(Published in Vietnam Law Magazine) Corporate bonds have been a hot topic in recent days as many big companies have issued corporate bonds to raise capital. This article analyzes current regulations on corporate bonds and the loopholes therein and offers recommendations to protect investors in Vietnam’s bond market.
Pham Duy Khuong & Doan Vu Hoai Nam, ASL Law
Current regulations on corporate bonds and existing legal issues
It can be said that in the existing capital market, corporate bonds serve as an important loan channel to help businesses gain capital for carrying out their projects and ensuring their business progress against the backdrop that getting a bank loan is more difficult when the bank manages and monitors the loan provision more and strictly.
Concerning the issue of corporate bonds, Government Decree 153/2020/ND-CP (Decree 153) sets clearer regulations on corporate bond issuance procedures, e.g., principles of corporate bond issuance and use of bond capital; basic terms and conditions of bonds; entities that may buy bonds; conditions on bond offering; bond offering process; bond issuance plans and authorities to approve such plans. The decree has provided a clearer mechanism to regulate the bond issuance as well as protect investors investing in this financial instrument.
However, there remain legal loopholes in Decree 153 that businesses have used to circumvent the law, thereby illegally raising capital from not only professional investors but also small investors. Indeed, according to Decree 153, for non-convertible bonds without warrants, bond buyers are professional securities investors defined by the securities law. As stated in Article 11 of the 2019 Securities Law, professional securities investors are investors with financial capacity or professional qualifications in the field of securities, including:
(i) Commercial banks, foreign bank branches, financial companies, insurance business organizations, securities companies, securities investment fund management companies, securities investment companies, securities investment funds, international financial institutions, off-budget state financial funds, and state financial institutions that are allowed to purchase securities;
(ii) Companies each with contributed charter capital of over VND 100 billion, listed organizations, or trading registration organizations;
(iii) Holders of securities practice certificates;
(iv) Individuals each holding securities listed or registered for trading with a value of at least VND 2 billion as certified by the concerned securities company at the time he is recognized as a professional securities investor; and,
(v) Individuals each earning a taxable income of VND 1 billion or more in the latest year by the time he is identified as a professional securities investor according to the tax declaration dossier submitted to the tax office or tax deduction document of the income payer.
Thus, in addition to the entities specified at Points (i) and (ii) above, an individual who wants to become a professional securities investor only needs to meet one of the remaining three conditions. However, it can be seen that, in the case of Tan Hoang Minh, small investors still consider themselves to be holding bonds issued by Tan Hoang Minh without meeting the above conditions.
The reason for this is that Tan Hoang Minh’s subsidiaries issue bonds for the purpose of using them to cross-invest in other member companies in the Tan Hoang Minh eco-system, instead of raising capital for the company by directly offering bonds. However, the main buyer of the bond, which is the bondholder, is Tan Hoang Minh Group. From that, following the form of a ghost contract called “Investment cooperation with Tan Hoang Minh Hotel Trading Service Co., Ltd.”, Tan Hoang Minh has raised nearly VND 10 trillion from private investors.
In fact, individual investors are essentially not holders of Tan Hoang Minh bonds, though many of them think they are bondholders, and many others mistakenly believe that the bonds of Tan Hoang Minh Corporation have been licensed by the State Securities Commission of Vietnam.
However, according to the current securities law, the State Securities Commission of Vietnam only licenses and strictly manages corporate bonds issued by public companies. As for private corporate bonds, businesses follow the principles of self-borrowing loans, self-paying debts, and taking self-responsibility for capital use efficiency and debt payment ability, without having to obtain approval from any authority. Moreover, investors will have to give self-assessments, be responsible for their own investment decisions and bear all risks arising in investing and trading in bonds of these corporations.
The State does not guarantee that bond issuers pay in full and on time the bond principal and interest upon maturity as well as other rights for bond buyers. Therefore, in case a bond issuer loses money and cannot afford to pay, investors will face the risk of not getting paid for the bonds, because private corporate bonds issued in Vietnam mainly come from the companies not rated yet, and many types of bonds are not accompanied by payment security.
In addition, the management and supervision mechanism is alarming. Though Decree 153 requires a bond issuer to clearly state the purpose of bond issuance in the bond issuance dossier, the bond offering process (Article 11 of Decree 153) and bond issuance plans, and the authority to approve and accept bond issuance plans (Article 13 of Decree 153) still lack management and supervision by competent state agencies.
Specifically, Decree 153 says that an enterprise is only allowed to issue bonds for three purposes, namely to implement investment programs and projects; to increase the size of working capital; and to restructure its own capital, and these purposes must be clearly stated in the bond issuance plan of the enterprise. However, the bond issuance plan is subject to approval by leaders of the enterprise itself, such as the General Meeting of Shareholders, for joint-stock companies, or the chairperson of the Board of Directors, for limited liability companies.
Furthermore, Article 41 of Decree 153 also states that the supervision of the mobilization and use of capital through bond issuance and payment of bond principal and interest is the responsibility of the Board of Directors, the General Meeting of Shareholders, the Members’ Council, the Company President, or the company owner in accordance with the Decree and the company charter. Because of the lack of management and supervision by competent state agencies, businesses can arbitrarily mobilize and use the capital for improper purposes, thus causing serious damage to investors.
Regarding the issue of disclosing false information or concealing information in bond issuance, according to Decree 156 of 2020, an enterprise may be fined VND 400-500 million and, depending on the nature and severity of its violation, may be subject to one or several remedial measure(s).
In the case of Tan Hoang Minh, this enterprise is obliged to recover securities already offered for sale or issued; return to investors money amounts used to buy securities plus interest calculated at the rate stated on the bonds. However, if the violation is severe, the enterprise may be regarded as intentionally disclosing false information or concealing information in securities activities under Article 209 of the 2015 Penal Code (revised in 2017) if there are signs of this crime.
However, disclosing false information or concealing information in bond issuance still occurs more frequently because of the lack of a management and supervision mechanism applied by competent state agencies as mentioned above. State authorities make intervention only when the investors suffer heavy damage or the violations are too obvious.
Solutions to monitor bond issuance and protect bond investors
It can be seen that the manipulation of the bond market in the past time by enterprises has shown that the control and management by state management agencies seem to be inadequate, causing serious losses and damage to investors.
Therefore, the first solution is that the State will provide a clear legal framework and mechanism for all bond issuers to bring transaction data to one focal point. Especially in the current era of Industry 4.0, the State should apply various tools to strictly monitor and manage the bond issuance, thereby promptly detecting violations. This can limit false and hidden information in the bond market and thereby create a transparent environment for investors.
Secondly, since investors still lack information and knowledge about financial products as well as information about bond issuers, the State may consider formulating a mechanism to evaluate the level of credibility of bond businesses.
Accordingly, investors may base themselves on the credit rating results of enterprises from published databases or risk assessment analyses of credit rating agencies to assess relative interest rates and risks associated with bonds issued by enterprises in the same industry or in different industries. On that basis, investors can make the right choice and avoid risks.
Thirdly, the State should also consider building a mechanism to protect investors, for the reason that although it is possible to assess the credibility of an enterprise, it is difficult for investors to monitor the enterprise’s interest and principal payment, financial situation as well as compliance with the terms of the bond contract.
As a result, when the issuing business goes bankrupt or becomes insolvent, the investors do not receive any compensation for their investments. It is proposed that the State may consider issuing legal provisions for the establishment of organizations with the above functions to monitor the process of bond issuance as well as protect investors in case they suffer damage.
This article was published in Vietnam Law & Legal Forum.
ASL LAW is the top-tier Vietnam law firm for Investment Services. If you need any advice, please contact us for further information or collaboration.