The limit on foreign holdings in Vietnam’s listed companies has been officially lifted, significantly removing investment restriction in public companies that are listed on the country’s stock exchanges, the Vietnam Ministry of Finance announced on Friday.
The regulation on the new foreign ownership is part of the Decree 60/2015 to replace Decree 58/2012, which gave detailed guidance to the implementation of the Securities Law.
Instead of setting the foreign holding limit at 49 per cent for all listed firms, the new legal document is more open, defining that the ownership (of overseas investors) in Vietnamese firms will depend on each sector.
Notably, the foreign holding limit has not been capped in companies that are excluded from conditional business lines.
Meanwhile, for the involvement in equitised state firms, the foreign holdings are regulated by the equitisation schemes approved by competent agencies.
In addition, overseas investors can do unlimited investment in government bonds, securities investment fund certificates, non-voting shares in public companies, derivatives and depository receipts.
“Once the Decree takes effect, it is hopeful that foreign investors will boost their activities in the Vietnamese securities market,” said the minister of finance Dinh Tien Dung.
“It is a game-changer, brings Vietnam closer to fulfilling its WTO commitments, and may serve as a catalyst for ascension to MSCI’s Emerging Market Index,” commented Andy Ho, chief investment officer of VinaCapital.
According to him, foreign ownership limits on listed companies have been a major hurdle to capital markets, deterring many foreign investors. The limits have dramatically capped the level of foreign participation and depressed valuations.
“Rarely has the world seen such a young market make such change at this stage of its development,” he added.
If measured on a simple price to earnings (PE) basis, Andy does the calculation, the market currently trades at 13 times trailing PE, with a liquidity discount in recent years of between 25 per cent and 35 per cent. As the market is opened, a greater participation from both local and foreign investors is expected. “This will increase the liquidity and will go some way to narrowing the discount,” he said.
In addition, Andy also anticipates the new decree will create a catalyst for state enterprise equitisation. “As the government starts to clear the backlog in its privatisation program, the options for investors through public listing, the sale to strategic investors and a likely increase in consolidation through M&A activity is exciting, especially in high-growth sectors such as food and beverage, property and infrastructure,” he added.
Meanwhile, the sectors that the local government considers “strategic”, in which they will not sell controlling stakes, are likely to include – banking, telecommunications, airlines and defence companies.
Foreign participation in the local stock market is currently at less than 15 per cent of the total. This lack of depth in the market, and the resulting domestic investor bias, assisted by margin lending levels, have featured as predominant reasons for market volatility, which will potentially, be reduced by increased foreign investment and new listings.
The revised decree is an exciting development, as it will make the market more competitive, accessible and investor friendly. Andy believes that the lifting will immediately make Vietnam the most attractive Asian frontier market.