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[Vietnam Update] New PPP Decree to come into effect on 19 June

The Government of Vietnam issued the new Decree 63/2018/ND-CP on Investment in Form of Public-Private Partnerships (PPP) replacing the old PPP Decree 15/2015/ND-CP, which was viewed by many as nonfunctional.

The new Decree appears to remove the requirement for investors to obtain an investment registration certificate before establishing a PPP project company. It also contains procedures on converting existing public projects to PPP projects aside from other revised provisions. In tandem, the Investor Selection (Bidding) Decree is expected to be revised as well. Those who are engaged in infrastructure projects in Vietnam may want to review how to apply both new decrees in practice.

For more information, please contact Manfred Otto at  MOtto@duanemorris.com or any other lawyer you are regularly communicating with at Duane Morris.

Disclaimer: This post has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. Each case should be analyzed individually with the support of competent legal counsel. For more information, please see the firm’s full disclaimer.

ThaiBev’s Record $4.8 billion Vietnam M&A Deal Verifies Foreign Ownership Limit Work-Around

Pros and Cons of the ThaiBev-Sabeco Structure

ThaiBev affiliate’s legal status as a Vietnamese domestic investor enabled it to acquire a majority stake in Sabeco, despite a foreign ownership cap of 49%.

Vietnam’s Ministry of Industry and Trade (MOIT) auctioned off a majority stake in Saigon Beer – Alcohol – Beverage Joint Stock Company (Sabeco) on 18 December 2017. The former State-owned enterprise has a 40% share of the Vietnamese beer market. The Thai Beverage (ThaiBev) affiliate Vietnam Beverage acquired a 53.59% stake for VND 110 trillion (or roughly US$4.85 billion) – a record for Vietnam.

Sabeco's stock chart

No other companies – domestic or foreign – submitted bids despite much interest. One of the reasons could have been the high price. As seems to happen often in anticipation of such sales, within 6 months before the MOIT announced the auction, Sabeco’s share price had risen about 75%. Vietnam Beverage paid VND 320,000 per share – a 2017 P/E ratio of almost 47 times. The price fell quickly after the deal went through, and the shares have been trading within a narrow band around VND 255,000 for the past few weeks.

Besides the price, the other main reason for international investors holding back could have been a combination of Sabeco’s foreign ownership limit and the timing between the official announcement, bid registration, and auction date. Even ThaiBev admitted in its 22 December 2017 Singapore Exchange (SGX) filing that the timeline for the submission of bids was “extremely tight” and that they had to make compromises, including not obtaining official shareholder approval in advance and in terms of financing of the deal. While timing is very important, we will take a closer look at Sabeco’s foreign ownership limit and legal structure of ThaiBev’s investment here. Understanding the structure first can help investors to position themselves for future deals and meet tight deadlines.

The ThaiBev-Sabeco structure

We illustrated the legal structure of ThaiBev’s investment in Sabeco in the following chart based on publicly available information. We have suggested this structure since 2015, when Vietnam’s then-new Investment Law came into force. Our interpretation of Article 23 of the Investment Law is that subsidiaries of companies registered in Vietnam with a foreign ownership of less than 51% can conduct investment activities under the same conditions as domestic investors. The Sabeco deal confirms the validity of this structure in practice, even for bigger deals, and that foreign ownership limitations do not apply to such subsidiaries.

ThaiBev-Sabeco structure chart

Here, Vietnam Beverage is a wholly-owned subsidiary of Vietnam F&B Alliance Investment Joint Stock Company (Vietnam F&B). ThaiBev’s indirectly wholly-owned subsidiary BeerCo Limited, a Hong Kong company, owns 49% in Vietnam F&B. Because BeerCo’s stake in Vietnam F&B is less than 51%, Vietnam F&B’s subsidiary Vietnam Beverage is not subject to investment conditions that apply to foreign investors. Therefore, Vietnam F&B could buy Sabeco shares as a domestic investor.

Sabeco’s foreign ownership limit

ThaiBev announced that it chose the above domestic-company structure to acquire a majority stake in Sabeco, because of Sabeco’s foreign ownership cap. Under Vietnamese securities regulations, foreign investors can only own up to 49% (in aggregate) of a public company where the company has registered so-called “conditional” business lines (unless otherwise provided by international treaties or domestic law).

A conditional business line is an activity that is subject to additional requirements, such as a special business license. Like many Vietnamese domestic companies, Sabeco had a long list of registered business lines, including conditional activities, e.g. – distribution and real estate trading. (By law, a company in Vietnam must register all its business activities.) Without substantially restructuring its business, Sabeco’s sale to foreign buyers was limited. Considering the 49% cap and that foreign investors had already owned 10.4% of Sabeco (including Heineken’s 5%), less than 39% of the total 54% for sale in this round were available to foreign buyers. But as a domestic investor, ThaiBev’s affiliate Vietnam Beverage could buy a majority stake.

To what extent does ThaiBev control Sabeco?

The 4.8 billion-dollar question is ThaiBev’s level of control over Sabeco. Although, Vietnam Beverage has a 54% majority stake in Sabeco, Vietnam Beverage is wholly owned by Vietnam F&B, where ThaiBev’s wholly-owned subsidiary BeerCo owns only a minority stake.

Politics and other levers aside, from a pure legal perspective, the general meeting of shareholders (GMS) can pass ordinary resolutions with approval of attending shareholders representing at least 51% of the votes. Special resolutions require at least 65%. Likewise, decision in the board of management (akin to a board of directors in some other jurisdictions) require a simple majority of all attending board members. Although, Vietnam’s Enterprise Law permits that companies stipulate higher voting thresholds in their charters, Sabeco’s most recent publicly available charter sets out the same default 51% and 65% ratios for the GMS and 51% for its 7-member board. Therefore, Vietnam Beverage can now unilaterally control ordinary resolutions of Sabeco’s GMS (except for related party transactions) and can vote its nominees to the board.

However, ThaiBev may not fully control Vietnam Beverage, because it only has 49% minority stake in Vietnam F&B. Two Vietnamese individual shareholders own 51%. According to ThaiBev’s 22 December 2017 SGX filing, “One of the Vietnamese investors in Vietnam F&B is a business person [who] is in the same group as the Company’s distributor of alcohol beverages in Vietnam. The other Vietnamese investor is the Company’s local business consultant [who advised] the Company in relation to the [Sabeco acquisition].

This raises a number of questions similar to those that arise in nominee companies in Vietnam: How much control can ThaiBev/BeerCo exert over the two Vietnamese shareholders in Vietnam F&B?

  • Did BeerCo and the Vietnamese shareholders enter into a properly drafted shareholders’ agreement and approve a charter for Vietnam F&B with reserved matters and other guards to give BeerCo more control? (NB: Vietnam’s Enterprise Law permits voting preference shares only with Government approval and only to founding shareholders for maximum three years.)
  • What happens with the dividends from Sabeco/Vietnam Beverage – will the two Vietnamese shareholders get 51%? (Dividend preference shareholders have no voting rights, so that wouldn’t be in BeerCo’s interest.)
  • Can ThaiBev buyout those Vietnamese shareholders? How much will it cost? (The market value of Vietnam F&B should be sky high now.)
  • What if they sell their stakes to a competitor?
  • Will the courts enforce the shareholders’ arrangements when contested (less than 30% of Vietnamese court judgments are enforced in Vietnam; let alone foreign arbitral awards)?

We do not know for sure, as Vietnam F&B’s documents are not public, but those are a few of the potential risks of the ThaiBev-Sabeco structure.

New Investment Law and management committee for SOE equitization

It is important to note that Vietnam is in the process of amending its Investment Law (again, after less than three years in force). The first published draft has revised provisions that affect M&A activities – including the dreaded pre-M&A approval requirement. The ThaiBev structure may or may not work in the future. At the earliest, we expect the new law to come into force in 2019. So, upcoming SOE divestments including Habeco, PV Power, PV Oil as well as the sale of the MOIT’s remaining 35% of Sabeco might still be in time to apply the above structure if they close in 2018.

In addition, the Government plans to establish a new State capital management committee to coordinate divestments of all State-owned assets taking over powers from the various ministries and State Capital Investment Corporation (SCIC).

Pros and cons of the ThaiBev-Sabeco structure

+ Allows foreign investors to participate in investments under the same conditions as domestic investors.

– No full ownership and limited control over those investments.

For more information, please contact Manfred Otto at  MOtto@duanemorris.com or any other lawyer you are regularly communicating with at Duane Morris.

Disclaimer: This post has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. Each case should be analyzed individually with the support of competent legal counsel. For more information, please see the firm’s full disclaimer.

Vietnam Logistics Law – New Decree 163 – Nothing to See Here?

Despite media reports to the contrary, Vietnam’s new logistics regulation does not further open up the market to foreign investment but newly requires compliance with e-commerce regulations.

On 20 February 2018, Government Decree No. 163/2017/ND-CP on logistics services will replace the old Decree 140/2007/ND-CP. Many foreign investors had hoped for further clarification and market access in the logistics sector. The new Decree 163 does not grant new rights to foreign investors, at least on paper, and may even introduce new uncertainties in practice. While the most interesting new provision could turn out to affect the digitalization of logistics processes.

Issued in 2007, just when Vietnam acceded to the WTO, Decree 140 is ancient for Vietnamese law standards. The law has moved on since then, as Vietnam opened most service sectors to foreign investors, including many (but not all) business activities in the logistics sector. A few points on Decree 163 are outlined below.

I. “Logistics” redefined

Foreign investors (and Vietnamese businesses seeking foreign investment) must closely review each business activity they plan to conduct in Vietnam to see if foreign ownership limitations and other conditions apply. The old Decree 140 defined “logistics” with reference to Article 233 of the Commercial Law 2005. Article 3 of the new Decree 163 defines and regulates the following “logistics services”:

Logistics services under Article 3 of Decree 163

  1. Container handling services, except for provision of such services at airports.
  2. Container warehousing services as part of maritime transport support services.
  3. Warehousing services as part of support services for all modes of transport.
  4. Delivery services.
  5. Freight transport agency services.
  6. Customs brokerage services (including customs clearance services).
  7. Other services including the following activities: bill of lading inspection, freight brokerage services, cargo inspection, sampling and weighing services; goods receipt and acceptance services; and transport documentation preparation services.
  8. Wholesaling support services and retailing support services including activities being management of goods in storage, collection, sorting and classification of goods, and goods delivery.
  9. Freight transport services as part of maritime transport services.
  10. Freight transport services as part of inland waterway transport services.
  11. Freight transport services as part of rail transport services.
  12. Freight transport services as part of road transport services.
  13. Air transport services.
  14. Multimodal transport services.
  15. Technical analysis and testing services.
  16. Other transport support services.
  17. Other services provided by logistics service providers and as agreed with their clients in accordance with the basic principles of the Commercial Law.

“Delivery services” and “other transport services” are not further defined in Article 3. The lawmakers probably intended that one refer to the Vietnam Standard Industrial Classification System (VSIC), which is comparable to the United Nation’s Central Product Classification (CPC) codes used in Vietnam’s WTO Service Sector Commitments (WTOSSC) . For example, “delivery services” under VSIC 5230 include delivery of mail and parcels not covered by “freight transportation services.” VSIC 5320 is similar to WTOSSC’s “courier services” (CPC 7512), which includes “express delivery services.” There is no foreign ownership limit in Decree 163 for “delivery services,” nor for “courier services” under the WTOSSC – that’s good news for foreign courier services providers.

II. No changes to foreign ownership limitations (FOL)

WTOSSC and Decree 140 already defined FOL and their respective schedules. Decree 163 does not change anything. Decree 163 addresses FOL of various freight related services but is silent on passenger transportation services.

The below chart summarizes the main foreign ownership caps in the logistics sector. It is a simplified chart, and additional conditions apply to those business lines. Further conditions apply to foreign investors. For example, maritime freight transport companies with up to 49% foreign ownership may register ships in Vietnam and fly the Vietnamese flag, but only up to one third of the crew members may be non-Vietnamese; the captain and the first officer must be Vietnamese citizens. Like other conditions in Decree 163, this is nothing new and was already set forth in the WTOSSC.

Vietnam: Foreign Ownership Limitations (FOL) in the Logistics Sector

WTOSSC Decree 163
CPC Service Description FOL FOL
742 Storage and Warehouse 100%
748 Freight transport agency (incl. freight forwarding services) 100%
749 Bill auditing; freight brokerage; freight inspection, weighing and sampling; freight receiving and acceptance; transportation document preparation on behalf of cargo owners 99% 99%
7211 Maritime transport (Passengers; less cabotage) 49%
7212 (a) Maritime transport (Freight; less cabotage) – joint-venture fleet flying Vietnamese flag 49% 49%
7212 (b) Maritime transport (Freight; less cabotage) – foreign fleet 100% 100%
7221 Internal waterways transport (Passengers) 49%
7222 Internal waterways transport (Freight) 49% 49%
7111 Rail transport (Passengers) Unbound
7112 Rail transport (Freight) 49%
7121 + 7122 Road transport (Passengers) 49%
7123 Road transport (Freight) 51% 51%
No CPC Custom clearance 99%
No CPC Container station and depot 100%
7411 Container handling (except at airports) 50% 50%
621, 61111, 6113, 6121, 622, 631 + 632 Distribution (import/export, commission agents, wholesale, retail) 100%

III. New e-commerce provision – digitalization of logistics services

One thing that is new in Decree 163 is its express requirement to comply with Vietnam’s e-commerce regulations. Article 4.2 provides that a logistics business conducting part of or its entire business electronically over the Internet, mobile or other “open networks” must comply with e-commerce regulations. Vietnam’s main e-commerce regulation is Decree 52/2013/ND-CP. Decree 52 requires e-commerce service providers to either notify or register with the Ministry of Industry and Trade. E-commerce providers must also protect personal information and consumer interest in accordance with Decree 52 and other laws and regulations. Arguably, though, these e-commerce requirements were already applicable to logistics services that conducted e-commerce activities before Decree 163.

Article 4.2 is very broad and could obviously apply to any business communications over e-mail, messaging apps, web-conferencing, company websites, and social networking sites – just to name few. The question is whether Article 4.2 will also apply to new internal, digital enterprise processes, such as digital supply chain and smart warehousing technologies that utilize “open networks.” Vietnamese law does not define “open networks,” and various literature about the topic is inconclusive as to what it actually means. For instance, one tech article concludes that today “open network” means “user choice” – which is not very helpful from a legal perspective. If IT specialists disagree on the meaning of “open networks,” the various Vietnamese authorities involved in regulating and licensing logistics activities are likely to be confused as well and could interpret Article 4.2 in various, uncertain ways.

Bottom line: The new Decree 163 does not expand market access rights of foreign investors in Vietnam’s logistics sector, but it introduces an explicit requirement to comply with e-commerce regulations.

For more information , please contact Manfred Otto at MOtto@duanemorris.com or any other lawyer you are regularly communicating with at Duane Morris.

Disclaimer: This post has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. Each case should be analyzed individually with the support of competent legal counsel. For more information, please see the firm’s full disclaimer.

“RegTech in Asia – Opportunities & Challenges” – 23 Nov 2017 Presentation

Slides from my recent presentation in Ho Chi Minh City on “RegTech in Asia – Opportunities & Challenges” on 23 November 2017 organized by QRC HK & Infinity Blockchain Labs:

171123 RegTech in Asia-Otto-EN

Main topics:

  • AML/KYC (anti-money laundering and “know your customer”)
  • Compliance costs in Asia
  • e-Government (e-Customs, e-Courts, e-Tax)

Statutory KYC Requirements in Vietnam

For more information , please contact Manfred Otto at MOtto@duanemorris.com or any other lawyer you are regularly communicating with at Duane Morris.

Disclaimer: This post has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. Each case should be analyzed individually with the support of competent legal counsel. For more information, please see the firm’s full disclaimer.

『ベトナム国有企業M&A~コーポレートガバナンス』2017年11月16日プレゼン資料

2017年11月16日に日本アセアンセンターが開催した「ベトナム政府との対話~国有企業の株式化とM&A~in 東京」と題したセミナーの私のプレゼン資料です。

トピック

「ベトナム国有企業M&A~コーポレートガバナンス」

  1. 機関設計
    株主総会、取締役会、社長など
  2. 少数株主の権利保護
    株式譲渡制限に関する定款・契約条項

ダウンロードリンクは以下です。

171116 Vietnam SOE and M&A-ASEAN Centre-Otto-JP.pdf

ご質問等ございましたら、オットー(MOtto@duanemorris.com)または弊所で通常連絡を取っている担当弁護士までご連絡ください。

Organization Chart of a Vietnamese SOE

〈ご注意〉こちらの記事は皆様に情報をお届けする目的でのみ作成・掲載しておりますので、法的なアドバイスとして提供・構成することを目的としておりません。詳細につきましては、当事務所の注意書きをご一読下さい。

***

Slides from my recent presentation in Tokyo on “Vietnam State-Owned Enterprises and M&A – Corporate Governance” organized by ASEAN-JAPAN Centre on 16 November 2017.

171116 Vietnam SOE and M&A-ASEAN Centre-Otto-JP.pdf

For more information , please contact Manfred Otto at MOtto@duanemorris.com or any other lawyer you are regularly communicating with at Duane Morris.

Disclaimer: This post has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. Each case should be analyzed individually with the support of competent legal counsel. For more information, please see the firm’s full disclaimer.

Vietnam’s State-Owned Enterprises Equitisation and M&A – 6 July 2017 Presentation Slides

Slides from our recent presentation in Singapore on “SOE Equitisation and M&A – Recent Trends and Corporate Governance”.

Vietnam SOE Equitization and M&A-6 July 2017-Otto-ENG

For more information , please contact Manfred Otto at MOtto@duanemorris.com or any other lawyer you are regularly communicating with at Duane Morris.

*   *   *

先日シンガポールで開催した「ベトナム国有企業の株式化とM&A~最近の動向とコーポレートガバナンス」についての日本語版プレゼン資料です。

Vietnam SOE Equitization and M&A-6 July 2017-Otto-JP

ご質問等ございましたら、オットー(MOtto@duanemorris.com)または弊所で通常連絡を取っている担当弁護士までご連絡ください。

 

More Clarity on Foreign Investment and M&A in Logistics Companies in Vietnam

Foreign investors can now proceed with more certainty when setting up logistic companies or acquiring stakes from Vietnamese partners. Logistics is an area where discrepancies between international treaties and domestic law implementation have caused many headaches. However, Vietnam’s Ministry of Industry and Trade (MOIT) has recently provided more clarity through a guiding regulation (Circular No. 9911/BCT-KH) and a number of official letters, including responses to the Ho Chi Minh City People’s Committee and the Vietnam Business Forum. At the same time, a few Japanese logistics companies have established 100% foreign-invested subsidiaries in Vietnam.

International treaties should supersede national law, and official comments from MOIT have restated that view. So, we initially refer to Vietnam’s WTO service sector commitments (WTOSSC) in most cases. Accordingly, some sectors are open to 100% foreign investment (e.g., warehousing and freight forwarding), while some still require Vietnamese equity participation (e.g., container handling).

Foreign Ownership Limitations in the Logistics Sector (WTOSSC)
CPC Service Description Max. Foreign Ownership
742 Storage and Warehouse 100%
748 Freight transport agency (incl. freight forwarding services) 100%
749 (partially) Bill auditing; freight brokerage; freight inspection, weighing and sampling; freight receiving and acceptance; transportation document preparation on behalf of cargo owners 99%
7211 Maritime transport (Passengers; less cabotage) 49%
7212 Maritime transport (Freight; less cabotage) 51%
7221 Internal waterways transport (Passengers) 49%
7222 Internal waterways transport (Freight) 49%
7111 Rail transport (Passengers) Unbound
7112 Rail transport (Freight) 49%
7121 + 7122 Road transport (Passengers) 49%
7123 Road transport (Freight) 51%
No CPC Custom clearance 99%
No CPC Container station and depot 100%
7411 Container handling (except at airports) 50%
7512 Courier (express delivery) 100%
621, 61111, 6113, 6121, 622, 631 + 632 Distribution (import/export, commission agents, wholesale, retail) 100%

As a foreign buyer in an M&A case, besides the purchases price and other conditions, we recommend to consider and differentiate between absolutely essential and optional business lines as well as the best case and acceptable levels of ownership in the target.

Yamato Logistics and Sagawa Express have established 100% foreign-invested subsidiaries in Vietnam. This is possible through strategically limiting business lines to those that are open to 100% foreign investment.

For further information, please  contact Giles Cooper (gtcooper@duanemorris.com), Manfred Otto (motto@duanemorris.com) or any other lawyer you are regularly communicating with at Duane Morris.

What’s a Controlling Stake in a Vietnamese Company? Watch the New Voting Thresholds!

MA-Bridge-Banner

By Giles Cooper and Manfred Otto, Duane Morris Vietnam LLC

More for Less. A shareholder of Vietnamese joint stock company (JSC) will be able to generally control the company with a simple majority of 51%, unlike the statutory minimum of 65% currently.  This change, set out in the new Enterprise Law effective from July 2015, comes at the same time as other favorable M&A regulations for foreign investors who seek to buy stakes in Vietnamese companies (see Vietnam’s New Investment Law Paves the Way for More M&A – No More Investment Certificates!). The new regulations are expected to support the continued uptrend in M&A activity in Vietnam.

Voting thresholds in a shareholding company

Under the new Enterprise Law, the statutory voting thresholds for a JSC’s general meeting of shareholders (GMS) will be lower:

  • Quorum: 51% of voting shares (old law: 65%)
  • 65% of the votes for special resolutions (old law: 75%)
  • 51% of the votes for all other shareholder resolutions (old law: 65%)

Voting thresholds in a JSC in Vietnam

A foreign investor will be able to generally control a JSC with only a 51% stake. It was impossible to do so in the past, absent voting preference shares or other voting arrangements of limited enforceability.

On the other hand, investors who relied on minority stakes (e.g., 25% or 35%) to block GMS resolutions should be alerted. They risk losing their “veto right,” if the company amends their voting thresholds to 65% and 51%.

The current cap for foreign investment into publicly-listed companies still stands at 49% (lower for financial institutions etc.). Those caps have long been expected to change to spur the stock market. However, raising the cap to say 65% would theoretically open the door to hostile takeovers of publicly-listed companies by foreign investors under the new law.

Voting thresholds in a limited liability company

Unlike in a JSC, 51% does not constitute a majority required for decisions in a limited liability company with multiple members (MLLC) under the current and the new Enterprise Law.

Statutory voting thresholds for members’ council resolutions in an MLLC:

  • 75% for special resolutions
  • 65% for ordinary resolutions

Note that in single-member limited liabilities companies, the above thresholds don’t matter, because there is only one investor. So long as there is no members’ council, most decisions can be unanimously made by the owner or chairperson.

Time to amend charters

As under the current law, the voting thresholds must be reflected in the company’s charter to become effective.

Investors interested in applying the new lower voting thresholds will need to reach consensus with other shareholders according to the decision-making rules contained in the relevant existing charters.  In the vast majority of cases this means the GMS will still have to pass a special resolution with the current minimum required votes (at least 75%).

New investors should always check the target company’s constitutional documents with the help of competent legal counsel, before negotiating amendments and before closing deals.

Duane Morris Vietnam LLC is here to help you in your negotiations with business partners and structure your investments in Vietnam. We have been top-ranked in Corporate and M&A by Legal 500 again this year.

For more information please contact Giles T. Cooper or Manfred Otto.
日本語でのお問い合わせは japanese@duanemorris.com までお寄せください。

 Disclaimer: This post has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. In addition, in Vietnam, the authorities enjoy broad discretion to interpret and administer the laws. Current laws are subject to revision and further details in guiding and implementing regulations. Each case should be analyzed individually with the support of competent legal counsel. For more information, please see the firm’s full disclaimer.

Vietnam – Refinancing a Domestic Loan with an Offshore Loan?

By Giles Cooper and Manfred Otto, Duane Morris Vietnam LLC

Vietnamese regulations and policy are certainly not in favor of using foreign loans to refinance existing domestic loan debts. However, the State Bank of Vietnam (SBV) could feasibly exercise its discretion to permit such loans if applicants made a compelling case.  Prudent cross-border lenders will require Vietnam borrowers to disclose the purpose of a loan and seek clarification from the SBV in case of refinancing needs.

The SBV’s Circular 12/2014/TT-NHNN on the conditions for enterprises to borrow non-government guaranteed loans explicitly permits taking out foreign loans to restructure other foreign loans, so long as they do not increase the cost of borrowing. In other words, a new foreign loan at a lower interest rate to refinance another foreign loan should be permitted.

However, Circular 12 is silent on the use foreign loans to refinance domestic loans. A conservative reading would suggest that such refinancing is generally not permitted. Policy consideration support this view. Vietnam seeks to limit offshore loans (i) to control foreign debt, (ii) to prevent arbitrage and (iii) for other macro-economic reasons.

  1. Foreign indebtedness control

The ultimate purpose of Circular 12 is to keep the country’s foreign indebtedness within permitted limits (annual limits approved by the Prime Minister). Therefore, the general thrust of the regulations is to permit offshore loans if they are necessary or benefit the economy (i.e., to the extent they are used to finance “real” business projects). An explicit exception to this “real purpose” rule is where new offshore loans would allow the borrower to reduce its offshore debt burden, thus easing pressure on Vietnam’s hard currency reserves as a whole.  Refinancing of onshore loans with offshore loans could of course help reduce the borrower’s debt burden as well, but would result in increasing the country’s foreign indebtedness without any new production or business project.

  1. Arbitrage

The SBV has generally been very uncomfortable with interest rate arbitrage, which would inevitably develop should refinancing of onshore loans be permitted. This would adversely interfere with the SBV’s monetary policy.

  1. Macro-economic impact

If refinancing of domestic loans by way of foreign loans was permitted, the influx of foreign currency could destabilize Vietnamese Dong exchange and interest rates and spur inflation.  It might also adversely affect local banks’ business and profitability.

We are not aware of any official or definitive pronouncement on this issue, and the SBV may exercise its discretion to issue a special approval. However, it would be necessary to prepare a strong case, including the economic rationale, the local lender’s support, and proof of revenue in foreign currency. The process can be started simply with an official letter of enquiry.

Remember that borrowers must apply to the SBV for registration of foreign loans having a term of more than one year. In events of default and acceleration, a change of repayment terms may have to be registered as well, before local banks can clear offshore remittances.

Duane Morris Vietnam LLC is here to assist you with loan agreements and SBV registration of cross-border loans to Vietnam.  We have been top-ranked in Corporate and M&A by Legal 500 again this year.  For more information please contact Giles T. Cooper or Manfred Otto.  For inquiries in Japanese, please contact japanese@duanemorris.com.

Disclaimer: This post has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. Each case should be analyzed individually with the support of competent legal counsel. For more information, please see the firm’s full disclaimer.