Vietnam eyes changes to foreign-ownership rules

Vietnam is considering more comprehensive stock-ownership rules for overseas investors than those mooted previously, say sources. This comes amid other regulatory developments that will make the domestic market more accessible by both foreigners and locals.

The plan in March was to raise foreign ownership limits for listed companies to 59% from 49% via non-voting depository receipts (NVDRs). But that has been superseded by something more ambitious, says Bill Stoops, chief investment officer at Ho Chi Minh-based fund house Dragon Capital.

In recent weeks, the authorities have started discussing a scheme whereby companies meeting certain as-yet-unspecified criteria would automatically get 10% "more foreign voting room", he notes. Also, they would be allowed to issue 10% in new non-voting shares to so-called “foreign strategics” if they so wished – a term that is also undefined as yet.

The scheme for NVDRs is still on, but evidently as a supplement to these more recent proposals, adds Stoops.

In March, Vietnam had sent a large delegation to Thailand of senior government officials, say sources. They were there to look at how the Thai exchange’s foreign board works, as the government mulls the long-awaited liberalisation of Vietnam’s stock-ownership rules.

The SSC did not respond to a request for comment by press time.

“Whatever the final outcome, I can see increases in the foreign ownership limits happening – the government has definitely accepted that in principle,” adds Stoops. “All the body language there is positive – officials are talking about how to do it rather than whether to.”

The rise in ownership limits “would be a nice short-term boost for the market if it happened, but Vietnam needs more macro changes for the stock exchange to really see a sustainable increase in business”, says Stoops.

“Mainly it needs to get the NPL [non-performing loan] situation sorted out so that loan growth can resume and push GDP past the current 5% barrier it’s stuck at,” he says, referring to the relatively high NPL ratio among Vietnamese banks (estimates range from 10-20%). It has set up a 'bad bank' to this end, as reported by AsianInvestor.

However, adds Stoops, “the system needs to channel more funds to companies, so stock-market reform is important, not least if it draws in foreign capital.”

Vietnam is in the process of making other significant regulatory changes, which would include allowing domestic investment managers to set up open-ended funds and exchange-traded funds (ETFs). Local fund houses have been working on product launches in anticipation of such changes.

Vietnam Fund Management, owned by Dragon Capital, is likely soon to launch an ETF, and other domestic asset managers look as if they are preparing to do the same, says Stoops. These will be fairly straightforward products – cash vehicles tracking the VNI or the VN30.

“Everybody wants to do this – it will be very competitive,” says Stoops. He points out that domestic managers have the advantage that they are not hindered by the stock-ownership limits that foreign firms have to contend with.

There are no onshore Vietnam ETFs as yet, but there are two listed elsewhere: Van Eck’s $360 million Market Vectors Vietnam product, which uses a proprietary index, and Deutsche Bank's $285million db-X Trackers Vietnam fund, which references the FTSE Vietnam Index.

Meanwhile, Stoops expects to see a pension funds industry develop in Vietnam in coming years, which would create demand for domestic savings products. Hence he argues it makes sense to invest in local open-ended fund products. Dragon Capital is significantly building up its onshore subsidiary Vietnam Fund Management, which has $130 million in assets under management.

VFM also launched a bond fund in June with $5 million in starting capital that invests in both corporate and sovereign issues. Dragon has run its own fixed-income fund since 2009, with current AUM of about $40 million and is lending its experience to VFM for the new product.

At the same time, Dragon is making progress with setting up a Ucits platform and expects to have the first sub-fund ready next month. It is also talking to other firms about them using the platform for their own funds, says Stoops. BNP Paribas is providing custody and administration services for the platform.

However, it remains challenging to raise capital for frontier-market products, as was highlighted by Dragon and Singapore-based Frontier Investment & Development Partners putting on ice their joint-venture IndoChina fund late last year.

"The reality is that raising a blind pool of capital for [investing in] frontier markets is very tough, not least when the world is suffering flu," said Dragon CEO Dominic Scriven in February, referring to the reasons for ceasing the JV.