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Foreign portfolio investment (FPI) into Vietnam by purchasing shares, and capital contribution in an established enterprise is a legitimate investment practice. However, this form has been utilized as a tool for foreign investors to circumvent the law to invest in Vietnam in conditional or even prohibited businesses toward foreign investors.
There are certain actions that foreign investors cannot conduct in Vietnam such as receiving the transfer of or owning land, houses in Vietnam; and there are certain conditional business lines such as real-estate distribution, trading…vv. Foreign investors either cannot or would have to satisfy a great number of conditions in order to conduct such businesses in Vietnam. As such, many foreign investors sought to circumvent the laws by purchasing an enterprise in Vietnam that already has assets/business lines they are after and conduct the business themselves.
A number of consultancy units have been advising their clients to employ this method in order to circumvent the laws under the guise of FPI.
Even so, can the method of FPI really circumvent the laws?
First and foremost, we must confirm that FPI via purchasing capital contributions is one of the foreign investment format prescribed by the Investment Law 2014. However, there exist many loopholes in the examination of the investment conditions. To be more specific, foreign investors only have to complete two procedures which include: registering the purchase of capital contribution and amending the business registration, in order to become the new owner of the enterprise.
The loophole here is that the investment registration agency could not and does not examine the assets the enterprise currently owns, as such, assets such as lands, houses often go unnoticed; or maybe the agency cannot examine how many retail stores the enterprise currently has. As such, the agency would only require the enterprise to satisfy the the general conditions regarding distribution.
In other words, the procedure for FPI is not as strict as the direct investment procedure and there exist gaps that foreign investors can exploit to circumvent the laws and participate in the Vietnamese market without satisfying the business conditions or to conduct business in sectors that are prohibited to foreign investors.
Although, in our opinion, while foreign investors could employ the method of FPI to circumvent the laws, such circumvention shall only apply to the procedural aspect, during actual business activities, there is a risk of being exposed and sanctioned.
It is necessary to repeat Article 23 of Investment Law 2014 as follows:
When establishing business organizations, contributing capital, buying shares or capital contributions of business organizations; making investments under business cooperation contracts in one of the following cases, the foreign investor must satisfy the conditions and follow investment procedures applied to foreign investors:
- a) 51% of charter capital or more is held by foreign investors, or the majority of the general partners are foreigners if the business organization is a partnership;
- b) 51% of charter capital or more is held by the business organizations mentioned in Point a of this Clause;
- c) 51% of charter capital or more is held by foreign investors and business organizations mentioned in Point a of this Clause.
Business organizations with foreign investment capital in other cases than those mentioned in Points a, b, and c of this Clause shall satisfy conditions and follow investment procedures applied to Vietnamese investors when establishing business organization, when making investment by contributing capital, buying shares, buying capital contribution of business organizations, when making investments under business cooperation contracts.
As such, it could be understood that, even if the foreign investor chooses to conduct FPI via purchasing shares, capital contributions, the foreign investor still has to satisfy the conditions that apply to investors performing the procedure for direct investment. However, since the registration agency does not examine or is incapable of examining the dossier regarding conditions satisfaction, foreign investors try to avoid this matter. Such evasion could be seen as a legal violation and shall be strictly sanctioned if discovered.
Between investing directly and conducting FPI into Vietnam, each method has its own pros and cons. With many years of experience in providing legal consultancy in the field of M&A, foreign investment into Vietnam, business Lawyers at Inteco Legal Practice have successfully assisted thousands of transactions and cases. However, our opinion is that foreign investors should avoid using tricks and schemes to circumvent the laws in order to avoid future risks.
Employing the method of FPI to circumvent the laws will only help the investor to avoid the initial procedure, on the other hand, it will entail many risks during operation. The price to be paid shall most definitely outweigh the benefits.
