In recent years, Vietnam has been actively promoting equitization of State-owned enterprises (SOEs) to enhance efficiency, transparency, and competitiveness in the economy. This has attracted a lot of interest from foreign investors who see the potential for growth and profitability in the country’s equitization process. However, there are still many challenges and uncertainties that need to be addressed in order to create a favorable investment environment for foreign investors.
Overview
The equitization of State-owned enterprises (SOEs) has become increasingly attractive for investors, particularly due to the significant resources these SOEs hold within the economy. These SOEs account for approximately 7% of total assets and 10% of equity among all market enterprises. In addition, they make up around 25.78% of total production and business capital, 23.4% of fixed assets value, and long-term financial investments among operating enterprises.
Foreign investors in Vietnam’s business and investment landscape typically focus on investing in enterprises within their preferred industries that align with their investment strategies. Moreover, investors place emphasis on the proportion of state capital holdings in these enterprises post-divestment.
The correlation of advantages shared between foreign investors and SOEs that have undergone equitization
Foreign investors have demonstrated the ability to boost the performance of State-owned Enterprises (SOEs) significantly after purchasing shares. This is partly attributed to their contribution in modernizing business governance and providing a wealth of international information, leading to enhanced transparency and growth strategies.
Moreover, when engaging in the management apparatus of these enterprises, foreign investors can introduce technology improvements to enhance competitiveness, expanding markets and increasing economies of scale. Recent evidence highlights promising opportunities for investing in SOEs that have undergone equitization, particularly in key and developed economic sectors.
After 15 years in operation, State Capital Investment and Trading Corporation (SCIC) has divested successfully 1017 enterprises. Especially, in the period of 2016-2020, foreign investors participated in buying SCIC’s capital in various divestment deals with a total value of nearly 10 billion USD, 15 times higher than the book value. Thanks to the participation of foreign investors, the divestment process of large enterprises has brought better results.
Privatization process
The Vietnam SOE reform has undergone three significant phases: 1980-1986, 1986-2001, and 2001 to present. Prior to the Doi Moi era (1980-1986), SOEs and various business models underwent significant changes to transition to a socialist-oriented market economy. In the event an SOE is evaluated by book value, it can be restructured in one of three ways: private sale for investors, IPO, or wholesale for strategic investors.
Valuing enterprises is a crucial step in the privatization process that facilitates price negotiations between the government and strategic investors. Unfortunately, this process can be a bottleneck in the overall process, preventing successful equitization of many SOEs. Without a robust monitoring system for enterprise valuation, state assets can face severe losses. Consequently, this poses a significant obstacle to effective SOE equitization.
Potential hazards associated with buying stocks in state-owned enterprises (SOEs)
Deposit:
Foreign investors who are looking to purchase shares in state-owned enterprises face significant challenges when it comes to deposit regulations. Specifically, these investors must deposit a sizable sum of money in order to register their intention to buy shares, without yet knowing whether they will ultimately make the purchase. This predicament can lead to hesitancy among investors, as they weigh the risks and rewards of participating in the offering.
Additionally, in order to make a deposit, foreign investors must first convert their currency into VND (Vietnamese dong). However, if these investors are ultimately unsuccessful in acquiring shares, they will need to convert their VND back into their original currency, which carries a risk of exchange rate fluctuation and can increase the cost of international money transfers. This risk is exacerbated when transactions involve trillions of VND, as a sudden surge in demand for local currency to exchange for a large amount of foreign currency can have an impact on the domestic money market.
The rate of capital ownership:
Foreign investors buying shares in capitalized SOEs not only face deposit risks but also subject to restrictions on capital ownership rates. In certain industries, there are not clear legal provisions on this issue, leading some enterprises to seek guidance from relevant ministries and agencies – to no avail.
As a result, foreign investors are uncertain about their eligibility to participate in capital sales. While the government’s plan to capitalize SOEs involves reducing state ownership to 65%, leaving 35% for foreign investors, available opportunities for foreign investors to enter the market are scarce.
What notices foreign investors in purchasing shares of state-owned enterprise
First and foremost, foreign investors must evaluate the legal framework governing SOEs in the country they intend to invest in. Some countries have strict regulations in place that may limit foreign ownership of SOEs or restrict the sectors open to foreign investors. Understanding these laws and regulations is key to making informed decisions. Foreign investors must also evaluate the financial position and performance of the SOE in question. It is crucial to considering the company’s revenue, profitability, assets, liabilities, and cash flow before making investment decisions. Investors should also examine the SOE’s taxation policies, as these can significantly affect investment returns.
Governance is another critical factor for foreign investors considering investing in SOEs. It is important to examine the company’s board composition and structure to determine the level of transparency, accountability, and responsiveness to market changes. Investor returns can be significantly affected by taking into account the degree of government influence on company decision-making and operations. It is also essential for foreign investors to evaluate the management strategy of the SOE. Investors should determine whether the management has a clear and effective plan for the business, ensuring profitability in the long-term. In addition, evaluating the management’s capability to adapt to changing market environments and implement innovative strategies is crucial.
Finally, foreign investors should examine the company’s exit options. It is critical to have a clear understanding of the potential avenues for exit, including IPOs, M&A transactions, or strategic sales. Foreign investors must understand the local legal framework, exit fees and taxation, and potential challenges of exiting if finances.
Conclusion
To conclude, investing in the equitization of state-owned enterprises (SOEs) in Vietnam presents challenges and uncertainties, but also offers numerous opportunities to investors. By working with experienced experts who can provide critical guidance on navigating the country’s legal and regulatory landscape, foreign investors can position themselves to capitalize on these opportunities and achieve their business objectives. Though the road may be complex, the potential rewards of investing in SOEs make the effort well worth it.
HMLF is always available to offer assistance in understanding the procedures with authorities.
Harley Miller Law Firm “HMLF”
Head office: 14th floor, HM Town building, 412 Nguyen Thi Minh Khai, Ward 05, District 3, Ho Chi Minh City.
Phone number: +84 937215585
Website: hmlf.vn Email: miller@hmlf.vn
