vietnam stock market development qut bs98 feb2005

STUDENT NAME (S) (PLEASE UNDERLINE YOUR FAMILY NAME) FOR GROUP ASSIGNMENTS, WRITE THE GROUP LEADER’S NAME FIRST.

KHANH NGUYEN

STUDENT NO. N 04226097 (MASTER OF APPLIED FINANCE -

BS98)

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Campus: GARDENT POINT Faculty of Business School of Economics and Finance

Unit Name: PROJECT 1 Unit Code: BSN 404 Due Date: 18 February 2005

Lecturer/Tutor’s Name: MR. MARK CHRISTENSEN

Tutorial Day/Time N/A

Description/Topic: The Vietnamese Stock Market - The Privatisation & Market Listing Process of State-owned Enterprises

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BSN401- PROJECT1: The Vietnamese Stock Market Student Name: Khanh Nguyen (N4226097)

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Queensland University of Technology Faculty of Business

School of Economics and Finance - BSN404 PROJECT 1

STUDENT NAME: KHANH NGUYEN MASTER OF APPLIED FINANCE

STUDENT No: N04226097

THE VIETNAMESE STOCK MARKET

THE PR I VAT I S AT ION AND MARKET

L I S T ING P ROCES S OF S TATE -OWNED

ENTERPR I SE S

A BLUE SKY ’S BEST OPPORTUNITY

IN MERGING MARKETS


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TABLE OF CONTENT

Acknowledgments------------------------------------------------------------------------------------------------4

Glossary------------------------------------------------------------------------------------------------------------4

INTRODUCTION -----------------------------------------------------------------------------------------------5

CHAPTER (1) ----------------------------------------------------------------------------------------------------6

THE VIETNAMESE STOCK MARKET-------------------------------------------------------------------6

1.1 The Development Process of the Stock Market ------------------------------------------------6

1.2 The Rise, The Fall and The Recovery of the Vietnamese Stock Market-------------------7

1.3 The Current Stage of the Vietnamese Stock Market ------------------------------------------7

1.4 The Stock Market Operations ---------------------------------------------------------------------8 1.4.1 The Market Regulator, Facilitator and Owner: ------------------------------------------------------9

1.5 Current Issues Concerning The Development of Stock Markets ------------------------- 10 1.5.1 Issues That Hinder The Expansion of The Vietnamese Stock Market --------------------- 10

1.6 Future Development and Opportunities of the Stock Markets---------------------------- 12 1.6.1 Vietnam Outlines Solutions to Boost Stock Market in 2005 ----------------------------------- 12 1.6.2 Vietnam Launched the Second Stock Market in Hanoi and the OTC Market ------------ 13 1.6.3 Vietnam is Linking and Listing Large Companies on Overseas Stock Markets --------- 14 1.6.4 Vietnam Proposed Changes to IPO Rules to boost Market Investors:--------------------- 14 1.6.5 Vietnam Proposed Equisation and Market Listing of Large State-owned Corporations to boost the Stock Markets: ------------------------------------------------------------------------------------------ 15

CHAPTER (2) -------------------------------------------------------------------------------------------------- 16

THE PRIVATISATION AND IPO PROCESS OF STATE-OWNED ENTERPRISES --------- 16

2.1 What is Privatisation ?---------------------------------------------------------------------------- 16

2.2 The Need for Privatisation of State-owned Enterprises ------------------------------------ 16

2.3 What Types of Privatisation Techniques can be Adopted ? ------------------------------- 17 2.3.1 Small Business Auctions -------------------------------------------------------------------------------- 17 2.3.2 Trade Sale of Larger Enterprises --------------------------------------------------------------------- 18 2.3.3 Initial Public Offerings (IPOs) -------------------------------------------------------------------------- 18 2.3.4 Joint Venture ------------------------------------------------------------------------------------------------ 18 2.3.5 Mass Privatisation Programs--------------------------------------------------------------------------- 19 2.3.6 Build-Own-Operate/Build-Own-Transfer Programs---------------------------------------------- 19 2.3.7 Liquidation of State-owned Enterprises ------------------------------------------------------------- 19 2.3.8 The General Process of Privatisation ---------------------------------------------------------------- 20 2.3.9 Critical important factors need to consider --------------------------------------------------------- 20 2.3.10 General Problems Encountered during the Privatisation Process in the Former Socialist Countries ------------------------------------------------------------------------------------------------------ 20

2.4 The Vietnamese Privatisation Program ------------------------------------------------------- 21 2.4.1 Government Solutions in Speeding up the Equitisation Process ---------------------------- 24 2.4.2 Privatisation Results and Lesson Learned from the Process --------------------------------- 25

CONCLUSSION----------------------------------------------------------------------------------------------- 28

REFERENCES------------------------------------------------------------------------------------------------- 30

APPENDIX (A)------------------------------------------------------------------------------------------------- 32


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ACKNOWLEDGMENTS

The author wishes to thanks the course coordinator Mr. Mark Christensen for his valuable time, guidance and support during the busy time of the year, the festive season 2005.

GLOSSARY

ASIC Australian Security Investment Commission ASX Australian Stock Exchange AMP Australian Fund Management & Life Insurance Institution AUD Australian Dollar Circular 126/2004/TT-BTC MoF’s Circulation of Guidelines on Government’s Decree

187/2004/QD-CP.

Decree 187/2004/ND-CP Government’s Decree on Transforming State-owned Enterprise into an Equitised Enterprise.

Decree 161/2004/ND-CP Government’s Decree on Penalties of Administrative Violations in The Field of Securities and Securities Markets.

Decision 161/2004/QD-TTg Prime Ministerial Decision on The Approval of The Strategy for The Development of Vietnam’s Securities Market up to 2010.

Decision 63/2003/QD-TTg Prime Ministerial Decision on The Functions, Duties, Powers and Organisational Structure of the SSC.

Decree 144/2003/ND-CP The Government’s Decree on Securities and Securities Market.

Decree 103/1997/CP Decree on Regulation on Entrusting, Selling, Business Contracting or Leasing State Enterprises.

Doi Moi Vietnamese term for economic revolution in the 1980s. Equitisation A term for partly Privatisation . GDP Gross Domestic Product HOSTC Ho Chi Minh Security Trading Centre HASTC Ha Noi Security Trading Centre IPO Initial Public Offering MoF Ministry of Finance NRMA NSW Royal Automobile Club & Insurance company OTC Over The Counter market SSC State Security Commission SOEs State-Owned Enterprises US$ American Dollar VND Vietnamese Dong VAT Vietnamese Good and Services Tax (GST equivalent)


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INTRODUCTION

The Vietnamese stock market is one of the merging markets in Asia, which comprises of the Ho Chi Minh City Security Trading Centre (HOSTC), the Hanoi Security Trading Centre (HASTC) and the OTC market. The HOSTC has been in operation since July 2000, the HASTC is to become operational in March 2005, while an OTC market, also managed by HOSTC will kick off in mid 2005, according to Nguyen Doan Hung, Deputy Chairman of the State Securities Commission (Vietnam Investment Review News, January 2005). The HOSTC is currently the only official shares trading centre in Vietnam with 26 listed partly state-owned joint stock companies, and one recently listed privately joint stock company amongst more than 6,000 private and state-owned joined stock enterprises. The potential of the Vietnamese stock market is great, which can offer investors plenty of blue sky’s best opportunities and also pains and headaches. The main fundamental step taken towards the development of a stock market in Vietnam is to diversify ownership of national assets through the privatisation process. The basic legal infrastructure Law on Companies, Law on Private Enterprises has been passed. Enterprise valuation has proved to be the most difficult issue in implementing the conversion of state owned enterprises. Accounting standards have also been recently implemented. The pace of implementation has been pain taking slowed but the progress and number of reforms initiated are quite remarkable in such a short time. The country economy emerged from a post-war centrally planned system with an impressive average annual GDP growth rate of 8%, from a merely 10 billion USD economy during the late 90s into a striving 45 billion USD economy in 2004 (Reuters, January 12, 2005). As the economy expand which requires capital investment to grow, the government is accelerating the current equitisation (privatisation) process of State-owned enterprises, and at the same time pushing on with the development and expanding of the financial markets as future sources of capital investment for Vietnam’s economic expansion. The development and expansion of the Vietnamese stock market is fuelling by the rate and the pace of the equitisation (privatisation) program in Vietnam. Hence, this project will attempt to cover both processes at the introductory level, and identify issues for future researches. The project’s aims are to:

• Examine the development process and the current stage of the Vietnamese stock market;

• Identify future stock market development potentials and opportunities;

• Investigate the privatisation (equitisation) and market listing processes of State-owned enterprises;

• Lessons learn and suggestions for future researches on the Vietnamese privatisation and listing programs of state-owned enterprises.


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CHAPTER (1)

THE VIETNAMESE STOCK MARKET

1.1 The Development Process of the Stock Market

Follow the successful implementation of the economic reform ”Doi Moi” in the early 1980s that lifted Vietnam out of the socio-economic crisis and moved the country onto the stage of intensified industrialisation and modernisation. Vietnam transformed from a net imported foodstuffs country into a second largest rice exporter country in the regions within the short pace of time. Vietnam is seeking for capital development with a great need to transform the country economy from the centrally planned and subsidised mechanism into the free market economy. The need for a new channel of fund raising for development investment together with the privatisation of state-owned enterprises in the early 1990s were the driving force for an establishment of the securities market. As one of the preparatory steps towards kick-starting the stock market in Vietnam, the Capital Market Development Board under the State Bank of Vietnam (SBV) was then set up by its Governor’s Decision 207/QD-TCCB dated November 6, 1993. The Prime Minister approved of the establishment of the Board for drafting the Decree-Law of Securities in preparation of the establishment of a Securities Market as by the Prime Ministerial Decision No. 361/QD-TTg (June 29, 1995). This Board is assigned with responsibilities as follows:

� Drafting legal documents of securities and securities market;

� Drafting the Government’s Decree on the establishment of the State Security Commission;

� Preparing infrastructure facilities and training market regulatory staff and practitioners;

� Carrying out cooperation projects with other countries and international organizations in the field of setting up the securities market development in Vietnam.

Established under the Government’s Decree 75/CP (November 28, 1996), the State Security Commission (SSC) is a securities market regulatory agency (that take on the roles similar to ASIC in Australia, including some of the ASX’s roles) in charged with the mission of establishment, organizing and regulating securities and securities market operations. The establishment of the securities regulator prior to the actual functioning of the securities

market itself proves to be an approach in consistence with the general direction of building

and developing the securities market in Vietnam, and this determines the birth of the

securities market over 3 years later. The development of Vietnam’s financial markets can often be frustratingly slow. But regulators are conscious that by deregulating before the necessary infrastructure is in place is not constructive (infrastructure refers to staff skill, technology of market information, communications and management). In financial markets, a policy of crawling before


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walking, and walking before running may not be such a bad thing. Nevertheless, Vietnam launched its first post-war stock exchange in Ho Chi Minh City in July 2000.

1.2 The Rise, The Fall and The Recovery of the Vietnamese Stock Market

Trading on communist Vietnam's 5 years old stock market “The Ho Chi Minh City's Securities Trading Centre” (HOSTC) is rapidly recovering from the slump of 2002/2003, but still a far cry from the heady days of the first year, when speculators desperate for anticipated profits made it the world's best-performing market for the first six months listing during 2000. Fortunately, the current recovery is based on fundamental and healthy earning which far different from the steep rise that followed with a spectacular crash during 2002. The falling prices so enraged speculators in 2002 that they threatened to kill the exchange's director, Tran Dac Sinh. “There were some death threats. But now I think investors can understand the stock market better”, Sinh said. At that time investors thought I was manipulating the prices. We had to have police assistance. “Regulators say the recent stability of the stock market, in southern Ho Chi Minh City, is a sign it has already begun to mature, as investors who once believed the exchange would only climb higher are no longer view it as a source of risk-free quick gains” (The Associated Press - July 25, 2002).

According to the Securities Commission, Vietnam's five-year-old stock market saw positive developments in 2004, with the total market capitalization of listed securities increasing 93.4% on-year, equivalent to nearly VND12.5 trillion (US$796.2 million). The market has attracted more investors (20,300 accounts opened at securities firms as at the end of 2004) and its prices of stocks are gradually recovering after a period of declination in 2002 and 2003. The Vn-Index rose by 72.35 points, or over 43% to close at 239.29 on December 31, 2004 from 166.94 at the end of 2003 (Vietnam Investment Review News, January 2005).

1.3 The Current Stage of the Vietnamese Stock Market

The Ho Chi Minh City's Securities Trading Centre (HOSTC) is the only stock market currently in operation in Vietnam. By the end of 2004 there were 27 listed enterprises and one fund management company with a combined market capitalization of about US$260 million, together with an US$1.60 billion worth of 207 government and banks bonds. The current weekly trading values are on average of US$35 million for bonds, and just above US$1 million for shares. The market liquidity problem has so far deterred foreign investors and financial institutions to participate in the stock market. The stock market listed enterprises are predominant by industries that comprise of Confectionary & Foodstuff, Manufacturing, Engineering & Construction, Tourism, Transportation, Import & Export, Petroleum and Telecommunication. There is no banking or financial companies currently listed on the stock market, with an exceptional a Fund Management Unit listed since 2003 (Viet Fund Management, a 70:30 venture between the


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Saigon Thuong Tin Commercial Bank and the UK-based fund management Dragon Capital). The table of currently listed companies in the HOSTC is included in Appendix A. Among the 27 listed enterprises, 26 are privatised SOEs with one exception of North Kinh Do a maker of biscuits, cakes and confectionery, the very first Vietnamese private enterprise listed on the stock market. “Vietnam's fast expanding private sector got a boost by the recent listing of North Kinh Do, became the first company founded by a private entrepreneur to list on the country's tiny stock exchange. The three year-old confectionery company is a de facto subsidiary of Kinh Do, a construction and food-company founded by Tran Le Nguyen, one of a new breed of Vietnamese entrepreneurs profiting from the relaxation of state control over the economy over the past decade. North Kinh Do reported a revenues of 210 billion VND (US$13m) and profits of 15 billion VND (US$1 million) in 2003, was hailed as a big step forward for Vietnam's official stock market, and an inspiration for the country's 150,000 registered private businesses” (Bankok Financial Times, December 16, 2004). The Vietnamese stock market has so far attracted hundred of foreign individual investors and 25 foreign institutional investors, who now hold a large percentage of shares in all the 27 listed companies, according to the Ho Chi Minh City Securities Trading Centre (HOSTC). They sometimes hold up to the 30% limit of many listed companies, including the shipping line Transimex Saigon, the agriculture-product exporter Larocca, Gilimex, beverage producer Tribeco and fish producer Agifish. The P/Es of the stock market listed companies are in the range from 6 to 12, much lower than similar companies listed in the fully developed stock markets like the Australian Stock Exchange (ASX).

1.4 The Stock Market Operations

Listed companies shares are traded using the order-matching method with the principles of price priority and time priority system that similar to the Australian Stock Exchange Automated Trading System (SEATS). The odd-lot securities transactions are executed directly between investors and securities trading member firms of the Securities Trading Centre, with the principle of price negotiation. The shares are traded within the trading system that linked up the HOSTC with trading offices of the following 13 licensed securities trading member firms and one fund management firm: Bao Viet Securities Co., BIDV Securities Co., Thang Long Securities Co., ACB Securities Co., ICB Securities Co., Agribank Securities Co., Vietcombank Securities Co., MeKong Securities Co., Dong A Securities Co., Ho Chi Minh City Securities Co., Haiphong Securities Co., De Nhat Securities Co. and the VinaCapital.

Currently, shares trading are only accessible to clients of the 14 licensed securities trading firms with established trading accounts. According to investors, the Vietnam's stock market is at its initial period of development. It needs more time to become stable and attract attention from local and foreign investors. At the moment there are more than 22,300 accounts opened for trading at the Ho Chi Minh City Securities Trading Centre (HOSTC), the country's bourse. Only 40-50% of those accounts are actively traded. The HOSTC also host all public shares auction events for IPO of Joint Stock companies.


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The registry and depository managements of Shares & Bonds are carried out by the HOSTC with three nominated Custodian Banks with branches in Ho Chi Minh City and Hanoi (HSBC, Deutsche Bank, and Standard Chartered Bank). Three working days (T3) are typically applied for clearing and settlement of all shares and bonds traded at the HOSTC through the designated settlement bank, the Bank of Investment & Development of Vietnam (BIDV Bank). There is no known derivative and future markets current existed in Vietnam. The stock market is control and regulated by the State Security Commission (SSC), which owns and operates all financial trading markets in Vietnam (see Section 1.4.1 for details). Listing on the Vietnamese stock market required compliance with the basic listing rules outlined in the Governments Decree 144/2003ND-CP (an Interim Security Law), that required for market listing as follow:

1. Being a joint-stock company with a minimum market capital of VND 5 billion;

2. At least 20% of the shares must be owned by the public;

3. Having been profitable in the year prior to the one of applying for an IPO;

4. Having the feasibility study on investment and planning to utilise the proceeds from the issuance of shares;

The public offering of newly established joint-stock companies operating in the fields of infrastructure development and high technology could be exempted from the rules 1 and 2.

1.4.1 The Market Regulator, Facilitator and Owner:

The State Security Commission (SSC) is a market regulator, market facilitator and market owner agency that recently became part of the Ministry of Finance as assigned by the Governments Decree 66/2004/ND-CP. The SSC responsible for the implementation of the new Governments Decree 144/2003ND-CP (an Interim Security Law), which replaced the previously issued Decree 48/1998. Its chief mission of facilitating fund raising for development investment, ensuring the orderly, safe, transparent, equitable and efficient operation of the securities market, and protecting investors’ legitimate rights and interests. The SSC has its own legal status, its seal imprinted with the national badge and its account opened at the State Treasury as stipulated by applicable laws. The current Prime Ministers Decision No. 161/2004/QD-TTg entrusted the SSC with additional roles and powers to develop the financial and securities markets, at the same time it would organise and regulate the securities and securities market operations. In simple term,

the SSC is a services provider and the regulator of the Vietnamese financial market, which

takes on roles and regulatory powers similar to the ASIC and the ASX combined together (A

potential conflict of interest).

The organisational structure of the SSC comprises of: Nine (9) Departments;

1. The Securities Market Development Department;


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2. The Securities Issuance Management Department;

3. The Securities Business Management Department;

4. The International Cooperation Department;

5. The Human Resources Department;

6. The Planning - Finance Department;

7. The Legal Affairs Department;

8. The Inspection Department;

9. The Office of the SSC (with its branch office in Ho Chi Minh City).

Five (5) other Profit-seeking and Service-providing Organizations;

1) The Hanoi Securities Trading Centre;

2) The Ho Chi Minh City Securities Trading Centre;

3) The Securities Science Research and Training Centre;

4) The Information Technology and Statistics Centre;

5) The Securities Review Services.

The Minister of Finance defines the functions, duties, powers and organisational structures of all departments within the SSC.

1.5 Current Issues Concerning The Development of Stock Markets

In order to encourage more joint stock companies to list in the national stock market, the government is issuing preferential policies for the stock exchange listing companies, such as listed companies are paying no corporate income tax in the first 2 years, and a 50 percent reduction of corporate tax over the following three years. The listed companies also paying no VAT tax (GST) during the first two years after listing. Individual investors are exempted from stamp duty and taxes of capital gain and incomes that derived from shares investment dividend and interest. Despite all preferential policies given and 5 years in operation, the stock market can only attract 27 listed companies listed in the HOSTC among more than 1,000 State-owned and Private-owned joint stock companies, which could or already achieved the market listing criteria.

1.5.1 Issues That Hinder The Expansion of The Vietnamese Stock Market

(1). The roles of the SSC as defined in the government’s Decree 161/2004 included the development, own and operate the stock markets. The SSC cannot function effectively on the roles of the financial markets regulator and the operator without creating some significant conflict of interests. In comparison to Australia, the SSC


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roles are equivalent to the combination of the ASIC regulatory roles and the ASX operations together.

(2). The legal documents on equitising State-owned enterprises (SOEs) were issued late and changed frequently. The relevant legal framework is inadequate or still under development. The stock market was initially governed by government’s Decree 48/1998, which was subsequently replaced by the current governmental Decree 144/2003 (an Interim Security Law). The Security Law is still under development and the Draft to be approved by the National Assembly in 2006.

(3). Companies do not have the experiences or have not the need to utilise the main benefit of market listing, namely raising capital for business investment and

expansion using equity. Businesses have not given up the habit of borrowing from banks with the current business loan’s interest of 7% or less. The cost of equity is much higher than the cost of debt as the average dividend rates of listed companies are from 5% to 10% higher than the banks interest rates.

(4). The stock market’s regulations required financial disclosures and the administrative procedures for the stock market are too complicated for many

enterprises. Majority of equitised Joint Stock or State-owned enterprises are still operating under the financial cloud that lack of transparency, and they are unwilling to publicise their financial situation required by the stringent stock market listing rules. The government’s regulations are under amendment by the Ministry of Finance to allow enterprises which not qualified to list in Ho Chi Minh City Stock Market can do so in Hanoi Stock Market. In doing so, the government may in danger of relaxing the listing rules and introducing a new inferior market to compete again the main stock market in HOSTC.

(5). The stock market cannot develop if corporations do not see the significance of equitisation (privatisation) and market listing. Managers of all levels do not want to increase their administrative workloads for listing compliance, and enterprises are unwilling to provide transparent financial information. Thus, besides mechanism, the administrative and political measures should be taken to enforce listing.

(6). The listing compliance process is also a main issue. Many current equitised SOEs by passing the IPO process by issuing shares internally for managements and workers at a significant discount price to the enterprises market value. The current market listing rules dictate a minimum of 20% of public share ownership for listing compliance.

(7). Public education and enterprises disclosure of sensitive information to the public is still weak. Many potential investors still view the stock market as a risky place for investment where only insiders can make the profit in contrast to the currently hot real estate market in Vietnam.


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1.6 Future Development and Opportunities of the Stock Markets

1.6.1 Vietnam Outlines Solutions to Boost Stock Market in 2005

Vietnam’s State Securities Commission (SSC) in coordination with the Ministry of Finance (MoF) and major banks, on January 2005, adopted six solutions to implement immediately to accelerate the development of the local financial and stock markets to meet the increasing demands of the fast-growing economy; Solution (1): Speeds up efforts for the completion of a legal framework to support the market's operation as the first issue to be addressed this year. SSC has submitted to the Government the amendments of Decree No. 144/2003/ND-CP on Securities and the Stock Market. These amendments focus on the listing and over-the-counter markets with the aim of removing outstanding obstacles in administrative procedures. Finance Minister Nguyen Sinh Hung said “because the country is preparing to join the World Trade Organisation later this year so the country needs to restructure its financial market to comply with international requirements” (Vietnam News, December 2004). Solution (2): Vietnam aims to have Securities Law in 2006. The State Securities Commission (SSC), a Vietnam's stock market regulator will cooperate with other ministries and state bodies to begin putting together a Draft Securities Law from this year ready for National Assembly approval in 2006. The Securities Law will be a legal framework gathering all policies on the development of the Vietnam's 5 years old stock market. The new Law will help assisting the government's strategy for developing the market by 2010, which aims to increase stock market capitalisation to 15% of the country's GDP, compared with 2% currently achieved. Solution (3): The Securities Commission (SSC) will coordinate with the State Bank of Vietnam (SBV) to adjust the allowable control by foreign investors to facilitate their investment in the stock market. Currently Vietnam doesn't allow foreigners to own more than 49% of securities firms (Stock broking firms) or investment funds, and only 30% of interest in the joint stock companies. Solution (4): The SSC is to implement measures aimed at boosting the primary stock market through putting shares and bonds to auction when privatising State-owned enterprises (SOEs). Among the 1,500 SOEs to be equitised from now to 2007, enterprises that plan to sell more than VND10 billion (US$637,000) worth of shares to the public, will be auctioned through securities trading centres (in Ho Chi Minh City and Hanoi). Those enterprises that plan to sell less than VND10 billion to the public can still be sold through auctions at securities trading companies.


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Solution (5): The State will also adopt policies to encourage commercial banks and businesses to issue shares and list on the local stock exchanges. Officials from the State Securities Commission (SSC) said “the stock market would get a strong boost from a government scheme allowing some major state corporations to go public this year”. Under the scheme, already approved by the government, state-owned enterprises (SOEs) involved in key industries such as electricity, telecommunications, banking, insurance and chemical, will be equitised in different forms (MoF, January 2005). Solution (6): SSC is to expand stock market transactions and provide high-quality products for the stock market. Large and profit-making enterprises, including commercial banks and foreign-invested businesses will be chosen for listing. Relevant agencies will accelerate the preparations to put the Hanoi Securities Trading Centre into operation. SSC is to promote the stock market including improve the workings of stockbroking and securities firms, by training more professionals in the field, and tightening the compliance inspection in the stock market.

1.6.2 Vietnam Launched the Second Stock Market in Hanoi and the OTC Market

The State Securities Commission (SSC) has planned to launch the second stock market in the Ha Noi Securities Trading Centre (HASTC) on 8 March 2005. The Centre will conduct auction shares for the Posts Equipment Factory, and on 10 March 2005 auction shares for the Vinh Son-Song Hinh Hydropower enterprise at three different locations HASTC, HOSTC and Vinh Son-Song Hinh Hydropower Plant office. HASTC will coordinate with HOSTC and securities companies (licensed stocks broking firms) to announce information on these auctions on the mass media and started to receive registrations for bidding, deposits and request for attending auctions from investors in Hanoi and HCMC. According to the plan, HASTC will be built and developed in two stages. At stage 2 (from 2005 to 2007 or 2008), the HASTC will focus on conducting auctions for equitised SOEs during the IPO of shares; Conducting auctions for state and local governments bonds and corporate bonds; Organising transaction of unlisted securities. At stage 2 (from 2007 or 2008), the HASTC will develop an OTC market which is in line with the development scale of Hanoi securities market. The HASTC will accommodate the listing of small and medium-sized firms with a registered market capitals of between 5 billion dong (US$330,000) and 30 billion dong (US$2.0 million), while larger firms can still be listed on the HOSTC. Local and foreign investors will have more investment choices this year as the first over-the-counter (OTC) market and the second stock exchange are to open soon, while dozens more big firms are to be listed on the two bourses. The establishment of a market for the securities not eligible to be listed on the official bourses will create a new channel of investment, thus attracting more investors to securities businesses. In its initial stage, the OTC market will operate within a simple model and small scale. It is expected to be fully mature by 2010 (Vietnam News, January 2005).


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1.6.3 Vietnam is Linking and Listing Large Companies on Overseas Stock Markets

The Ministry of Finance is developing a pilot plan to recommend 1 or 2 enterprises to list on Singapore stock market as the first step of liking the local exchange to the international stock market. The Deputy Finance Minister, Le Thi Bang Tam has given to Dau Tu Newspaper some comments on this issue; “Presently, the Ministry of Finance (MOF) is looking for suitable enterprises with good operation, have transparent financial information, be audited and evaluated by international auditing firms, and further more, have demand on capital mobilisation for expansion of their production and business. MOF will coordinate with functional ministries, branches to select enterprises which can meet all the criteria for listing in the SGX” (MoF 20/08/2004).

1.6.4 Vietnam Proposed Changes to IPO Rules to boost Market Investors:

“The MoF actively supports the Government's plan to raise the percentage of stocks to be held by foreign investors from the current restriction of 30% in stock markets listed companies. The international investors are more advantageous than domestic ones in terms of financial capacity and technology they can offer to the listed enterprises. Thus, there is no reason to restrict the volume of stocks to be held by foreign investors. Moreover, the participation of a larger number of foreign investors in the Vietnamese stock market will boost the development and globalisation of the local market”, the Deputy Minister of Finance Ms. Le Bang Tam said (MoF, 27 December 2004). The move to auction shares of IPO enterprises on the stock markets rather than via securities firms as in the past aims to provide equal access to interested investors, and extract the full market value of the enterprises and stimulate activity for the country's hungry stock market. The newly issued Decree No. 187/2004/ND-CP on SOEs equitisation is superseding the previous Decree No. 64/2002/ND-CP, which requires SOEs under the equitisation process that plan an IPO of 10% of equity or more must auction their shares in the HOSTC or HASTC stock markets . The government introduced additional auditing standards inline with international accounting standards. The MoF has added 24 auditing firms in 2005 to the list of those qualified to audit and certify financial statements of companies. The new additions take the number of such firms to 68. Included in the new list are Grant Thorton Viet Nam, an Independent Auditing and Consulting Company, the An Phat Accounting and Auditing Company and the Dat Viet Auditing Consulting Company. There are over 70 auditing firms in Vietnam and the MoF warned companies not to get their financial statements audited by the remaining few none-approved auditors (MoF 23/02/2005).


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1.6.5 Vietnam Proposed Equisation and Market Listing of Large State-owned Corporations to boost the Stock Markets:

Vietnam Dairy Products Joint-Stock Company (Vinamilk) appears to be the biggest among the 11 companies plans by the Ministry of Industry (MoI) to list on the stock market in 2005. With the chartered capital of VND1.5 trillion (US$95.5 million), 76% is owned by the State and 15% by staff and suppliers. Ms Mai Kieu Lien, Vinamilk’s General Director said that “it would auction to the public an additional 16% of its total shares by the end of this month at the HOSTC to be eligible for the listing on bourse”. It is estimated that the State will recover around VND500 billion (US$31.8 million) from the shares auction,” she said. Vinamilk plans to reach the turnover of VND4.4 trillion (US$280.3 million) for this year. The company had recently won the bidding 12,000 tonnes exports of powder milk for children into Iraq with the value of US$21 million for this year (Vietnam News, January 2005). The Thanh Hoa Brewery Company and the Noodle and Agri-food Producer Vifon are also available for privatisation in 2005. MoI has also announced to put another 60 companies in the list of companies to be privatised 2005. It is estimated by the SSC that this year will see around 40 firms to be listed on both HASTC and HOSTC. Vietcombank Securities Co. has signed a underwriting contract for the country’s giant construction firm, the Song Da Construction Corp. to list its subsidiary firms shares on local stock exchange. The largest firm is the Can Don Hydropower Joint Stock Co. which has a chartered capital of VND320 billion (US$20.5 million). The State Bank has been appointed by the government to manage Vietcombank’s equitisation by issuing preferred shares of the giant financial institution, ready for IPO and listing on the stock markets in 2005. The biggest national insurance corporation Bao Viet is to undergo the equitisation process, going ahead with its planned sale of shares open to foreign investors. “The first steps towards Bao Viet’s equitisation will be undertaken in 2005 with the plan in the draft stages”, said Trinh Thanh Hoan, Deputy Director General of the corporation (Vietnam News, January

2005).


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CHAPTER (2)

THE PRIVATISATION AND IPO PROCESS OF STATE-OWNED

ENTERPRISES

2.1 What is Privatisation ?

Privatisation has been referred to as “the most important innovation in corporate finance during the last half of the twentieth century” (Megginson, 1999). Defined as the “transfer of firm ownership from governments to private investors” (Vickers and Yarrow, 1988). During the 1980s, the Thatcher’s government (UK) engaged in an extensive programs of ‘privatisation’, returning most of the nationalised industries in the UK to the private sector. Other industrialised countries have followed similar programs of privatisation in what has become a worldwide phenomenon. The Australian governments in particular has been following this trench since the early 1990s, privatised most of the national assets in transportation, the power and energy utilities, telecommunication, banking and pharmaceutical industries.

2.2 The Need for Privatisation of State-owned Enterprises

Privatisation is much more than selling an enterprise to the highest bidder, as it includes contracting out, leasing, private sector financing of infrastructure projects, liquidation, mass privatisation, etc. Privatisation is currently considered a legitimate tool of statecraft by governments of more than 100 countries. It is one of the key elements of the continuing global phenomenon of the increasing use of markets to allocate resources (Megginson & Netter, 2001). There is no single best approach to privatisation. The appropriate privatisation path depends on the goals that the government are seeking to attain, the individual circumstances facing the enterprise and the economic and political context of the country. It should be noted that privatisation is fundamentally a political process as well as a commercial and economic

process (refer to discussion in section 2.3.10). Many goals are often pursued through privatisation programs. These goals often fall along two principal dimensions:

1. Broad social or macro economic goals, and

2. Enterprise specific, or macro economic goals.

The macro economic goals in privatisation are numerous, however in general the privatisation program similar to Vietnam’s experience are basically focused on the following key goals.

i. Open up the economy to market forces: Privatisation will expose the industries to the free market economy, from which will flow the benefits of greater efficiency, greater growth and greater responsive to the wishes of consumers.


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ii. Reduced government interference: Privatisation frees management of nationalised industries from all the political influence and constrains and allow companies to make more rational economic decisions and plan future investments with greater certainty.

iii. Reducing the public-sector net cash requirement (PSNCR): Vietnam can attribute substantial portions of the country external debt to liabilities of state-owned enterprises. Significant portions of government budgets are devoted to paying subsidies or otherwise assisting loss-making State-owned enterprises. The Vietnamese government's objectives are simply to extricate from these financial commitments, and focus scarce resources instead on education, infrastructure development, and social welfare.

iv. Increase share ownership and popular capitalism: As part of a broad program of structural reform. The Vietnamese government is using equitisation (privatisation) as an element of the process of developing a free market economy and its associated financial institutions, and to broaden share ownership so that the public has mechanisms for saving and participating directly in the economies of their country, ready for the economic integration with the world economy in joining the WTO.

v. Promote the development of the private sector: Especially small businesses by levelling the playing field and ending subsidised competition from state-owned enterprises. There is a danger in Vietnam that emerging private businesses face unfair competition from state-owned enterprises that have access to credit and other inputs at below market rates and better access to government distribution channels. In order to give the private sector a fair opportunity to compete and thrive, state-owned enterprises are privatised.

In general, the macro economic goals of privatisation focus mostly on the potential improvement that private sector operators can contribute in increasing performances and chances of survival of enterprise. These goals recognise the need to improve enterprise efficiency by introducing new technology and financing sources, improving the quality of the product, enhancing marketing-especially in the international market, providing information systems, and generally improving the management of the enterprise. Obviously successful changes of this nature, when applied to a number of individual enterprises, will have significant macro economic implications as well.

2.3 What Types of Privatisation Techniques can be Adopted ?

There are a variety of methods that can be selected to use in privatising state-owned enterprises as following:

2.3.1 Small Business Auctions

A normal procedure for privatising small businesses is to auction them to the highest bidder. Given the size of the enterprises, elaborate bid evaluations and valuations are not appropriate and will only serve to delay the process. Auctions also create a dramatic setting to promote the visibility of privatisation and allow for broad participation, and they are truly transparent,


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in the sense that all participants can see for themselves how the process was conducted and identify the high bidder.

2.3.2 Trade Sale of Larger Enterprises

By soliciting technically and financially capable investors to acquire the enterprise. In soliciting the investors, the seller normally conducts a thorough review of the business and prepares material describing the business and it's equipment, workforce, financial condition, markets, and prospects. This information is circulated to a group of candidate investors that express initial interest in the business. These investors then submit bids outlining the terms under which they would purchase shares of the enterprise. Trade sales have significant disadvantages in that they can take a long period of time and substantial expense to conduct. Because of the substantial amount of negotiation often involved, and the nature of back room deals being conducted and are susceptible to complaints from bidders. This is a common method of privatisation of state-owned power utilities by the Australian Government during the late 1990’s, and it may not applicable for the current Vietnam’s economic situation.

2.3.3 Initial Public Offerings (IPOs)

Initial Public Offerings are the sale of shares directly to the public. Most of the privatisation conducted in the United Kingdom and in Australia during the 1980's and the 1990’s were done through IPOs. Because the potential buying public includes a large number of unsophisticated investors, relatively more information and higher quality information needs to be prepared to conduct an IPO. A valuation of the enterprise is prepared and a pricing strategy is developed that reflects the valuation, but also seek to ensure that the offer is sufficiently attractive that the shares available can be sold. IPOs have the virtue of stimulating interest among the general public in financial markets and increasing share ownership in society. The disadvantages of IPOs are that they do not bring new capital to the enterprise and do not bring in new managerial talent or resources. As a result, IPOs should only be used if the performance of existing management is satisfactory. In addition, IPOs are very time consuming and expensive to conduct, and they generally require the existence of a formal stock exchange and broker network or other distribution mechanism to be implemented effectively. This method is currently a very popular mean of privatisation and listing of large and profitable SOEs in Vietnam.

2.3.4 Joint Venture

A common form of privatisation in some parts of the world, especially China is the joint venture. Under a typical joint venture, an investor approaches the government and offers to contribute something of value to an enterprise, such as capital, management, or technology, and in return receives a share of the ownership of the newly constituted business. Joint ventures are often attractive to governments that are not fully supportive of privatisation because the government does not give up all control of the enterprise. Over time, and with new investments, it may be possible to minimise government control by diluting its ownership interest. There are several significant disadvantages to joint ventures as a form of privatisation. Because of the government's continued involvement, many of the goals of privatisation stated above are not met. The government remains involved in management and it's liability for poor performance is retained.


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2.3.5 Mass Privatisation Programs

One of the significant innovations in privatisation methods during the last few years is the development of mass privatisation programs. In concept, mass privatisation programs avoid the time and expense of case-by-case transactions and involve the general public by distributing shares for free or in exchange for specially created privatisation entitlements. This type of privatisation was applied in Australia during the late 1990’s to demutualise AMP and privatise NRMA (NSW automobile club). The mechanics of mass privatisation programs are similar to IPOs, except that vouchers of entitlement are used to obtained shares, rather than cash. As a result, significantly less analytical time is required and disclosure requirements are greatly reduced. The disadvantages of the mass privatisation programs lie principally in the diffusion of owner-ship across broad groups and in the critical role that management is able to “play” and make influence in the privatisation process.

2.3.6 Build-Own-Operate/Build-Own-Transfer Programs

Governments facing severe needs for infrastructure investments increasingly turn to the private sector to finance, build, and operate the needed facilities. In return, the government gives certain assurances to the investors and pays fees for the services they provided. This technique has proved useful in attracting additional capital into infrastructure investments and alleviating critical shortages of power and transportation requirements, especially in Australia and in Asia (Vietnam) where new power stations, toll roads and bridges are built. The disadvantages of these programs are that they are often very difficult and time consuming to negotiate, and structure with the relevant strong legal framework for infrastructure investments. Because these programs are relatively new and involve financing of new projects not assets that are already existed, many difficult legal and financial issues emerge that have not previously been confronted.

2.3.7 Liquidation of State-owned Enterprises

SOEs with very limited prospects for survival are sometimes liquidated and their assets auctioned separately to the private sector. Sometimes these liquidated enterprises continue as government going concerns. Liquidation ends the government's commitment to support an enterprise and lays the groundwork for private sector investment. Liquidation is normally a last resort, used when the government has no realistic alternatives to privatise the enterprise. Liquidation is commonly used in Vietnam to dismantle small SOEs that have no hope of survival without financial subsidises from the state.


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2.3.8 The General Process of Privatisation

Regardless of the privatisation technique that is selected, the process of privatisation is relatively standardised. Governments generally follow several steps in privatising enterprises; First, the target companies are reviewed, restructure if necessary and evaluated to understand, in a very general way, their characteristics, markets, prospects to put some values on the enterprises. Second, a privatisation plan is prepared to guide the implementation. This plan should match the goals of the government and the characteristics of the enterprise to determine the approach that will be taken. Third, the company is valuated and marketed, whether to core investors or the public, depending on the path chosen. Fourth, if necessary, the terms of the transaction are negotiated and the legal documentation prepared, and finally, the transaction is closed.

2.3.9 Critical important factors need to consider

Several factors are critically important to the success of the privatisation program:

� Firstly, speed is absolutely essential. During the period that governments are deciding to privatise, until the point that new owners are recognised, the enterprise is essentially under control of its management. Ownership interests whether of maintaining existing capital or investing new capital are ignored. Great potential exists for asset-stripping

or other misappropriation of assets.

� Secondly, the transparency of the privatisation process must be preserved and

publicised. Any questionable ethical conduct has the potential to destroy the integrity of the process and erode political support.

� Finally, the privatisation program must be implemented professionally. If it is not, the enterprises, investors, and the public could be discouraged from participating with disastrous consequences.

2.3.10 General Problems Encountered during the Privatisation Process in the Former Socialist Countries

Today we are witnessing the reintegration into the global economy of the former socialist countries in Central and Eastern Europe and, to a certain extent, the People's Republic of China and Vietnam. They are re-entry into global markets by various means and channels of cooperation, under new political and economic conditions. This reintegration process, which is taking place with tremendous speed, is creating a number of new and important problems for the countries in transition. The former socialist countries of Central and Eastern Europe and the former Soviet Union, China and Vietnam, face a completely different world economy in the 1990s from the one they dropped out of decades earlier. These countries, by definition, have a much weaker competitive position. In order to be reintegrated into the global economy, these countries have had to implement a number of important institutional changes, where a group of countries building up a democratic, political system and a market-based capitalist economic system from scratch by political initiatives and means through privatisation process. One can


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also expect the domestic institutions in China and Vietnam to adjust to the two countries' growing participation in global markets, especially its internal effects. The privatisation processes are taking place in these countries is historically unprecedented change. Within a very short period of time, major changes have occurred in ownership patterns. Unlike a market economy, where these changes develop from the grassroots level, the privatisation process in these transition countries is organised by the state. In essence, we are witnessing the "de-statisation" of economies by the state. This presents a very interesting contradiction in itself, which has a number of unfavourable consequences. For example, the state is being pushed to undertake the transition process at a very rapid pace. As a result, a large number of these countries are selling out their national wealth to their own citizens and

to foreign interests for far less than its full value. Similar to China, Vietnam is rapidly entering the global economy as a new frontier, without undergoing major political changes. So far, the net results of reintegration process have been much more favourable for China and, to some extent, Vietnam, than for the former socialist countries in Central and Eastern Europe and the former Soviet Union. This is primarily due to the fact that China and Vietnam opened up their countries and reintegrated with world markets, while maintaining a well-structured political institutional system which could influence the outcome of the changes taking place. Where as in the former socialist countries in Central and Eastern Europe and in the Soviet Union, the fact that these changes took place together with political transformations and the disintegration of the state, the establishment of new relationships with the global markets resulted in weak states which did not have the capacity to deal with the transition problems.

2.4 The Vietnamese Privatisation Program

The privatisation program in Vietnam is carried out under the name of “equitisation” or more broadly “transformation” of the national economy. Equitisation has led to the creation of publicly held companies in Vietnam with the State, the businesses employees, and private share holders being owners. It also helped mobilise capital from various sources for equitised SOEs and increase SOEs efficiency (Vietnam News, 25/02/2005). In general, the privatisation program in Vietnam is mainly aimed to achieve the following five macro economic objectives as described in details in Section 2.2:

• Open up the economy to market forces,

• Reduced government interference,

• Reducing the public-sector net cash requirement (PSNCR),

• Increase share ownership and popular capitalism, and

• Promote the development of the private sector.

The Vietnamese government defines the term “equitisation” and “transformation” interchangeably as a political safe-guard avoiding the usage of the controversy term “Privatisation” by the State. For the purpose of consistency with existing privatisation literatures in Vietnam, the terms “equitisation” and “transformation” are uniformly referred


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to as privatisation throughout this report. The equtisation process in Vietnam are generally carried out with the following 7 distinctive characteristics that have evolved over the years since the establishment of the financial market in July 2000:

1. State-owned enterprise is reorganised and equitised following the government rules and guidelines set out in Decree No.144/2003/ND-CP, Prime Ministerial Decision 155/2004/QD-TT and in Government’s Circular 126/2004/TT-BCT respectively.

2. An “equitised” or “transformed” company is registered as a Joint-Stock company under the Enterprise Law applicable to private enterprises (Decree 187/2004).

3. Shares of the company are issue to the public through the IPO process by auctioning at a reserve price determined by a valuation committee. The currently proposal is to employ professional financial & accountant firms to carry out this task (Circular 126/2004 & Decree 187/2004).

4. The State retains 100% ownership on some enterprises relating to the national defense and sensitive industries, and often retains 51% of shares if the enterprise is falls into the 25 businesses & services classified by the state in Prime Ministerial Decision 155/2004/QD-TT.

5. Private outsiders can own up to 20% and foreign investors are restricted to less than 30% majority stakes on the listed enterprises (Decree 187/2004).

6. Workers and managements are encourage to take on majority stake in the enterprise up to 30% discount based on an averaged price achieved on public auctions.

7. Ownership is generally diffused in the following pattern: If the government retains a majority shareholding, no institution may hold more than 30% of the shares and no individual is allowed to hold more than 5%. If the government holds less than a majority, then the limit is 30% per institution and 10% per individual.

After three rounds of SOEs reform, the numbers of SOEs in Vietnam has been reduced more than half from 12,300 SOEs in 1993 to 4,296 SOEs with a total investment capital of VND189 trillion (US$12 billion). The process of privatisation has been proceeding slowly and deliberately in Vietnam. The government began to implement the pilot program between 1992 and 1996 under a voluntary participation basis. Only seventeen SOEs completed the privatisation by the end of 1997. Considered the first phase of privatisation as a learning phase, the Vietnamese government had thoroughly monitored the privatisation program and identified the following obstacles (Arkady & Mallon, 2004):

• Management concerns for the loss of preferential treatment given to SOEs by the government.

• Lack of clear and transparent guidelines on the privatisation procedures.

• Economic concerns for the privatisation of the large number of small SOEs.

• Lack of liquidity in share trading.

• Limited institutional capacity to implement privatisation.

• Complex institutional arrangements slow down progress.

• Political concerns about the impact of privatisation.


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Aware of these obstacles, the government began the second phase of privatisation (1996-2000) in a more forceful, dual framework. Firstly, the privatisation program was no longer voluntary. With few exceptions, all SOEs were mandated to prepare for privatisation. Secondly, the government strengthened the institutional framework to support the privatisation program. A new Decree was issued subjecting all SOEs to restructuring and making explicit the government’s policy to:

• Support employee share ownership,

• Change management,

• Approve management performance incentives,

• Increase assets of the State,

• Raise income of employees, and

• Contribute to national economic growth.

As a result, over 700 SOEs were privatised in a period of five years to 2000. Third phase of privatisation (2001-2005), the Vietnamese government has made public its plan to privatise approximately all of two thousand smallest SOEs; i.e. those with tens of workers and low turnover (Saigon Times, 2002). This is a small category of SOEs had been identified by the government during the first phase of the privatisation program. Considering the costs and benefits of privatisation, the restructuring of such small state companies into joint-stock companies was determined as uneconomical, but necessary. The government’s solution to this problem is a privatisation scheme officially described as “privatisation through Entrusting (to labour collectives), Leasing, Contracting Out and Sale” (Decree 103/1999/ND-CP, which has recently been replaced by Decree 187/204/ND-CP) or Liquidation. Under this new privatisation scheme, profitable SOEs with capital less than VND1 billion (US$70,000) and loss- making SOEs with capital less than VND5 billion (US$350,000) are subject to privatisation. The privatisation program in the early 2000s, aimed specifically at these SOEs, is to transfer state ownership to ownership of the labor collectives using one of the methods of Entrusting Leasing, Contracting out and Sale. In the case of Sales method, discounts, occasionally up to 100%, are standard. As of the end of 2001, less than one year into the program, 37 SOEs had been sold, 4 contracted out and 61 entrusted to labor collectives (none leased) (CIEM, 2002). The Government has scheduled to renovate and restructure 1,000 state-owned enterprises each year between 2004 - 2005. Sixty percent of the enterprises will be privatised, including leading businesses in the fields of electricity generation, mechanical engineering, chemical-fertiliser, cement, construction, telecommunications, aviation, maritime, banking, and insurance (Saigon Times, 2004). In late February 2004, the Central Steering Committee for State-owned Enterprises Renovation and Development met with representatives from 46 corporations to discuss their plans for the final length of the privatisation process. As a result, the 9th Central Resolution of 11th Legislature issued directives that State-owned enterprises tend to further rely on the


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State’s subsidisation and protection. Although maintenance of the State’s monopoly is necessary in some industries national strategic importance as banking, defence and communication, but that can create monopoly of these areas. Many small and unprofitable State-owned enterprises have not been privatised, and yet these businesses operate in the fields in which the State does not need to hold control shareholdings any longer. They now have become burdens on the State budget and a potential danger for banks, therefore they must be privatised or liquidated.

2.3.11 Government Solutions in Speeding up the Equitisation Process

The country privatisation program since 1992 has equitised 2,242 SOEs. The Steering Board for Enterprise Renewal and Development announced that 724 State-owned enterprises (SOEs) will be equitised nationwide this year (2005). The figure includes 340 SOEs whose equitisation plans had already been approved in 2004 but have not yet been executed. In order to speed up the SOEs’ equitisation process, Ho Xuan Hung, Deputy Director of National Steering Committee for Enterprises Reform and Development Committee said, in the coming time, it is necessary to focus on 5 points set out in the 9th Central Resolution of 11th Legislature, including:

• Expand scale and size of SOEs that need equitising, including several corporations and big enterprises operating in the fields of electricity, metallurgy, machinery, chemical-fertiliser, cement, construction, road transportation, airlines, maritime, telecommunication, insurance, banking, etc.

• Evaluate enterprises, of which the value of land use rights, in principal, will be decided by the market;

• Publicise the purchase of shares on the market and overcome the internal equitisation;

• Abolish privilege and monopoly in SOEs’ business in line with an international economic integration roadmap;

• Reform the State management of SOEs, setting up State financial investment company and State management agency for an unified and effective implementation of the role as representative for the State capital ownership in enterprises of all national economic sectors.

Under Decree 187/2004, not only those SOEs that are fully owned by the State but also the ones that are partly owned by the State will also be turned into joint stock companies. The latter include state corporations, state companies, state commercial banks and state financial institutions.


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2.3.12 Privatisation Results and Lesson Learned from the Process

The following are preliminary results and issues identified from the current privatisation program;

(1). Equitied SOEs Increased Market Valuation. The recent government commission study into the effectiveness of the privatisation program indicated that a large numbers of SOEs have been re-arranged by being merged, dissolved, liquidated, leased out or equitised, resulted the remarkably decreased in number of SOEs while their market capital has increased.

(2). Equitied SOEs Improved Operation and Efficiency. A survey of 500 SOEs that have been equitised over the past year indicated that these companies have operated effectively, registering increases up to 43% in annual revenues and 2.4 times in profits on average. Their workers average income has also increased 54 % and dividend rates were on average 15.5%.

(3). The Need to Increase Public Shares Ownership. In the equitisation process, the State only need to held the necessary market shares on average of about 38% in those enterprises that supply key products and service and, only 10% of shares are sold to the public. This means that the equitisation of enterprises has mainly taken place within businesses (equitised companies issued shares to management and staff only). In other words, the equity process in Vietnam has so far failed to lure capital from potential investors, who possess capital, technology and management skills. Experts recommended the equitisation of large-scale enterprises to attract international investors.

(4). Once equitisation (privatisation) and listing are carried out in state-owned companies, there will no longer be many preferential treatments and subsidise

from the state in terms of accessing cheap capital from state banks with warranty

from the state. This is one of the main reasons why state-owned enterprises are reluctant to do so. The only way to change their mind is to abolish all such preferences.

(5). Effects on State and Workers. Privatisation changes the distribution of power within a society, as it diminishes control of the economy by the state and government-appointed managers. Workers often feel threatened by the potential changes inherent in privatisation, although employees frequently benefit from the process. Experts recognise that there is controversy among leaders of industries and enterprises and workers regarding the benefits to be obtained from equitisation. Some industry leaders want to "wait and see" and others worry about losing personal benefits. The current situation is that equitised companies are still classified as state-owned companies. To grow and expand, these companies need to raise capital and issue additional equity to the public. But it means that in order to maintain its legal 51% ownership, the state must provide the additional capitals, otherwise the state’s holding will be diluted below the required 51% minimum level. Does that mean such companies violate the Law on State-owned Enterprises? The sale of shares to employees is another controversial area. Employees of an enterprise are allowed to purchase its shares at 30% discount to the public, and low-income employees can buy shares on instalments over 10 years. However, in practice, many workers do try to buy shares of which they do not have


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available fund to pay for even at a preferred discount prices or on instalment. Who are financing these purchases?. Previous investigations indicated that in the first couple of months after the equitisation process ends, these employees sign contracts to sell their shares to unknown persons or institutions. Does the company know about these transactions?. Do employees aware in doing so that they have unwittingly sold the ownership rights transferred to them by the state, and in some sense, have sold their jobs?. Issues relating to shareholders are also urgent as it has been reported that many people have bought shares of enterprises via unofficial channels and they controlled activities of these enterprises for their own purposes.

(6). Difficulties in Determine the True Value of SOEs. The evaluation of to-be-equitised State-owned enterprises is another controversial issue to be satisfactorily solved. Previously, one of the factors slowing down the equitisation of SOEs was the confusion in evaluating SOEs. Preventing such confusion, Decree 187/2004 stipulates that the evaluation of those SOEs will be equitised will not be made by a state council as it was in the past. From now, SOEs can hire some professional organisation to evaluate their value. Director of the Enterprise Finance Department, Nguyen Dang Hoc commented recently that “at present, as many as 47 organisations have sufficient capability to evaluate SOEs. Commercial banks will be the first to hire foreign evaluation companies to do the job in the near future” (Vietnam Economic Times - No.122). Determining the actual value of enterprises are difficult, especially for enterprises which have goodwill, competitive advantages, trade marks, and are located in downtown areas of cities and town. There are two evaluating approaches commonly adopted:

� Determining the market price of the land-use-rights on the current hot properties market can creates an enterprise with rich assets and poor income, a situation in which can be quite difficulty in issuing shares to investors;

� Evaluating enterprises at incorrect levels makes it easier for managements to use equitisation process to take over valuable assets such as real estate in expensive locations and trade marks.

Mr Nguyen Thieng Duc, Chief of Secretariat of the Bureau for Economic Research, one of senior equitisation officers in HCMC, and other officials of the Enterprises Management Restructure Board, has stated that “under the previous evaluation guidance, enterprises which have competitive advantages like real estate in good locations, goodwill, monopolistic products, trade marks (if any), with after-tax-profit rates higher than 10 year-T-bond rates at the evaluating date, have to add the value of advantages to the actual value of enterprises”. The guidance stated that the evaluation of state-owned enterprises when they are transformed into join stock companies should be based on the market prices of assets; manufacturing, plants, real estate, and the construction prices determined by authorities. Officials experienced difficulties in evaluating enterprises under this guidance (Vietnam Economic Times - No.122). Also in this regard, the Ministry of Finance has submitted to the Government amendments to Decree 64/CP on the transformation of State-owned enterprises into equitised ones. One of the proposed amendments is that enterprises with assets valued below VND20 billion are allowed to make self declarations and evaluations and submit a report to relevant agencies, who will eventually announce the value of businesses. This amendment is expected to help accelerate the equitisation process considerably as there


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are a large number of businesses with capital less than VND20 billion set to go public. Deputy Finance Minister Le Thi Bang Tam said “Decree No.144/2003/ND-CP is considered an important "revolution" in transforming SOEs into joint stock companies. Ms. Tam (Deputy Minister of Finance) says the Government is providing guidelines for making a list of big companies and corporations that will be organised. Previously, we were confused in evaluating state corporations, due to inadequate legal framework, and the range of those SOEs that needed to be reorganised then was limited, she added. However, some large SOEs, a typical example being the Ho Chi Minh City Insurance Corporation (Bao Minh), underwent a successful reorganisation process and became joint stock companies in 2004, paving the way for other SOEs to follow (MoF, January

2005).

(7). Higher Responsibility for SEOs Management. Under Government’s Decree

No.144/2003/ND-CP, SOEs management must be more responsible in resolving the financial problems related to outstanding debts and assets during the reorganization process. The Decree consists of detailed stipulations on the responsibility of SOEs' directors in resolving such problems as well as the role of outstanding debts and assets trading companies. Specifically, these outstanding debts and assets will not be included in the value of the equitised SOEs but must be handed over to those trading companies. This will solved the current financial transparency problems of many SOEs which would-be-equitised, some of them unable to calculate profits and losses in addition to long-standing debts accumulated during the office terms of several government appointed directors.

(8). Better Governing and Management of Policies. Governing organisations and

equitisation-related agencies have also slowed the equtisation process. Because reorganising and equitising SOEs does not combine with the relevant administrative reforms, the regulations by responsible agencies applied to would-be-equitised enterprises have proven to be complicated and problematic. Many policies are unfortunately either impractical or incomplete and frequently updated and change. Many leaders at all levels, ranging from ministries to provinces, management boards, and directors of SOEs were not ready for equitisation, despite the fact that 80 percent of equitised enterprises reportedly have been running effectively.

(9). Foreign Investors to Allow to Hold more Equitised SOEs Stocks. Government

Decree No.144/2003/ND-CP shall be amended to create favourable conditions for investors to buy shares of the equitised SOEs. Thus, it will help boost the development of the Vietnamese capital and stock markets. Decree 187/2004 does not restrict the volume of shares investors intend to buy. Under the law to encourage domestic investment, foreign investors are allowed to hold a maximum of 30% of Vietnamese companies' stocks. The Government has requested that the Finance Ministry raise this percentage, and the Finance Ministry is consulting relevant government authorities about an appropriate increase in the percentage of stocks that can be held by foreign investors.


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CONCLUSSION

This project provides an overview on the development and operation of the Vietnamese stock market, as well as the Privatisation (Equitisation) Program of State-owned Enterprises by the Vietnamese Government. During the course of this research, the following issues were identified and discussed which may warrant additional details research on each topic in future study:

Chapter (1): Stock Market Development and Operation

(1). The roles of the SSC as defined in the government’s Decree 161/2004 included the development, own and operate the stock markets. The SSC cannot function effectively on the roles of a financial markets regulator and operator without creating some significant conflict of interests.

(2). The legal documents on equitising State-owned enterprises (SOEs) were issued late and changed frequently and confusing. The relevant legal framework is inadequate, and the Security Law is still under development which restricted the expansion of the stock market.

(3). Companies do not have the experiences or have the need to raise capital for business investment and expansion using equity market. Businesses have not given up the habit of borrowing from state banks with the current business loan’s interest of 7% or less. The cost of equity (dividends) is 5% to 10% higher than the cost of debts.

(4). The stock market listing required financial disclosures and administrative listing procedures are too complicated for many enterprises. Majority of equitised Joint Stock or SOEs are still operating under the financial cloud that lacks of transparency. Managers of all levels worry about increasing administrative workloads for listing compliance, and unwilling to provide transparent financial information to the market. Hence besides mechanism, political measures should be taken to enforce listing.

(5). The government’s regulations are under amendment by the MoF allow enterprises which not qualified to list in HOSTC can do so in HASTC. In doing so, the government may in danger of relaxing the listing rules and introducing a new inferior market to compete again the main stock main in HOSTC.

(6). Listing SOEs are no longer receive many preferential treatments and subsidise from the state in terms of accessing cheap capital from state banks with warranty

from the state. This is one of the main reasons why state-owned enterprises are reluctant to do so.

(7). The listing compliance process is also a main issue. Many equitised SOEs bypassing the IPO process by issuing shares internally for managements and workers at a significant discount price to the enterprises market value. The current market listing rules dictate a minimum of 20% owned by the public for listing compliance.

(8). Public education and enterprises disclosure of sensitive information to the public is still weak. Many potential investors still view the stock market as a risky place for investment where only insiders can make the profit in contrast to the currently hot real estate market in Vietnam.


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Chapter (2): The Privatisation of State-owned Enterprises (SOEs)

(10). Equitied SOEs Increased Market Valuation. The recent government commission study into the effectiveness of the privatisation program claimed that a large numbers of SOEs have been re-arranged by being merged, dissolved, liquidated, leased out or equitised, resulted the remarkably decreased in number of SOEs while their market capital has increased.

(11). Equitied SOEs Improved Operation and Efficiency. A survey of 500 SOEs that have been equitised over the past year indicated that these companies have operated effectively, registering increases of 43% in annual revenues and 2.4 times in profits on average. Their workers average income has also increased by 54% and dividend rates of return were on average 15.5%.

(12). The Need to Increase Public Shares Ownership. The equitisation process in Vietnam has so far failed to lure capital from potential international investors, who can bring in much needed new capital, technology and management skills. Experts recommended the equitisation of large-scale enterprises instead of small and medium-sized enterprises may result in better participation from international investors and institutions.

(13). Effects on State and Workers. Privatisation changes the distribution of power within a society, as it diminishes control of the economy by the state and government-appointed managers. Workers often feel threatened by the potential changes inherent in privatisation, although employees frequently benefit from the process.

(14). Difficulties in Determine the True Value of SOEs. The evaluation of to-be-equitised State-owned enterprises is another controversial issue to be satisfactorily solved. Evaluating enterprises at incorrect levels makes it easier for managements to use equitisation process to take over valuable assets such as real estate in expensive locations and trade marks.

(15). The newly issued “Decree No.144/2003/ND-CP is considered an important "revolution", and it will solve most problems previously encountered in the process of transforming SOEs into joint stock companies.

(16). Higher Responsibility for SEOs Management. Under Decree No.144/2003/ND-CP, SOEs must be more responsible in resolving the financial problems related to outstanding debts and assets during the reorganisation process. This will speed up the privatisation process and extract full value from equitised enterprises for government.

(17). Foreign Investors to Allow to hold more Equitised SOEs Stocks. Relaxing of restriction from foreign investors will help boost the development of the Vietnamese capital and stock markets.

(18). Better Governing and Management of Policies and Regulations. Governing and equitisation-related agencies have slowed the equtisation process. Because reorganising and equitising SOEs does not combine with the relevant administrative reforms, the regulations by responsible agencies applied for equitisation of SOEs have proven to be complicated and problematic. Many policies are unfortunately either impractical or incomplete and frequently updated and change.


Page - 30 -

REFERENCES

Arkady, Brian V. and Raymond Mallon, (2004), “ Doi Moi: Continuity and Change in the Vietnamese Economy. Hanoi: Unpublished manuscript in progress.

Bishop, Matthew R. & John A. Kay (1989). “Privatisation in the United Kingdom: Lessons From Experience,” World Development, Volume 17, Issue 5, pp. 643-657.

Boycko, Maxim, Andrei Shleifer & Robert W, Vishny (1996), “A theory of privatisation,” The Economic Journal, Volume 106, Issue 435, pp. 309-319.

Christensen, Ross, Thompson, Westerfield & Jodan (2001), Fundamentals of Corporate Finance (2nd edition), (Irwin/ McGraw-Hill), McGraw-Hill Book Company Australia, NSW.

Circular No.126/2004/TT-BTC “MoF’s Circulation of Guidelines on Government’s Decree No.187/2004/QD-CP”. Hanoi 24th December 2004

David K. Eiteman, Arthur I. Stonehill & Michael H. Moffett, (2001), Multinational Business Finance (9th edition),(Addison-Wesley-Longman) Addison-Wesley Publishing Company, US.

Decree No.187/2004/Nð-CP “Government’s Decree on Transforming State-owned Enterprise into an Equitised Enterprise”. Hanoi 16th November 2004.

Decree No.161/2004/ND-CP “Government’s Decree on Penalties of Administrative Violations in The Field of Securities and Securities Markets”. Hanoi, September 7th, 2004.

Decision No.161/2004/QD-TTg “Prime Ministerial Decision on The Approval of The Strategy for The Development of Vietnam’s Securities Market up to 2010. Hanoi, 5th August 2003.

Decision No.63/2003/QD-TTg “ Prime Ministerial Decision on The Functions, Duties, Powers and Organisational Structure of the SSC”. Hanoi, September 7th, 2004.

Decree No.144/2003/ND-CP “The Government’s Decree on Securities and Securities Market”, Socialist Republic of Vietnam. Hanoi, November 28th, 2003.

Decree No.103/1997/CP. “Decree on Regulation on Entrusting, Selling, Business Contracting or Leasing State Enterprises,” Socialist Republic of Vietnam. Hanoi, September 09th 1997.

John Sloman and Mark Sutcliffe (2001), Economic for Business, (2nd edition), (Prentice Hall) Pearson Education UK, Harlow, Essex.

Kim Chi Trinh, Duke University (2002), Presented Paper at the Fourth Asian Roundtable on Corporate Governance 2002, Mubai, India. “Privatisation: Effects of Ownership Structure and Competition on Performance”.

Michael McGrath & Christopher Viney (2001), Financial Institutions, Instruments and Markets, (2nd edition), (Irwin/ McGraw-Hill) McGraw-Hill Book Company Australia, NSW.


Page - 31 -

Megginson, William L. (1999), “The Impact of Privatisation on Capital Market Development and Individual Share Ownership,” Presentation at the 13th Meeting of the OECD Advisory Group on Privatisation in Paris, France, September 22-23, 1999.

Megginson, William L. and Jeffry M. Netter, (2001), “From State to Market: A Survey of Empirical Studies on Privatisation,” Journal of Economic Literature. Volume 39, Issue. 2, pp. 321-390.

Tran Ngoc Phuong, (2004) “Report from the Standing Vice Chairman, Ho Chi Minh City’s Enterprise Reform and Management Board. “Reform of State-owned Enterprises in the Context of Vietnam’s WTO Accession”.

Vietnam’s State Securities Commission’s Website for: Government’s Decrees or Prime Ministerial Decisions on Stock Market http://www.ssc.gov.vn/ssc/Detaile.aspx?tabid=735&FolderCode=11&CateCode=6 Vietnam’s Ministry of Finance’s Home Page for: Financial Market News http://www.mof.gov.vn/DefaultE.aspx?tabid=197 Vietnam’s Ministry of Finance’s Home Page for: Government’s Financial Laws and Regulations. http://www.mof.gov.vn/DefaultE.aspx?tabid=281 Vietnam News: A National English Language News http://vietnamnews.vnagency.com.vn/ Vietnam Investment Review News http://www.vir.com.vn/Client/VIR/Default.asp Vietnam Government Agencies: A comprehensive list of Central Government Ministries, Agencies & 61 Provinces http://www.vietnamembassy-usa.org/learn/other.php3 Vietnam Laws Database: Contains all Government issued Decrees, Decisions, Memos, Circulars & Guidelines, to dated http://www.luatvietnam.com.vn/ Vickers, John and George Yarrow, (1988), “Regulation of Privatised Firms in Britain,” European Economic Review, Volume 32, Issue. 2,3, pp. 465-473.

World Bank (2001), Vietnam Development Report 2002: “Implementing Reforms for Faster Growth and Poverty Reduction”, World Bank Vietnam Office.12


Page - 32 -

APPENDIX (A)

CUSTODIAN BANKS

STT Company Name Website

1 The Hongkong and Shanghai Banking Corporation

Limited - Ho Chi Minh City Branch

2 Standard Chartered Bank - Ha Noi City Branch

3 Deutsche Bank Ho Chi Minh City

FUND MANAGEMENT COMPANY

No Company Name Website Chartered Capital

1 VietFund Management www.vinafund.com 8.000.000.000 VND

DESIGNATED SETTLMENT BANK

No Company Name Website

1 BIDV- Nam ky Khoi nghia Branch

SECURITIES COMPANIES

No Company Name Website Chartered capital

1 ACB Securities Company Ltd. 43.000.000.000 VND

2 BIDV Security Company, Ltd www.bsc.com.vn 100.000.000.000 VND

3 Bao Viet Securities joint stock Company www.bvsc.com.vn 43.000.000.000 VND

4 The First Securities Company www.fsc.com.vn 43.000.000.000 VND

5 Incombank Securities Company, Ltd 55.000.000.000 VND

6 MeKong Securities Corporation www.mekongsecurities.com.vn 6.000.000.000 VND

7 Thang Long Securities Company, Ltd 43.000.000.000 VND

8 Vietcombank Securities Company, Ltd. www.vcbs.com.vn 60.000.000.000 VND

9 Eastern Asia Bank Securities Company,

Ltd

www.eabbank.com.vn 21.000.000.000 VND

10 Hai Phong Securities joint stock Company 21.750.000.000 VND

11 Saigon Securities Incorporation www.saigonsecurities.com 20.000.000.000 VND

12 HoChiMinh City Securities Corporation www.hsc.com.vn 50.000.000.000 VND

13 Agribank Securities Company, Ltd 100.000.000.000 VND


Page - 33 -

CURRENTLY LISTED COMPANIES ON THE STOCK MARKET (HOSTC)

No Company Name Website Chartered Capital Financia

l reports

1 AGF An Giang Fisheries Import & Export Joint Stock www.agifish.com 41.791.300.000 VND view

2 BBC Bien Hoa Confectionary Corporation www.bibica.com 56.000.000.000 VND view

3 BBT Bach Tuyet Cotton Corporation www.bachtuyet.com.vn 68.400.000.000 VND view

4 BPC BimSon Packing Company 38.000.000.000 VND view

5 BT6 620 - Châu Thới Concrete Corporation concrete620.com 58.826.900.000 VND view

6 BTC BinhTrieu Construcsion and Engineering Joint Stock Corporation

12.613.450.000 VND view

7 CAN Halong Canned Food Stock Corporation www.halong-canfood.com.vn

35.000.000.000 VND view

8 DHA Hoa An Joint Stock Company 35.000.000.000 VND view

9 DPC DaNang Plastic Joint Stock Company 15.872.800.000 VND view

10 GIL Binh Thanh Import - Export production and Trade joint stock Company

www.GILIMEX.com 25.500.000.000 VND view

11 GMD General Forwarding & Agency Corporation 200.000.000.000 VND view

12 HAP Hai Phong Paper Joint Stock Company 20.080.000.000 VND view

13 HAS Hanoi P&T Construction & Installation

Joint stock Company

12.000.000.000 VND view

14 KHA Khanh Hoi Import Export Joint Stock

Company

20.900.000.000 VND view

15 LAF LongAn Food Processing Export Joint

Stock Company

19.308.200.000 VND view

No Company Name Website Chartered Capital Financia

l reports

16 PMS Petroleum Mechanical Stock Company www.cokhixangdau.com

32.000.000.000 VND view

17 REE Refriferation Electroniccal Engineering

Corporation

www.reecorp.com 225.000.000.000 VND view

18 SAM Cables and Telecommunications Material

Joint Stock Company

180.000.000.000 VND view

19 SAV Savimex Corporation 45.000.000.000 VND view

20 SGH SaiGon Hotel 17.663.000.000 VND view

21 TMS Transimex-SaiGon 22.000.000.000 VND view

22 TRI SaiGon Beverages Joint Stock Company 37.903.000.000 VND view

23 TS4 Seafood Joint Stock Company No 4 15.000.000.000 VND view

24 VTC VTC Telecommunications Joint Stock 17.977.400.000 VND view

25 SSC Southern Seeds Joint Stock Company 60.000.000.000 VND view

26 SFC Sai Gon Fuels Joint Stock Company www.satra.hochiminhcity.gov.vn

17.000.000.000 VND view

27 NKD North Kinh Do Confectionary Joint Stock 50.000.000.000 VND view

vietnam stock market development qut bs98 feb2005

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