Germ any, Svvcdcn, and A ustralia vvill also be visited The aim o f the com parative study is to contribute to the completion o f the legal frame\vork governing the securities market, which in turn can foster a well operational market for V ictnam in the ílilure Given that aim, more advanced iurisdictions seem to be

a betler choice for com parison than those that arc at the sam e level as Vietnam To speed up the im provem ent o f the íìiture market, it may vvell be that nothing is more useful than learnina Irom the experiences o f those vvho have already succeeded in this area

See Mi c hae l .1 Sco\vn "Asia's Bmcrsiiiiỉi Equilies Markets” ( 1 9 9 0 ) Ecist Asiun E xccutive R e porl

8, 8 In this arlicle, it is reported lliat: " beíore the 1990 markct crash, the Japanese stock market

wa s tho lai'” Cst in the \vorld, \viih -40 percent o f world capitalizalion, c omparcd vvith 32 percent for thc Uni t ed State.”

1 The Economic System beíore the Open Door Policy

Prior to 1975, V ietnam had undergone different foreign occupations and

^vartime destruction Since 1955 the country had been separated into two parts:9 ihe N orth and the South ruled by two opposite governm ents (C om m unist Party

G o v ern m en t and American Colonial Rule, respectively) Since 1975, aỉthough the

C o untry has been reuniĩied, its post-war legacy was little m ore than the condiúon

o f an underdeveloped economy, as obscrved by economists:

For m a n y years, our econom y has la n d ed in a serions crisis,

a rapidly increasing in/ỉaíìon, a w eak infra-structure, a big

im balance in econom ic stnicture a n d various difficulties [acing the p o p u la tio n in daily life 10

Until 1986 the Vietnam econom ic system vvas a centrally-planned one

s o v em m en t They were not responsive lo market demand M arket participants in

th e e c o n o m y in c lu d c d Ivvo m a in c o m p o n e n ts : c o o p e r a t iv e s and State e n te rp ris e s

(doanh nghỉep nha nuoc).

The íormer were the second most important co m ponent in the socialist econom y aiter the latter They consistcd oí' small-scale saving and credit cooperatives, supply and m arketing cooperatives, niinor handicraít cooperatives and asricultural cooperatives

The system ol' saving-and-credit cooperatives had bccn in operation since

mainK’ involved larniers, householders and small cooperatives and vvere a means

T o w a r d s a W e J J P u n c t i o n ing S e c u r i t i e s M a r k e t in V i e t n a m : C h a p t e r ỉ

o f supporting thc population during thc revolution o f the V ietnam ese people." These cooperatives were said to be rather strong during the colonial period and their success continued until the early e ig h ties.12

T h e system o f supply and m arketing cooperatives w as íìrst set up in 1955 under the form o f a collective trading enterprise in vvhich ĩarm ers invested in shares involving iheir Products By 1962, this form o f cooperatives had become

w idespread throughout the North o f Vietnam They w ere used to buy and sell

Products bought from state-trading organizations At the present time, the number

o f successíul supply and m arketing cooperatives is quite smalỉ, since m ost o f them have been liquidated or sold to private entrepreneurs.13

M inor handicraft cooperatives have been used as a com ponent o f governm ent-guided strategies for industrial developm ent since the ĩirst five-year plan (1961 - 1965) This kind o f cooperative has the sam e organizational structure

as supply and m arketing co o perativ es.14

By the ti me land reí orm vvas introduced, agđcultural cooperatives had come into existence vvith governm ent support In practice, these were producers' cooperatives established in the placc o f individual ia rm in g 15

engaged in transportation and construclion \vork ỉl vvas reporled that before the Open D oor Policy vvas inilialeđ, Viclnam had more than 30,000 industrial and handicraít coopcratives, 10,000 trading, 200 transportation and 500 construction

in the e c o n o m y Their C a p ita l \vas f u lly fu n d e d by the g o v e r n m e n t fro m the State

b u d g e t on a noin -refu n d basis I f any ex tr a Capital w a s n e e d e d d u r in g their liíetime, they could get loans from state-owned banks Even with the loans from banks, the enterprises did not have to discharge their debts if they incurred a loss In addition, they could enj<oy many preíerential treatments in doing business: they enjoyed a more ad v an tag eo u s tax s y s t e m 17 compared to other business entities in other econom ic secto rs; they had Ihe right to access scarce resources; to have a priority position in e x p o rt and import activities; to have m onopoly p o w e r in a num ber o f

Industries suclh as telecom m unications, railways, transportation, banking and insurance Purlherm ore, production and consumption were conducted according to plans designedl by the governm ent The enterprises did not even have to think o f the quality o f goo d s they should produce in order to make their own markets The governm ent g a v e them consum ers' addresses and they sim ply sold their Products

to those cu stom ers at a price already decided by the g o v ern m en t.18 Even if the enterprises did not com plete the above-m entioned plan, directors did not incur any

conduct their business effectively Consequently, loss-making enterprises were

said lo be profitable T he unproíĩtable enterprises had debts about double their

I 19

C a p ita l.

eco n o m ic grovvth, the m anagem ent mechanism in a centrally planned econom y did not generate expected outcom es

17 Prior to 1990, the state-ovvned s e c t o r and other e c o n o m ic sectors w ere subịect to tvvo different

c o lle c li o n r eg im es Pirst is a turnover and proRl c o lle ctio n re^imc (the term “ tax” vvas not used

f o r t h e s t a t e - o v v n e d s c c t o r ) , a p p l i e d t o S t a t e e n t e r p r i s e s F o r c x a m p l e , t h e “ P r o f i t s D i s t r i b u t i o n a n d

Funds F orm ation R e g im e a p p ly in g to State Industrial Enterprises’' [Che D o Phan phoi Loi Nhuan

trong C a c Xi niihiep C o n g n g h ie p O u oc doanh] pronuilgated under C i r c u ỉa r 1 l.T C /C N A dated

J11 ly 2 2 , 1986; the “S ta te E n t e r p r i s e s ' T u rn o v er CoH ccíioti RetỊÌrne” [Che D o Thu Ọ u o c Doanh]

p r o m u lg a te d under D e c is iơ n /SốYC7'dated Jun 2 1 , 1988 S e co n d is a tax system that consisted o f

turnover tax, proíìt tax, agriculture tax, and c o m m o d it ie s tax, im posed on non-state sectors For

e x a m p l e , the "Reuulation o f Inclustrial-Commercial T a x ” vvas applied to c o o p er a liv e s and

lìo u s e h o ld s tlial en«as>e in c o m m e r c ia l and industrial b usincss ac tiv itie s” [D ie u Le Thua C o n g

Th u o n ạ N q lìie p ] prom ulgated under R es o lu tio n No 2 OO N O/T VQH , dated Jan 18, 1966 This

R e g u la tio n \vas c o n tin u o u sly revised throughout 1 966 -1 989 ; and “Ordinance on Agricultural Tax

o f 1 9 83 " [Phap lenh thue n o n g ng hiep].

18 See: lN ơuyen N « o c Vu, “ C hinh sacli tai tro doanh nghiep duoi tac d o n g cua thue va chi phi pha

sa n ” [ P o l i c y on Enterprise S u b s id y under the Impact o f 1 ’a x e s and Bankrupt E xpenses] (2 0 0 0 ) 8,

Tap C h i N ạ u n H cm ẹ [B a n k in g R c v ic w J 5 2 , 52 In this arlicle, the author also m entions the

production and consiiniption o f thc State ciìtcrp rise s in the cen trally planned econom y.

19 S e e D a v i d o D apice (Marvard Inslitule íor Intcrnational D c v c lo p m c n t), “ VietnanVs Economy:

R e sp o m ses to the Asian Crisis", luip:/Vnsc.nifis.edu \s l itingrcllou s-ccon, visited [)ec 24,

2 0 0 0.

T o v v a r d s a W e l l F u n c t i o n i n g S c c i 1 rit i e s M a r k e t in V i e t n a n i : C h a p t e r ỉ

was the m onetary market The other minor part o f financial markets was the national construction bonds market The bonds m arket consisted o f issuing markets, w hich operated only when the governm ent w ished to raise more funds to meet b u d s e t dcíìcits

In m onetary markets, market participants consisted o f the National Bank o f Vietnam (no\v the State Bank o f Vietnam), 20 state-ow ned banks, credit

cooperatives and socialist saving funds {Quy tiet kiem xa hoi chu n g h ia ) 2]T he

state-owneđ banks were specializecỉ banks operating in điíTerent areas (indicated

by bank's nam e) For example, at this stage, there w ere two types o f banks, namely

1963.23

In the centrally planned economy, the role o f the banking system was to fulfill the Capital allocalion requirements o f the economy As such, there was no separation betvveen the State m ana»em ent íunctions o f the State Bank (the Central Bank) and the trading functions o f the specialized banks.24 Because o f this feature

o f the banking system, it has been reíerred to as the one-tier banking system in Vietnam In Ihis system, the State Bank worked as a com m ercial bank and a Central bank at the same time It had branches and sub-branches located throughout thc country, írom municipal and provincial lo dislrict levels The main tasks ol suclì branches and sub-branches werc to prepare and im plem ent credit and cash p h n s at Ihc direction o f the g ov ern m en l.2' The spccialized banks were actually m crc branchcs o f the State Bank and their operation was subịect to

20 In 1951, thc National Bank o f Victnam vvas established under D ecree No 15/SL ( s i g n e đ by Presideni I lo Chi Minh) dated May 6, 1951 in 1961 il vvas renamed the State Bank o f Vietnam

u n d e r D c v r c e X o 1 7 1 / C P dated October 26, 19 6 1.

1 he system o r Socialist Saving Pimds vvas sct up as part o f the State Bank o f Vietnam to collect savings 1*0111 iiulividuals.

Bank h r Constr ucli on vvas formed under Dccrcc I77/T'I\ ị dated Aprỉl 26 1957.

B ank 1)1' l;orci«n Trade vvas sel up under Decree 155/CP dated Dcc 30, 1962.

http:/Avy\\ ,\ n n v n/inveslỉiient/busincss/busi envi/baiìk_riỉia.ỉìtinỉ, visited Dec 25, 2000.

25 Se e Dicrcc 94 / T l \ dated May 27, 1951 Tlìis Decree \vas replaced by Decrec 171/CP dated

O c t o b e r 26, 1961 (hereinaỉter, Decree I71/CP). Under llìese tvvo Decrees, the State Bank of

V i e t n a m w a s r e s p o n s i b l e for tho i s s u a n c e a n d m a n a ụ c m e n t o f n i o n e y a n d Capi t al m o b i l i z i n g -

l e n d i n g l u s i n c s s

State Baik o f V i e t n a m ' s mobiliziim-lcndini» runction, cerliHed that llie State Bank o f Vietnam vvas a letnl cntity and niì ccononiic onj.auization.

direction from the latter.26 Such direction designed detailed activities for the banks, including the specification o f banks’ borrowers and the determination o f ceiling and floor interest rates Banks could only provide loans for customers appointed by the governm ent at an interest rate íalling w ithin limits also announced by the government Financial transactions m ainly occurrecl between

I n d i v i d u a l s w e r e n o t a l l o w e d to o p e n b u s i n e s s a c c o u n t s a t b a n k s , a l t h o u g h t h e y could borrow money from credit cooperatives to đevelop their household econom y

w ith a limited am ount depending on each individual purpose D eposit and lending rates varieđ depending on the purpose o f borrovving or the legal form o f the

borrcnv ers.27The low est rates w ere often given to State e nterprises Banks' roles

and lìinctions, at this stage, w ere clearly designed to im plem ent the government's econom ic policies, neither for m aking proíìts nor for actually enabling íìnancial

fl ow.

2 Th e Econoinic System after the Opcn Door Policy

aller the Sixth C om m unist Party Congress The relorm focused on a num ber o f socio-oconom ic policies The most notable ones vvere: (1) ovvnership should be divcrsilìed to encoura°e non-state ovvnership and allovv the non-state sector to estahlish businesses Joint ventures betvveen the State, cooperative and private

the so-called "socialist accounting principlcs’29; (3) íòreign investments should be

2t’ S e o D e c r e e n i / C P and D e c r e e 163/CP

A lìe r the p assage o f D e c r e e 6 5 / H D B T0 1 1 May 28, 1986 legal personality o f specialized banks

w a s r c c o g n i z e d for t h e fi rst t i m e ; tliis D e c r e e m a d e a first s t e p in s e p a r a t i n g t h e State

adm inistrative íunction o f the State Bank and the trading lìinction o f sp e cia lize d banks T h is new

d iie e ú o n w a s later again adoplcd in D e c r e e 5 3 / I l D B ' í dated Marcli 2 6 , 1988, vvlìich gave the first

le>>al Ibundation for the estab 1 ishment o f a Uvo-ticr bankiniĩ system ( s c e b c lo w , Section 1.2 o f this chaptcr).

l;or e x a m p le , to promote amicuUural production, lovver-interest-ralc loans vverc 0ÍÌCI1 giv en to

e nlerprises operatiim in ihis arca - lovver compared wilh those g iv e n to enterprises vvorking in other areas; State enterprises cou ld í>el loans vvitli lo u e r interest rates com parcd vvith tliose applied

lo c oop or ative s.

1 liis term ineans "Nevv D e a l”

e c o n o m i c a l l y and n n an cia lly independent basis In other \vords, stale enterprises liave husiness and llnancial autonom y.

IV c viou sly , State enterprises tliat niade a loss could íiel further (ìnancial support from the uovornm ent Under the n c w s o c ia lisl nccouiitinu prineiples, tliey can 1 1 0 longer depend on sỉONciMimcntal llnancial supporl Ratlier, llicv shoukl makc proíìts and have to be responsible for thcir o \\ 11 dcbts.

encouraged Favorable policies and incentives should be applied to Vietnamese living abroad and to ĩoreigners, in order to attract their investm ent and business cooperation into the country; (4) prices shoulcỉ be liberalized U nder this new price policy, the econom ic system should be svvitched from adm inistratively determined prices to m arket determ ine d prices; (5) the financial system should be

o f the specialized banks; (6) offícial exchange rates should be adjusted from time

to tim e so that they w ould closely reílect genuine rates.30

Such renovation aim ed to switch the econom y into a state-oriented market

econom y in order to p ro m o te econom ic growth So far, the O pen D oor Policy has

generated initially en co u rag in g outcomes It is reported that the V ietnam ese social and political regime has been maintained vvhilst its econom y has quickly been stabilized and restored D u rin g 1993, its m acro-econom ic indicators were stable; inílation had been severe, then dropped as low as 8.4% and the budget deíìcit was reduced M o re surprisiimly, V ie tn a m ’s econom y has even been able to recover from the slo\vdown that followecỉ the outbreak o f the regional financial crisis Statistics m ade vvithin the íìrst 6 months o f 2000 show that econom ic growth incrcased bv 6.2%, the h ighest rate during the last 3 years, industrial production grew up to 14.5%, and agricultural production reached a record o f 16.7 million tonnes

the A cl on F oreỉgn In veslm en t in Vietnam (Luat dau tu nuoc n g oai tai Vielnanr,

Act, foreisn investors can do business in Vietnam under three ionns: wholly- foreign-o\vned enterprises, ịoint venlLires and business cooperation contracts Article 2 o f the Act gives definitions oi' three other types o f contract into which íbreign investors may enter to do business in Vietnam Such contracts include

B uild-O perate-T ransíer contracts (BOT), Build-Transfer-Opcrate contracts (BTO), and Build-Transfer contracts (Ỉ3T) Thcsc contracts can be concluded between an

Ít vvas the iìrst tim e another economic sector - Foreign ovvners, rather than State and Cooperative ones - has been le°allv recognized in Vietnam Shortly after

tha:, the Ị 990 C om panỵ A ct (Lual cong tỵ) and the 1990 Private Enterprise Ací

30 S é e Van kiưn D a i ho i D cm ạ lo a n Q utìc lun thu VI [D o c u n ie n ís () f lh e Sixlh N a lio m tl C o n g r e s s o f

(Luaí doanh nghiep tu nhan) w ere passed These legal d o cu m ents provided the

newly-form ed market econom y som e more new types o f enterprises, by permitting the private economic sector to set up businesses under the form o f shareholding

E nterprise A c t (Lnat D oanh N ghìep), which rcplaces the above-m entioned two

statutes, has broadened market participation even further by the recognition o f partnerships and single m em ber limited liabilily com panies It can be said that

since the O pen D oor P olicy was initiated in Vietnam, m arket participants have

been enriched by the recognition o f a multi-sectoral e co no m y in which all economic sectors are equal beíb re the law All com panies, including State enterprises, now have to com pete with each other to m ake their own markets in order to avoid bankruptcy Production has been conducted subịect to the market's

and deĩense reasons

In thc taxation sphere, a turning point occurred in late 1990 w hen various tax

laws were enacted, such as the Turnover Tax A ct (Luat thue cloanh thu), Proỹư Tax

A ct (Luat thue loi tuc), Special C onsum ption Tax Act (Lucit thne tieu thu CỈCIC biet),

and the Im port-export D uties A ct (Lnat thue xuat nhap khau) Since then, a single

diíĩerent econom ic s e c to r s 35 This more or less created an equal business environment íbr business entilies regardless o f their ownership Throughout the 1990s, the tax system hacỉ been progressively improved by the passage o f a number o f nevv tax lavvs and ordinances, and hy the revision and replacement o f other tax lavvs 6

33 It is n e c e ssar y to e m p h asiz e that in V ietnam , the usage o f the term indicating “ business

en titie s’ has been changcd froni tim e to time in legai texts B eío re ỉ 9 9 0 , thc term “enterprise'’

vvas íbrmally used in both governm ental and ministerial legal d o c u m e n ts W hcn the C o m p u n y Act

vvas passed in 1990, the term “c o m p a n y ” vvas first formally used for shareholding and Iimited liability c o m p a n ie s But recently the N ational A s s e m b ly has g o n e back to the term “enterprise”

vvhen ử a í t i n g and cnacliim the 1999 E n te r p r is e A ct Thus, at present, all lavvs governing

com panies in Vietnam use Ihis term H o w e v e r , i f o n e scmtinix.es ihe A ct, this term is not aKvays used in an individual article, vvhen reíerring to all types o f enterprise For exaniplc the 1999

E nterprise A c í uses the lerms "limited liability c o m p a n y ”, 'ksh a reh old in g com pany" and

4tpartne*ship c o m p a n y ” vvhile it uses the term "private enterprise”

34 S e e A p p e n d ix N o 1, B e c r e e 5 0 -C P dated A ugust 28, 1996 on "The Establishment,

R e o r g a iiza tio n , Dissolution and Bankruptcy o f State Enterprises" for the List o f Priority Areas

w h e r e State Enterprises can be established.

35 S e e a*)ove n 17 for the diíTerence belvveen the old tax system and the nevv one.

36 For e<aniple: the Orcìiìiaỉicc on Hiỉ*h Incomư E arnư rs' Tax [ P h a p /cnh ílìỉie (hu n h a p d o i voi

nguoi Cỉ) thu ììh(íỊ) cao], a n d t h e Orc/inancc on I/oiísư (1/1(1 Luncl Tctx [PhctỊ) lưn/ì thue nha c/cií]

vvere pisscd in 1994 and 1991 respeclivcly I lic Titrnovcr Tax Act /Lucil ílìuc d o a n h th u ị and

Law reform concerning íìnancial markets occurred in 1988 when D ecree

5 3 /H D B T dated M arch 26, 1988 was issued by the G overnm ent with the

introduction o f a two-tier banking system In this system, the State administrative functions have been given to the State Bank o f V ietnam , while the trading functions have been vested in specialized banks; and the specialized banks are no longer com ponents o f the State Bank o f Vietnam, rather they have become independent legal entities

This Decree also created two other state-owned banks (apart from the Foreign Trade Bank and the Construction Bank, vvhich was later, in 1981, renam ed as the Investm ent and Construction Bank and then, in 1990, the Investm ent and D evelopm ent Bank) namely the Induslrial and Com m ercial Bank and the Bank for Agricultural D evelopm enl (now Bank for Agriculture and Rural

D ev elo p m en t37) A few years later, the Bank for the P oor38 and Bank for Housing

D evelopm ent in Cuu Long D elta39 were also established, pushing the num ber o f state-ovvned banks up to six

In 1990, D ecree 53/H D D T w as replaced hy Ihe O rdỉnance on the State Bank

o f Vietnam (.Phap lenh N gan hang nha nuoc Viet nam ) and the O rdinance on Banks, C redit C ooperatives a n d F inancỉal C om panles (.P h ap lenh ngan hang, hop tac xa tin dung va cong tv tai chinh) These Ordinances provided the m arket with more paríicipanls by pcrm itting private and íoreien sectors, apart from the State and cooperative ones, to carry out banking business In 1997, these tvvo ordinances

vvcre replaced by the State B ank o f Vỉelncim Act (Lua! ngo n han g N ha nuoc Viet

ncun) and the C redit ỉnstitution s Acl (Luat CÚC to chuc tin dung) respectively.

T h e C redit Institutions A ct even takes a further step com pared vvith thai taken

hy the O rdinance un B anks, Cred.il Coopercilives and P in a n cia ỉ C om panies in

diversiíying the forms o f credit organization Banking business can now be carried out by dilTerent econom ic sectors: state-owned, cooperative-ovvnecỉ, tbreign- ovvneđ sectors, and private scctor'10 under the 1'orms o f bankino, and non-banking institutions

Proĩil Tax A c t [Lua! tlnte lo i tu c ] were replaced by the Value A d d e d Tax A c t [T h u e g ia tri g ia tan g] and C ư r p o r a te Incorne Tax A c t [T h u e thu nhcip d o a n h n g h ie p ] respectivelv.

37 See D e c is io n 2 8 0 /Q D - N H 5 díited October 15, 1996.

38 Tliis bank was formed under D e c i s io n 2 5 2 / Ĩ T g dated Augus t 3 1 , 1 9 9 5 , as a non-profit bank !ts

o p c a t i o n a l purpose is to e l i mi nat e poverty.

39 T i i s bank wa s set up under D c c is ìo n 7 69/T T g dated Sept ember 1 8, 1997.

40 S n c e p r i v a t e c r e d i t i n s t i t u t i o n s a r e n o t r e c o í » n i z e d u n d e r t h e C r e c / i í I n s ỉ i í u t i o t ì A c í , t h e p r i v a t e

seclor can only establish shareholdinii credit institulions For furtlìer inlornialion, see Art 12,

C r e ì i r / n s í i í ỉ i í i o n A c ỉ

The monetary m arket today is no longer coníìned within íìnancial transactions that occur between banks and entities that belong to state-owned or cooperative-ow ned sectors Rather it has been opened to all market participants from different economic sectors T he differentiation in interest rates based on the legal form o f the borrower has also been abolished since 1989.41 However, lending

fro m s ta te -o w n e d b a n k s to State e n te rp rise s s t ill a c c o u n t s for a ro u n d 80% o f alllending in Vietnam 42 It is also noteworthy that interest rates have continuouslybeen controlled by the governm ent In other words, credit organizations have to trade w ithin the ceiling and íloor interest rates announced from time to time by the State B ank o f Vietnam It is worth quoting the World B a n k ’s observation:

ỉn genercil, Vietnam's credit m arket is hig hly distorted as a result o f sub sid ized and directed credit program s, incỉuding the p rio rity given to loans to SO E s (state-o w ned enterprises: author adcled) and to various com m odity p ro g ra m s f o r the purch a se o f rice and other crops fo r e x p o r t4ì

This íầct, together with the collapse o f the system o f the People's Credit Funcỉs in the late 1980s and early 1990s, led to a lack o f public confidence It was reported that:

[T jlìc public keeps an estim oted 45% o f broad m oney as cash

a n d over 50% o f local business transactions are conducted outside o f the banking svsíem ■ • ■ At p re se n t, there are only 10,000 individual bcink ciccounts f o r a p o p ulation o f 7 7

m illion Vietncim conlinues to operate largely as a cash

-1-1 econom y.

In such a situation, public savings have not been able to be adequately mobilized The banking system has missed a areal iìnancial resource vvhich il should use lor econom ic development Capital needy businesses, in turn, have surely íầced obstacles in looking for banking loans

41 See A rticle l.b, D e ã s i o n 3 9 / H D B ' í dated April 10 1989 (prom ulgating “ P o licy on Deposii and

L endine Interest Rates”).

42 Sse "Couiitry C o m m ercia h G uides - FY 1999: Vietnam", Chapter VII: ln vestm en t Cliiuate http://vvw\v.stat e gov/vv\V\v■ ahout s 1 ate/bIIsỉ 11 e s s /c oIìj_ ạuidcs/ 1999/easta.sia/vicl99 ()7hlniI

The other com ponents o f the íìnancial market are non-organized credit

m arkets (which have spontaneously been developed in rural areas) These markets have been operating outside the banking system, am ong individuals, and are oíten referred to as "underground credit markets"

Griffin and Keith's observation might be useful to sum up the situation o f the íìnancial m arket in V ietnam in the 1990s:

It is \videly known that the banking system is inefficient and in

n eed o f reform • • * M o sỉ dom estic investm ent is self- jìn a n c e d or fin a n c e d through in form al credit arrangem ents; the C a p ita l m arket is u n d e r d e v e l o p e d a n d th e c o m m e r c i a l

banking system plays CI m inor role in fm a n c ia l interm ediation.45

II T H E N E E D F O R A SEC U RÍTIES M A R K E T IN V1ETNAM

1 A Securities Markct and Long Term Finance for Businesses

From an econom ic viewpoint, Vietnam is one o f the poorest countries in the world.‘“’ Vielnam has been aUempting to move avvay from this position for more

than a decade, since the Open D oor Policy vvas 1'ìrst introduced The economic

up enterprises As a resull the number o f non-statc enterprises has been rapidly increased

It is estim ated thai vvithin seven years írom the passage o f the 1990

C om pany Act, there vvere more than 35,000 com panies and private enterprises4

Sec G riíĩin Kcith, “T h e M ananem ent o f Structural Acljustmenl and M a c r o e co n o m ic reform in

Vietnam", H u m a n S y s t e m MunugemeiU, ( 1 9 9 8 ) (V o l 17) (Iss 1) < D atabase: A c a d e m ic Search

Elite>, visited N o v 2 2 , 2 0 0 0

‘u’ S e e “ 1998 W orld D ev e lo p m e n t Indicators C D - R O M ”, Woi'ld Bank

h t t p : / / v v e b a c c c s u i i i c e d u / f a c i / l a i i p d l , v i s i t e d M a r 16, 2 0 0 1.

S e e also N orm an B r o w n IV, “The Long Road lo Reform: An A n a ly s is o f l:oreign Investment

Reíorin in V ie t n a m ”, ( 2 0 0 2 ) “25 B oston C o lle g e o f I n te rn a tio n a l C o m p a r a t i v e L a w Revie\v 97,

9 9 In this article the author points out thai V ie tn a m ’s e c o n o m ic and íìnancial framework remains vvcak and und e r d e v elo p e d

47 The term " c o m p a n ie s" liere refers lo shareholding c o m p a n ie s and limited liability com panies

vvhich w er e establishecỉ and operating under the 199 0 ( 'o m p a n v /íc l.

The term “ private enterprises” lierc relcrs to onc-man-ovvncd enterprises, \vhich \vere

e s t é bl i s he d a n d o p e r a l i n a u n d e r the Prìvatu linicrpri.se Acl o f 1990.

established in V ietnam On average, over 5,000 com panies and private enterprises

have registered every year.48 Especially since the day the E n terprise A ct came into

effect, the business clim ate has been improved The p r o o f is that the num ber o f new ly registered enterprises in 2000 almost equals the total nu m b er o f enterprises established \vithin the 9 years from 1991 to 1999 Within the íìrst three months o f the year 2001 an increasing tendency in the num ber o f newly registered enterprises could still be seen There were 4000 enterprises íbunded vvith a total

times the size o f that recorded at the sam e time in 2 0 0 0 49 A m o n g enterprises established in 2000, the n u m b er o f shareholding com panies (excluding equitized

State e n te rp ris e s ), although accounting for only around 4 % (compared w ith 44% for private enterprises and 51% for limited liability com panies), is still bigger than the n u m b e r o f shareholding com panies established in the previous 9 years (from

1991 to 1999).50

form ed enterprises The increasing num ber o f shareholding com panies recently established o nce aeain show s the neecl for a fully-fledged securities m arket to enable those c o m p an ie s to raise íunds from the public and create liquidity for their shares Tlìis is to ensure that shares can be publicly issued, and that the repurchase and resale o f such shares can be easily eíTected

securilies m arket in a real sense The principal vvay for business enlities raising

m ore lìmds \vas to borrovv from banks But cven if the bankins; system had been very vvell tu n ctio n in g , ils capability in providing long term íìnancing vvould have been limited This is because b anks’ íìnancial resources rely m ainly on custom ers’ deposits \vhich can ch an g e considerably, depencỉing on cu sto m ers’ cỉemands

In practice alm o st all shareholding banks in V ietnam have been facing íìnancial consiraints They need to increase their charter Capital Some oí' them

Botli o f the a b e \ e - m e n t i o n e d Ac ts vvere replaced by the 1999 E n te r p r is e A c l on January 1,

2 0 0 0.

',s See “ D e \ e l o p m e n t s in Cớrporate Lavvs in Vietnam: Overvievv o f Legislative Reí brms in

Vietnam", (Apr 21 2 0 0 0 ) ( V i s i o n & Associ at es) M o n d a q Business BrÍL’fìng < Le xi sNe x i s : No n -

u s N e w s >

u See M i n i s t n oi’ P la n n i n g and Investment: "Bao c a o tinh hinh m oi num llm c liicn Lucil do an h

iUỊÍiiep" [ R s r o r i an O n e Y e a r /m plem ư nta/ioii o f the E n te r p r is e A c t\ delivered at the

G o v er nm e ma ! M e e i i n a ( Mar c h 2 8 - 29 , 200 1 ) 5.

50 Ibid.

h a v e gone public to meet their pecuniary needs.51 Clearly, not only enterprises but also banks themselves have been looking for a securities m arket vvhere long term íìn a n cin g can be accessed In other words, an organized securities market has

c o m e to be desired by alm ost every type o f business entity in Vietnam As stated

b y T ran Dac Sinh, D eputy D irector o f the Securities T rading Center, “ We needed

2 A Securities Market and the Promotion of the Equitization Process

Apart from their roỉe in providing long term financing for enterprises, a full- riedged securities m arket w as said to be necessary to speed up the equitization

p rocess since they faciỉitate the liquidity o f shares issued by those equitized enterprises 53 Faced with the problem o f loss-m aking and ineffective State enterprises, since 1992 the V ietnam governm ent had been conducting an equitization program on an experimental basis by the passage o f the tvvo legal

texts, D ecision 2 0 2 / C t 54 and D ecision 203/C T ’.xS Then, four years later, a large- scalc equitization program vvas carried out under D ecree 2 8 /C P 56

51 S e e N g u y ê n Tran Que (ed.), Thi í r u o n g c h u n g khoan: P h u o n g th u c h o a i d o n g v a kinh do an h

[ S e c u r i t i e s M a r k e ís - O p e r a í i o n a l a n d T n u lin g M e íh o d s y, ( 1 9 9 6 ) , 2 3 4 Hercinaíter, N g u y ên Tran

Ọ uc.

52 S c e Paul W iscm an, "V iclnam s í o c k mcirkcl s c c s ỉa\v s ííir l, s ỉ e a d y g r o w i h ' \ ( N o v 17, 2 0 0 0 ) USA

T O D A Y < L e x isN e x is : u s Nevvs, C o m b in e d >

S e c “ VietnanVs Pinance M in isle r says SO E R qu iii/a tio n s M usl G o Pasler", (D c c 24 , 1999)

ASIA P U L S E < L e x is N e x is : Ncvvs Group File, A ll> Hereinafter, ^Vietnam's Pinance Minister

sa y s S O E Equitizations M usl G o Fastcr”

51 T h is D e c is io n vvas s igned on A u g u st 6, 1992, by the President o f the M in iste r s’ Council The

D e c is io n promulgated “T h e R em ilation o f the C onv ersion o f a N u m b e r o f State Enterprises into

Sh a rc h old in g C o m p a n ie s 01 1 an Experim ental B a s is”

55 T h is D c c isio n vvas sig ned on A u g u st 6, 1992, by the President o f the M in ister s’ C ouncil The

D e c is io n promulgated “ A List o f State Enterprises that wi 11 be Equitized” T h e D e c isio n selected

t h e first s e v e n State e n t e r p r i s e s f or e q u i t i z a t i o n 011 a n e x p e r i m e n t a l b a s i s

56 Tlìis Decree w a s issued on M a y 7, 1996, prom ulgating "The R egulation o f the C onversion o f a

N u m b c r o f State Enterprises into S h areholding C om panies"

D e c r e e 2 8 / C P vvas later r evised by D e c r c c 2 5 / C P dated March, 2 6 , 1997, and in 1998 both o f

these D ec r c es vvere replaced by D e c r e e 4 4 - 1 9 9 8 / N D - C P dated J11 ne 2 9, 1998 (prom ulgating “The

R egulation on tlie C o n v e r sio n o f State Enterprises into S h a re h o ld in g C o m p a n ie s ” ), hereinafter,

D e c r c e 4 4 / ỉ 998.

A r t i c l e 2 Decree 44/1998 d e ỉ ì n e d t h e g o a l s o f t h e e q u i t i z a t i o n p r o g r a m : ( 1 ) t o m o b i l i z e

Capital from the p ubl i c, t r a n s f e r t e c h n o l o g y , c re a t e j o b s , d e v e l o p e nt e r pr i se s , e n h a n c e c omp e t i t iv e

capabilily and reíòrm enterprises' structure; and (2 ) to create opportunities for e m p lo y e e s lo

b ec o n ic the co m p a n y ONvners, to reform c o m p a n y nianaiie ment m eclianism , and so 0 1 1.

State enterprises fell into three ca tegories for the purpose o f equitization T h e ílrst category

c onsistcd oi' not-for-profit enterprises operatiim in s o m e speciH ed areas shall not be equitized

The sc c on d c onsisted o f enterprises to be cq u itiz ed , but atìer bciim equitized, the State must be a

I he latesí legal r u le s that govern the e qu itization o f State en terprises has

recently been released under D ecree 64/2002.5 The D ecree states the goals o f the

equitization program First, the program aims to enhance the effectiveness o f and com petitiveness amongst enterprises; and to diversiíy enterprise ovvnership, and to

im p ro v e enterp rise g o v e m a n c e so that enterprise assets a n d tho se o f the State will both be used effectively Second, the program aims to m obilize both domestic and forcign savings in order to modernize technology and prom ote enterprise developm ent Third, the program is designed to strengthen the oversight o f investors over the enterprises and to harmonize the interests o f the State, enterprises, and investors.58

D ecree 64/2002 does not explicitly classify State enterprises for the purposes

o f equitization as its predecessor, D ecree 44/1998, dicỉ R ather it deĩines four ways

for equitization, as follows By the first vvay, the w hole Capital the State has invested in enterprises is to be maintained while new shares will be issued to raise more funds for the future equitized enterprises The second w ay allows the sale o f part o f the Capital the State has invesled in enterprises T h e third way permits the

com bines the second or the thircỉ way o f equitization with the issue o f new shares

Vietnam has thus been in the process o f the equitization o f State enterprises 1'or a dccadc The equiũ/.alion might promote the development o f thc securities

m arket hy providing them with more commodities Hovvever, the equitization

market placc thai enables the liquidity o f such special com m odities The problem would be more serious vvhen a large number o f State enterprises is equitized Then, the absence o f a 1'ormal securities market vvill make it even m ore diíĩícult for shares to continue to be purchased and sold For the time being, the problcm has not yet arisen, because o f the modest num ber o f equitized enterprises It is estimated that by December 1999 the num ber o f State enterprises throughout Vietnam that had been equitized vvas 167 This tìgure accounts for only 40% o f thc 1999 target and shovvs the slow speed at which the equitization prooram has prog,ressed

cont rolling shareholder o f each enterprise The t h i r d consisted o f enterprises that need to be equitized or converted into otlier types o f ovvnership In this group, the Government need not be a

controlling shareholder For íurther information, s c e Appendi x, D e c r e e 4 4 /1 9 9 8

' 7 This De c r e e vvas issued by the Government on June 29, 2 00 2 and has c o m e into force since the

15'1, day after the issuing date.

58 S e e A l t 1.

5; F o r l u r t h e r i n l b r m a l i o n s c c “ V i e t n a n V s P i n a n c e M i n i s t e r s a y s S O E E q u i t i z a t i o n s M u s t G o

F a s : e r ,\ a h o v e 11 5 3

O f course, a fully-fledged securities market is not the only factor that can prom ote the equitization program Some other factors include the government eíĩorts in speeding up the program , the willingness o f the incum bent m anagements

cannot deny positive impacts generated by the existence o f a íormal securities

m arket on the success o f the equitization process

3 A Securities M ar k et and the Mobilization of Funds from Domestic and Foreign Savings

A formal securities m arket is necessary for the developm ent o f a newly

em erging market econom y It gives mo re possibilities for investm ent projects to be funded, which are, in turn, able to expand the industries It broadens the chances for local com panies to raise íìinds by having access even to household savings As noted hy economists:

A s fo r an underdeveloped econom y in Vietnam, econom ic grow th a n d developm ent mean industrialization and

m odernìzalion fo r the country C apital d em a n d has thus been increasing day by day This dem and calls f o r m edium and long-term /ìn a n cin g providecỉ by sp ecia l inslitulions, one o f

\vhich is a securities mcirket An org anized securities market

\vill q uìckly prom ote Capital rnobiliiaíion, xvhich in turn will

p ro m o te the incỉustrialiiaíion o f the con ntry 60

In addilion, such a m arket can even play a signitìcant role in creating

as ịust aĩter the O pen D oor P olicy was initiated, the 1987 F oreign Investm ent A ct

eKternal íìnancial resource, into V ietn am /’1 Movvever, the Act and even tlie cuitent

6(1 S e e N g u y e n Van Luan (et al.), a b o v e n 10, 124.

u' The POreiạn ỉn v e s tm e n t A c l oi' 1987 gave generous tax incentives to foreign investors

B i l c r p r i s e s vvitli ĩ o r e i g n i n v e s t e d Capital could enjoy lovver tax rates com pared vvilh tliose a p p l i e d

u d o m e s l ic enterprises Por^example, profil lax rates applying to íòreign invested cnterprises vvcrc I 5% and 25% ( s e e Art 2 6 ) (these ílgures can be contrasted to 30% 40% and 50% profit ta.x

n te s ap p ly in g to d o m e s tic enterprises: se e Art 10 the PrọỊìl Tux A c l o f 1990) Where foreign

itvcstors reinvested part o l'p r o fit s dcrived Irom llieir business conducted in V ielnam , tliey were eititled lo proíìt tax refund correspoiKlinụ lo thc ainount o f tax vvhiclì w a s already paid for the

p o l ì t s reinvested (seo A n 32) Foreit>n investcd cnterprises vvere also able lo e n ịo y other tax iic c n tiv cs such as tax liolidavs, tax reduction and so 011 (se c Art 27).

Foreign Investm ent A ct can only activate one o f the channels through which

íòreign Capital (FDI) can be invested into Vietnam A nother potential channel, a

had been missing Obviously, not all íbreign investors seek to invest their money

by running a business themselves Rather, many o f them look for an indirect way

o f investm ent through w hich their money can generate profíts through dividends

or interest derived from corporate shares or bonds they own In such a case, a formal securities market will be an ideal place for them to realize their investment desires, since ihe purchase, sale, and repurchase and resale o f shares and bonds can be effected In the absence o f such a market, the country apparently misses a signiíìcant external ĩinancial resource, which would otherw ise be mobilizềd for econom ic development

III T H E D E V E L O P M E N T OF SECƯRITIES R E G U L A T IO N IN V IET N A M

1 The introduction of securitics regulation

The starlins, point for the development o f securities regulation, as mentioned

earlier, can be traced back as early as 1990 vvhen the íìrst C om pany A ct and the

O rdinance on B anks, C redit Cooperatives and F inancial C om panies were

ađopted, with the recognition o f shareholding companies and shareholding banks

Then in 1992, the government made a íurther eíTort in issuing D ecision 203/C T,

p u rsu a n t to w h ic h the n r s t g ro u p o f se v e n State enterprises w a s s in g lc d out for

convcrsion into shareholding companics through the sale o f equity

In 1994, a considerable number oi' lee,al documents concerning the issuance

o í'securitics vvere passed Started in July 26 when the governm ent passed D ecree

72/CP, accorđing to w hich thc issuance oỉ' three types o f governm ent bonds

(treasury bills whose term is less than one year to maturity; treasury bonds which malure after one ycar; and prọịcct-lìnance bonds vvhose term is more than 5 years) was iniliated Then in Septem ber 17 the eovem m cnl issued a second regulation

The c u r r e n t 1'oreign i n v e s t m e n t lavv still o í ĩ c r s l a v o r a b l e t r e a t m e n t t o f o r e i g n i n v e s t e d

enterprises T he F oreign /n v e s lm e n l A c l o f 1996 (as amended in 2 0 0 0 ) g iv e s tax e xe m p tion and

reduction to foreign inveslcd Enterprises (Alt 2 la) Loss incurred by a íoreign invested enterprise

in the current financial year can be deducled from the enterprise’s assessa b le inco m e o f the

f o llo w in g ílscal year ( A lt 4 0 ) Pacilities and machines thai are imported to constitute im m ovable assets ol" Ibreiun invcsted enlcrpriscs are also exem pted IVoni import tax (Art 4 7 2 ) See also

Deereư 2 4 / 2 0 0 0 - N D / C P dated Jul 31 2 0 0 0 (miidiim the im plem entation o f the Foreign

Invescment Act) Arls 55, 57; and scc C irc u h tr 13/2001 TT.B TC dated Mar 8, 2001 (guiding the

implementation o í t h c rcmilation oTtaxcs uitli rcspccl to tbrcimi invested enterprises), Section II.

(D ecree 120/CP) under which State enterprise bonds and s h a r e s could be publicly oíTcrcd.

In the same year, the State Bank also passecl som e legal instruments to

enable the issuance o f State Bank Bills (D ecisỉon 2 1 1 -Q D /N H 1 dated September

22, 1994) and the issuance o f bonds and shares by com m ercial banks (D ecision

2 1 2 -Q D /N H l dated Septem ber 22, 1994 and D ecision 275-Q D /N H 5 dated

N o v e m b e r 7, 1994, respectively)

In 1995, markets for bidding and for repurchase and resale o f Treasury Bills

and bank bills vvere eslablished under D ecision 8 8-Q D /N H 9 dated M arch 28, 1995 and D ecision 89-Q D /N H 9 (on the same date), issued by the State Bank.

A lthough, up to this stage, a formal securities m arket had continuously been absent in Victnam, nevertheless the prim ary securities m arket was broader than

thai w hich hađ been operating beíbre the introduction o f the Open D oor Policy

On such a securities market, the issuancc oí' governm enl bonds, com pany shares and bonds and bank bonds was conducted.62 A lthough the prim ary market existed,

a num ber o f problems still remained The principal ones were:

(1) There vvas a lack o f an adequate inibrmation disclosure regime Enterprises that souíìhl to issnc shares and bonds had to apply for an issuing license from the Ministry ol' 1 inancc (MOI7) Thcy liad to lì le Ihc Iblknving documents with the MOI': a letter ol' application; the cnterprise charler; a proposed business plan; thc lìnancial slatements o f the most recent three years; and the proposal o f the issuance A lter getting the issuins license iVom Ihe M OF, they merely had to

as num bcr oí' shares or bonds going lo be issued, thcir nominal value, time, and vcnuc 1'or the issuance, and rights o f the securities h o ld e rs 63 There was no provision saying thai either the issuers or ihe M O F vvould be responsible íor disclosing íìnther iníòrm ation that could affect Ihe securities' price; nor was there any provision sayinẹ, tliat continuous and timely disclosure o f iníbrmation was required

62 L e g a l b a s e s f o r this m a r k è t , a s e a r l i e r m e n t i o n e d , h a d been c o n t i n u o u s l y r e l e a s e d s i n c e the

(2) There were neither anti-fraud provisions to prevent m isconduct on the market, nor any speciíìc provision to handle violators o f the regulation o f such a primary market.

(3) There was a shorlage o f professional intermediaries such as brokers and dealers for offering and distributing securities.64 Securities were often issued through the State Treasury, commercial banks and financial companies, or were even issued by the issuing enterprises themselves

(4) A lthough there were legal bases for the issuance o f com pany shares and bonds and governm ent boncls, as earlier mentioned, it was reported that in practice most

o f the securities issued were short-term bonds whose terms were less than one year.65

The intention o f the Vietnamese governmenl to set up fully-fledged securities markets was expressly revealed in the middle o f 1995, when the Prime

Minister issued D ecision 361/T T g to form a Preparatory Com m ission for the

Establishment o f a Securities Market The Commission's task was to study and to draft proposals on the establishment and development o f a securities market in Vietnam Then the year 1996 marked an important event, the establishment o f the State Securities Commission (the s s c - thc public regulatory authority over

securitics markets) under D ecree 75/CP.

Tvvo ycars later, in 1998, a basic legal iramevvork for the operation o f

securilies markets, D ecree 48/1998, and a legal íbundation for the establishment

o f stock trading centers and the planned stock exchanges, D ecision 127/1998,

the currenl securilies regulalions in Vielnam

D ecree 4 8 /Ỉ9 9 S reaulates public olìeiings and the trade o f listed securities

Private olTerings and the trade o f non-listed securities are not subịect to this Dccree

It can be said that all lavvmakine activities throughout the 1990s have shovved the sovernm ent's elTorts in preparinỉỉ nccessary conditions for the birth oi'

64 See Ibr exam ple: Alt 9, D e c r c e 72/C P: this Articlc said that " overnm ent bonds can be issued

tlirough the State Treasury and co m m ercial banks, lìnancial c o m p a n ie s and Insurance companies;

A n 30, D e c r c e Ỉ2Ọ/CP: tliis Article vested in the State Bank o f Victnam a righl to giiide

com m crcial banks and nnnncial c o m p a n ic s in actiim as ai»encies for issuing co m p a n y shares and

bonds; Parts: 1.15.! and II 15, C ir c ii/a r 91-TC'KBN N.

<>? See Níiuven 1 raII Ouo a b o \ o II 5 1, 232.

a íorm al securities market in Vietnam Those efforts w ere íìnally realizcd on July

20, 2000, w hen the íìrst Securities Trading Centcr vvas put into operation in Ho Chi Minh City

2 A n Overall Appraisal of the Cornerstone of the Securities Regulation:

D ecree 48/1998

The cornerstone o f the securities regulation, D ecree 48/1998, was drafted

based on experience learnt from various jurisdictions such as u s , .lapan, Britain,

G erm any, Prance, Hong Kong, Korea, and China

Because o f the com plexity o f activities conducted in securities markets, usually in countries that have seen a long historical d evelopm ent o f such markets, each group o f activities is often governed by a separate act For example in the

u s , securities lavvs consist o f different acts cover different areas such as Securỉties

Act o f 1933, Securities Exchange A ct o f 1934, Investm ent C om pany A ct o f 1940,

Ịn vestm ent A dvisers A ci o f 1940 and so on In Japan, various lavvs compose

securities laws: Securities and Exchange Low o f 1947, T he Law on Foreign

Securities C om panies o f 1 9 7 1, The Law on Tradỉng in P inan cia l Futures o f 1987,

and so on

In Vielnam, thc situalion secms to btí quile dillcrent rhe liighest body ol

is D ecree 48/1998, a governm enlal lcsial rule 1'his Decree covers almost every

aspect o f securities inarkcts IVom tho reoulation o f public oiTerings, oỉ' securities proíessionals and the participation o f foreigners in securities markets, to the

re g u la tio n o f a b u siv e m ark el practices and the State m a n a g e m e n t o f securities

markets It is nccessary lo reemphasize that in som e areas, the Decree merely gives general principles, and as such, niore delailed euidance wili be found in subordinate lesislation issued by Ihc s s c

The Dccree was designed to embrace lour maiII uoals First is to create a íavorable environment for the issuc and Irade o l'secu rities Second is to promote the mobilization o f internal and external long-term tìnancial resources Third is to ensure thai the securities market operates in an orderly way salely, publicly, fairly and effectively And the íburlh is to protect the lawful interests o f investors.66 With such obịectives, the Decree vvas divided into 1 1 chapters, covering 83 articles

(,í> S c e D e c rc ơ 4 ti/199S s cc o n d parauraph.

Tovvards a W eỊỊ Functionin» S c c u ritie s M a rk et in V ie tnarrr Chapter I

Chapter I, titled “G eneral P rovisions”, sets forth the scope o f the regulation

and deíìnes terms usecỉ in the following chapters A lthough the chapter was designed to clarify necessary key terms, defínỉtions o f a num ber o f important term s are still missing

Chapter II, titled “P ublic O fferings o f Securỉties” , is expected above ali to

give a series o f requirements concerning information disclosure imposed on issuers before going public for fund raising However, the chapter has failed to tell issuers that information disclosure is the most important thing to do before a public offering can be conducted Although iníormation disclosure is mentioned several times in the chapter,67 the language o f such provisions cannot gíve the impression to the public that iníbrmation disclosure is significant and should be

m ade before and even after the issue o f securities - to disclose iníbrmation continuously during the time the securities are in circulation

The chapter concentrates on certiíying that all public oíTerings o f securities

to be listed on a íormal trading center must get approval from the s s c 68 after

m ake a public oỉTering o f securities must meet a num ber o f threshold;70 and thatsecurities distribution m ust be done through speciíìed m ethods in a specilìed term.The chapter also em phasizes some administrative measures that can be employedduring a public oỉTeriim, sucli as lo poslpone a distribution and to withdraw an

I • 71

ìssunití, license

Chapter III identiíles the stock írading centers and the planned stock exchaiiRes The governm enl clearly reveals its intention first to set up trading centers, later to be replaced by stock exchanges.72 Some rem arkable points in this chapter include: the recognilion o f a state-ovvned íonn o f stock trading centers73 vvhich m iehl exist unlil they are replaced hy the stock exchanges in the future; the uncertain legal structure of the planncd stock e x c h a n g e s ;74 the silence o f the Decree on cerliiying w helher or not both the stock trading centers and the planned stock exchanges are self-regu!atory orRani/.alions

71 Article 23 allhouulì prov itlcs lor the slock c.xchaimcs does not spcll out thcir torm oỉ

ovvncrship Il is unclear vvhctlicr stock cxchanucs \N i 11 bc ovvned by tlic State or by public 01' by exdianue menibers

Chapter IV codiỉìes securities firms Il spelis out a nu m b er o f conditions to

be m e t 75 and the procedure that needs to be fo llo w e d 76 in order to set up a securities firm It also lays down criteria imposed o n 77 and procedure followed by securiúes fírms' affiliates78 to obtain a practicing license Rights and duties o f securities íìrm s79 and som e adm inistrative measures that m ieh t apply to such ĩirms and their associates80 are also included in this chapter Furtherm ore, the chapter

(tong cong ty) to set up their ow n subsidiaries in the form o f securities íĩrms to

interest issues This is o f im portance to ensure that public investors are adequately protected

Chapter V designs a legal fram ew ork for the establishm ent and opcration o f investm ent funds and fund m anagem ent companies It explicitly states the parties thai are necessary for setting up a securitics investment fund (a fund m anagem ent com pany, a supervisory bank and invesíors).82 u also provides for the conditions83 and procedures 4 for establishing an investm ent fund, a fund m anagem ent com pany and a supervisory bank Rights and duties o f these entities, as well as right o f investors, arc also stipulaled in this chapter.85

Chapler VI, titled “R egistration, C iearing a n d Securities C uslody Services”,

merely gives general principles lor ihese services, sucli as the conlcnts o f such services; conditions beins, met by securities fírms thai providc the services; and the vvay in vvhich custo m ers’ assets arc to be m anaged by those íìrms

Chapter v u lays tiovvn provisions concerning the parlicipation o f tbreigners and foreign entiũes in the securities market A ccording to this chapter, foreign or°anizations and individuals can take part in the Vietnam securities market by purchasing, selling, and tradino, securilies W here thcv seek lo engage in securilies busincss, they vvill have to establish a ịoin-venlurc vvith a Victnam ese parlner and

s ' Sec Arts 45 & 55.

iU See Arts 51, 46 & 5 5 2 , rcspcctivoly.

85 See Arts 47, 56 & 57.

obtain a business license from the s s c 86 Foreign investm ent funds that are seeking to invest into V ietnam ese securitics markets can do so aíter getting an approval from the Prim e M inister and then a license from the s s c 87

C oncerning the percentages o f securities that can be held by 1'oreign investors, there are a num ber o f conílicts Such conílicts will be mentioned vvhile

d is c u s s in g th e State e n t e r p r is e la w in re la tio n to th e o p e ra tio n o f s e c u r it ie s

m arkets.8

C hapter VIII, tilled “P ro hibited a n d R estricted A c tivities” , establishes

regulation o f abusive m arket practices, takeovers and mergers Takeovcr and

m erger can be eíTected provided that those who engage in such transactions are subject to so m e statutory requirem ents such as reporting to the stock trading center and holding a public tendering in accordance with the s s c rules.89

A b u siv e market practices are dealt vvilh in a sim ple manner The cliapler

m erely lists prohibited aclivities It either does not properly cỉeal with some activities or over-regulates other activities Short-sw ing trading, for example, rem ains unregulated vvhile other activities like short selling and margin Iratling seem to be over-reeulated

C hapter IX is titlcd "T he State M anagem ent o f Securities a n d Securiiies

M arkcís" A ccordinu to this chapter, the right to m anage sccurities markcts is

veslecl in t h e G o v e r n m e n t T h e s s c is a State o r g a n thai p l a y s thc State

m an agem en l rolc on behalí' o f ihe Government O ther ministries, governmcntal organs and the people's committees at provincial and municipal levels are responsible Ibr cooperating vvith the s s c in carrying out the stale management

íu n c li o n s in th e fie ld o f s e c u r it ie s m a rk e ts an d v v i t h i n t h e ir ovvn d u tie s and r ig lit s.90

A llhough the s s c is authorized lo oversee securities market in this chapter, its slructure, personnel, and concrete ria,hts and duúes are not speciíìed To have

an entire picture o f the s s c , one will have to look at Decree 75-CP

C h ap ter X aivcs a legal basis íor "Inspection, S upervision a n d Sanclion.s /òr

V iolations" This chapter specitìes those w ho are subịect to the inspection and

s u p e rv is io n o f the s s c 91 Ít als o s p cc i í ì c s the State ors,ans that are responsi blc Ibr

disputes resolution.92 Concerning sanctions for violation, it mercly lists different levels o f sanction and seems to leave such sanctions to be dealt with in detail by other governm ental rules.93

Pinally, like any legal document, the last chapter, Chapter XI, contains

“Im plem entation P r o v i s i o n s Such provisions concern the date o f effect o f the

other m inistries in guiding the implementation o f the Decree

M ore detailed guidance for most o f the chapters o f D ecree 48/1998 is

does not adequately make up for the above-m entioned weaknesses in the Dccree

This paper proposes to deal vvilh major problcm s o f the current securities regulations In the íblloxving chapters, the lìve main ihem es thai wi 11 be discussed are:

(1) Information đisclosure requirements in relalion to a transparent market;

(2) Anti-fraud provisions and a íầir market;

(3) Regulation o f securities proỉessionals in relation to a healthy market;

(4) Lecal structure o f exchanee market and a \vell orsan ized market; and

(5) Markct reeulatory apparatus in relation to en lb rcem en t issues

92 S e e / r t 79.

1,3 S e e Ẩrt 80.

Before discussing the information disclosure regiine, it may be helpíul to have a quỉck look at the public offering process in V ietnam , and also the way in

w hich issuing com panies are listed in a trading center T h e reasons are tvvoíold First, pnblic offering and listing procedures adopted in V ietnam are quite distinct

vvhich sounds stricter than what is adopted elsewhere T h e latter seems to be accom plished either in a lenient or in a slrict manner depending on the ĩiling date94

o f lisling documents vvith a trading center.95 Secondly, both public oíTering and lisling trigger com pany duties in information disclosures T o have a clear idea o f whal an issuer and a listed com pany are requircd lo do to discharge such duties, a pre-underslanding o f statutory public olTerine, and listing is thus required

'M The later lìling date s e e m s to be the inore dirricult procedure an is s u in g c o m p a n y has to face in order to b e c o m e a listed con ip a n y For fiirther iníbrmation, se e S e c t io n I, Su b -section 2 o f this Chapler.

1,5 U su a lly in othcr countries the issuers m erely file a registration statem ent to the State authority

in order to e x e c u te a public issu a n c e (there is no need for a lic e n se ) and to have their securitics listcd 0 1 1 an e x c h a n g e , the issuers vvi 11 have lo apply at the e x c h a n g e and must get approva! from

ít The u s and Japaii are e x a m p le s where the requircmcnis are a lm o st the o p p o site to tliose in

V ietnam

Pursuant to S e c u r itie s A c l u f 1933 s 5, 15 u s c s 77e ( 2 0 0 2 ) , no se c u r itie s m ay be offered

or sold to the public un less registered with the SBC.

S e c u r i l i e s cnul E x c h a n g e L a\v o f Ì 9 4 8 (2001 Japan) Article 4 a ls o says: "A p u b l i c offering

o r p u b l i c s e l l i n g o f a s e c u r ì t y ( ' ’ ' ) s h a ll not be macle unle.ss the i s s u e r híis m a d e re g istra lio n with the P r i m e M in is íe r f o r th e p u b l i c offering o r p u b l i c s e llin g o f a s e c u r i t ỵ • ■ • "

Hoxvever, in order to be listed 01 1 an exchange, for ex a m p le N A S D A Ọ Japan Market, the issuer vvill have to file a listing application vvhich wi 11 g o through a listin g exam ination betore getting approval In sucli an e xa m ina tion, the soim dness o f corporate m a nauem ent, the adequacy

o f c ỉis c lo s u r e o f c o r p o r a t c iníbrm ation, and otlicrs such as the stalus o f the parcnt c o m pany, status

o f any b n sin c ss activitics vvhich are against public inlcrcsts will be lookcil into For rnrther

info m ia tio n , sc c O sa k u S e c itr iliex ExchuiiiỊư: lùicl Book IV.

Ị PUBLIC O F F ER IN G A N D LISTING PROCESS U N D E R T H E C Ư R R EN T

s e c u r i t i e s r e g ư l a t i o n

1 P ublic O ffe rin g

Public offering o f securities is the offer for sale o f securities that m eet some

s tat ut or y t h r e s h o l d s c o n c e r n i n g ( 1) t h e a m o u n t o f e q u i t y Capital o r d e b t Capital o f a company held by the public; and (2) the num ber o f outside investors that purchase such amount A ccording to such thresholds, the issuer has to sell at least 20 percent

o f the equity capital/debt Capital to more than 100 outsiders W here the equity

c a p i t a l / d e b t Capital e x c e e d s 100 billion Dong, t h e n , at l e a s t 15 p e r c e n t o f the equity/debt Capital has to be sold to more than 100 outside investors.96

Under the current securities regulation, public offerings o f securities has to

be licensed by the s s c , except for the issuance o f g o v ern m en t bonđs.97 However, not all o f the issuers can be licensed; only those vvho m eet a num b er o f specified criteria are eligible to apply for such a license These criteria include:

(1) The issuer shall have at lecist 10 billion Vielnam ese D ong

(5) The issuer shall have at least 20% o f equiíy C a p ita l held

by m ore than 100 outside investors;

(6) Founcìing shareholciers o f the issner sh a ll h o ld at least 20% o f the equity Capital o f the issuer \vithin three y ea rs fro m the dale o f com pletion o f the issuance;

(7) The issuer shall have an n n d en vrite r fo r the issuance i f the total volue o f issuing sh a res exceetls 10 billion Vietnam ese Dong.

96 Pursuant to A rticle 2 2 , -Decree 4 8 / 1 9 9 8 , " [ p ] u b l i c o f f e r in g s a r e th e offers f o r s a le s o f

tr a n s /e r u b le s e c u r i t i e s thaI m e e l re q u ir e m e n ts p r e s c r i b e d in A r t i c l e s 6 ,5 a n d 8 2 o f this D e cre e "

A rticles 6.5, and 8.2, D e c r e e 4 8 / 1 9 9 8 lay dovvn requirem ents c o n c e r n iim the am ount o f equitv

Capi t al or debt C a p i t a l o f a com pa ny lield by the public and the num ber o f c o m p a n y outside investors.

1,7 Ibicl, A n 3.

)S Ibid, A r t i c l e 6.