The Vietnam government has abolished the foreign ownership limit of 49% for public companies, with the prime minister signing a decree to that effect on June 26. The rules come into effect on September 1, after which international investors can fully own domestic listed firms, except those in certain sensitive sectors.
“We’ve been waiting for this change for a long time,” said Manfred Otto, an associate at law firm Duane Morris in Vietnam. “The possibility of 100% foreign ownership is beyond our wildest dreams as we were just expecting a relaxation of 60%-70%. The new rule opens doors for a lot of foreign money.”
The restrictions have been a big barrier to developing Vietnam’s capital markets as room for more foreign investment has always been limited. There are 31 companies whose foreign ownership has already hit the 49% limit, and another 10 firms are nearing the cap.
These firms, accounting for roughly 30% of the market capitalisation of the Vietnam exchange, are considered the crème de la crème — making them highly sought after by the international community, but hard to get hold of.
Vietnam’s move to open up its markets to outsiders has been called a milestone, especially as the measures have been in the works for around three years. Add to that the performance of the country’s indices and it’s no surprise that foreign investors are salivating for more. The benchmark Ho Chi Minh index has provided returns of nearly 9% in the past year, while the smaller Hanoi index has advanced nearly 15% — outperforming many of their regional frontier peers.
“The move is very positive and shows a big change in the philosophy of the Vietnamese government to the stock market,” said Tuan Le Anh, head of research at fund manager Dragon Capital. “The market is growing, the macro environment is good, the equity market is at a discount to its regional peers and the currency is strong. So why not open the market now?”
Lofty ambitions
While the country is hungry for more foreign inflows, easing up on foreign ownership rules form part of a bigger plan. Index provider MSCI classifies Vietnam as a frontier market but the country has ambitions to get into the MSCI emerging market index, said Anh. By raising foreign ownership limits, it is moving a step closer to achieving that goal.
The country has been on a drive to open up. Early last year, the government started to push state-owned enterprises and banks to execute IPOs, and recently put together a list of firms it wanted to monetise. It has a pipeline of around 340 SOEs to privatise by 2017, worth a hefty $25bn.
The numbers are daunting, but some think the lifting of limits on foreign ownership will help stimulate the IPO process.
“This will incentivise those companies that have previously hesitated to list to do IPOs,” said Duane Morris’s Otto.
Investors however will not be able to get their hands on all listed stocks in Vietnam. Ownership of banks and financial institutions is still capped at 30%, while limits are also imposed on firms in sensitive sectors such as telecommunications and defence.
Businesses operating under international treaties or pacts made by Vietnam with entities like the World Trade Organisation (WTO) or under the Trans Pacific Partnership will also be excluded from seeking 100% foreign investment.
But there is some concern that while foreign ownership has been liberalised, restrictions will be imposed on more sectors — which is where the introduction of non-voting depositary receipts (NVDR) is critical.
As part of the changes, NVDRs will be allowed for restricted companies, which will let foreign investors own equity stakes in firms that have already reached the ownership cap, but without any voting power. This is a big positive for industries that will not be completely opened up.
“If you look at Thailand, they allow foreigners to buy stocks without any voting rights,” said Tuan. “And investors don’t care about voting power because equity ownership at least gives them a way in to the market.”
No mad rush
Graeme Cunningham, head of Indochina research at KT Zmico, said he was optimistic about the changes. If popular large cap stocks had no room to increasing foreign investment, he said, investors typically had wait for a big block sale to hit the market, and would then shell out a premium over the market price to get their hands on the stock. With the new rules, that problem could be solved for some stocks, he said.
But the extent to which companies want to open themselves up is at their discretion — and because of this, Cunningham was sceptical of there being as big a rush as people might expect.
“Theoretically they can [open up fully], but how many will want to?” he said. “They could lose management control because they will no longer be the main shareholder. So the good and popular companies may not necessarily go for it.”