While Vietnam is targeting to attract more foreign investment, opaque
definitions of a foreign-invested company are causing big barriers for foreign
investors to enter this market.
When Ho Chi Minh City-based
Mekophar Chemical Pharmaceutical decided to list on Ho Chi Minh Stock Exchange,
its director Huynh Thi Lan hoped the firm would call for investment from
foreign investors who were interested in the profitable pharmaceutical sector.
Her dream came true as foreign investors acquired 4.70 per cent of the
company’s stakes.
However, at that time she did not
know that the involvement of foreign investors in her company would bring
trouble, as the city’s Department of Planning and Investment refused to give
the firm a licence to distribute and sell drugs in the domestic market.
She sent out many SOSs to the
Ministry of Planning and Investment (MPI), the State Securities Commission
(SSC) and the Government Office, but nobody could help her. Finally, Mekophar
decided to delist from the stock exchange floor in July 2012 to restructure its
capital contribution, expecting that it could obtain a licence for distributing
and selling drugs in the market again.
“They said that we were a
foreign-invested company and we didn’t have the right to distribute and sell
drugs in Vietnam. We are really a state-owned firm, why aren’t we allowed to distribute
drugs?” Lan told a seminar on definition of foreign invested enterprises in
Hanoi last week co-organised by VIR and MPI’s Legislation Department, attended
by nearly 100 policy-makers from the National Assembly, the MPI, the Ministry
of Finance, the SSC, business leaders and lawyers.
Mekophar’s trouble highlighted
the unclear definition of foreign-invested enterprises in Vietnam’s Investment
Law issued in 2005. This law defines that a foreign-invested enterprise is one
enterprise established by a foreign investor to conduct investment activities
in this country or a Vietnamese enterprise in which a foreign investor
purchases shares, merges or acquires. Of course, given this definition,
Mekophar is a foreign-invested enterprise and so it is not allowed to
distribute drugs in accordance with the Ministry of Industry and Trade
regulation.
However, the Investment Law also
regulates that the same investment conditions which are applicable to domestic
investors shall be applied to foreign-invested enterprises where Vietnamese
investors hold more than 51 per cent of the charter capital of the enterprises.
“Given this regulation, we can
enjoy all the rights granted to a domestic enterprise. That was why we decided
to list in stock exchange to call for foreign investment,” said Lan.
Mekophar is not the only firm
facing this trouble. But its withdrawal from the stock exchange rung an alarm
about the consequences of this unclear definition.
Dang Duong Anh, partner at
Vietnam International Law Firm (Vilaf-Hong Duc), said he faced many similar
cases as local authorities declined to grant business registrations to foreign
invested companies. Many lawyers at other law firms also shared this issue.
If an enterprise is 100 per cent
foreign-invested, there is no problem. The problem will come to an enterprise
in which foreign investors hold less than a 49 per cent stake like Mekophar.
The overlapping regulations in
existing laws governing investment and enterprises embarrassed business
registration authorities and in some case they denied to handle applications
for establishing enterprises with less than 49 per cent of foreign capital.
“Local officers are confused
about what a foreign-invested enterprise is, therefore they don’t know what
procedure should be applied,” said Anh.
In fact, right after the
Investment Law took effect in 2006, insiders realised this unclear definition
and the consequences it brought to foreign investors. However, the obstacle has
not been revolved.
“I don’t know exactly what the
purpose of this definition is, to regulate administrative procedures or to
limit foreign investments in restricted sectors. This is the reason why the
definition is unclear,” Phan Vu Hoang, director of Tax and Advisory Service at
Deloitte Vietnam, said.
He added the overlapping
definitions deterred many foreign investors from investing in Vietnam,
especially for foreign investors planning to invest in Vietnam through buying
shares of domestic enterprises.
In the Mekophar case, Lan said,
no foreign investor dared to buy the firm’s shares “even though we are one of
the most profitable pharmaceutical companies in Vietnam. If they buy shares, we
will not be allowed to distribute drugs, a profitable business,” she added.
“The overlapping definitions can
be viewed as a lack of transparency and this perception can make Vietnam less
attractive,” said Ronald Parks, director of tax and corporate services of KPMG.
He said the attraction of foreign
direct investment (FDI) by its nature was competitive among countries and raised
concerns that if Vietnam did not take steps to resolve this issue, fewer
foreign investors may come to Vietnam.
In a bid to improve investment
climate, the Vietnamese government proposed the National Assembly to revise the
Investment Law which would help to remove this obstacle.
Actually, the definition of a
foreign invested enterprise remains raising debate. Many lawyers and
policy-makers agreed to define a foreign enterprise should be the one with at
least 49 per cent of stakes held by foreign investors. Meanwhile, the others
claim a foreign invested enterprise should be the one where foreign investors
take the control.
But Parks has another point of
view. “Vietnam, like other countries, will have some restrictions on foreign
investors because of national security and other important policies. But the
actual wording of the definition may be less important than how they define
specific regulations on implementation for each industry and special cases.”
said Parks.
Even what the definition of
foreign-invested enterprises is, the new one will just come in 2014 when the
National Assembly approves the amended Investment Law.
Lan said this would be a long
time to wait and many enterprises would continue suffer the headache in the
upcoming two years.
“We will come back to the stock
exchange market right after the definition is clear because we still want to
call for investment from foreign investors,” she said.
Ngoc Linh | vir.com.vn |
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