The 2019 Law on Securities (2019 LoS) came into effect on 1 January 2021. In order to smoothly implement the 2019 LoS, the Government and Ministry of Finance (MoF) issued multiple decrees and circulars to provide further guidance for implementation of the 2019 LoS.
This update will provide a general brief look into the most notable developments of decrees and circulars guiding the implementation of the 2019 LoS. The respective decrees and circulars entered into force on 1 January 2021 except Circular 120/2020 of the MoF which entered into force on 15 Feburary 2021.
Compared to its predecessor, while mostly similar in contents, Decree 158/2020/ND-CP on the derivatives and derivatives market (Decree 158) better clarifies conditions for securities companies and fund management companies to do business and provide services related to derivatives. After being issued a certificate of eligibility to conduct derivatives-related business, securities companies may broker, trade for itself derivatives and/or provide derivatives investment consultancy while fund management companies may only provide derivatives investment consultancy services.
Under Decree 155/2020/ND-CP (Decree 155), securities companies may provide securities lending service if all of the following conditions are satisfied:
- The company is licensed to perform the securities brokerage activity and it has been approved by the board of management, members’ council or owner respectively, that the company can provide securities lending service;
- The company is not under warning, control, special control, suspended, temporarily suspended, consolidation, merger, dissolution, bankrupt status;
- Total debt-to-equity ratio complies with the Ministry of Finance’s regulations, owners’ equity not lower than minimum charter capital required by Decree 155;
-The company has a system to facilitate securities lending, supervise securities lending accounts; and manage securities trading deposit separately to each investor at the bank; and professional procedures and procedures to manage risks and control securities lending activity; and
- The available capital ratio reaches a minimum of 220% for the last consecutive 6 months up to the registration date to provide securities lending service.
Under the predecessor of Decree 155, only major shareholders of a public company were allowed to offer stock to the public. Decree 155 changed this to shareholders to seemingly facilitate public offering by minority shareholders as well as divestment by State-invested companies.
Decree 155 sets out some conditions for additional public and private stock offering below par value, besides normal offering conditions. In particular:
- For additional public offering:
a. the stock price of the issuing entity on securities trading system must be lower than the par value; and
b. the issuing entity has sufficient share capital surplus based on latest annual audited financial statements to compensate negative surplus generated by offering stock below par value.
- For private offering:
c. in addition to the requirements mentioned at a. and b. above, only strategic investors can participate in the offering and transfer of the stock which is limited to at least 3 years except for some specific cases.
d. Also, the issuance must also not violate the rules on cross-ownership as set out in the Law on Enterprises.
Decree 155 adds more conditions for public offering of stock by one or more shareholder(s). Some noteworthy conditions are:
- If the shareholder that registers to offer stock is an institution, the stock offering plan must be approved by the competent body of such institution as per the Law on Enterprises and charter of such institution;
- The shareholder registering to offer owns the offered stock and the offered stock is freely transferable; and concurrently, a securities company provides consultancy to the offering shareholder on the application to register the offering, unless the shareholder registering to offer is a securities company itself; and
- The shareholder registering to offer must open an escrow account to be able to receive the purchasing amount of the offering trench.
Decree 155 adds new provisions to regulate public offering of stock by a limited liability company intending to convert into a joint stock company. This is to be in line with the new provisions in the Law on Enterprises and Law on Securities.
Before the issuance of Circular 120/2020/TT-BTC of the MoF on trading listed stocks, trading registration and fund certificates, corporate bonds, covered warrant listed on securities trading system (Circular 120) investors had to wait 2 business days after having bought securities before they could sell the securities. Circular 120 now allows for intraday trading of securities, which is defined as the buying and selling of the same security with the same volume, on the same account and on the same day.
Under Circular 120, investors may perform intraday trading after entering into an intraday trading agreement with a securities company permittted to provide securities lending service.
Investors conducting intraday transactions must not place orders for simultaneous purchase and sale of the same securities in the same periodic match order, except for orders that have been entered into the system at the previous continuous transaction. Also, intraday trading is not permitted for odd-lot and put through transactions.
The implementation of intraday trading is expected to boost the market’s liquidity and attract more investors. However, it is not clear when intraday trading will be practically implemented, due to technical difficulties.
Under Circular 120, the Vietnam Stock Exchange can decide on the circuit breaker mechanism after it has been approved by the State Securities Commission (SSC). A breaker mechanism is a mechanism allowing for automatic temporary suspension of transactions in a trading session when securities price or statistics reaches determined thresholds. Depending on the actual market conditions, the SSC may decide to apply either the circuit breaker mechanism or the circuit breaker mechanism combined with a price fluctuation amplitude.
The availability of the circuit breaker will help regulate the market better in the event the market gets too volatile.
Circular 120 adds provisions regulating short selling also called shorting. A secured short sale is defined as a transaction that sells borrowed securities in the securities borrowing and lending system of the Vietnam Securities Depository, after which the seller must buy back the securities . The addition of short selling will provide investors a new option to generate profit.
Decree 156/2020/ND-CP on handling administrative violations in the field of securities and securities market (Decree 156) increases the maximum penalty amount for violations.
In particular, for violations by institutions, VND 3 billion (~USD130,000) is the maximum threshold for all violations except for insider trading and market manipulation. In this case it is the minimum penalty amount. The fine for those 2 violations can be up to approximately 10 times the illegally obtained income. This as opposed to the previous fixed maximum fines of VND 1 billion (~USD43,330) and VND 1.2 billion (~USD51,997). This used to be VND 2 billion (~USD86,660).
Note that half of this amount applies to invididuals.
Circular 95/2020/TT-BTC of the MoF guides the supervision of securities trading on the market (Circular 95). It adds more entities that may supervise securities including subsidiaries of Vietnam Stock Exchange, being the Ho Chi Minh Stock Exchange and the Hanoi Stock Exchange, and trading members, i.e. securities companies, exclusive of special trading members on the derivatives and government bond market. Circular 95 also lists the rights and obligations of stock exchanges being subsidiaries of Vietnam Stock Exchange and provides more rights to the SSC with respect to securities trading supervision.
Circular 98/2020/TT-BTC (Circular 98) and Circular 99/2020/TT-TBC (Circular 99) of the MoF on operation of securities investment funds do not contain substantial amendments or additions compared to its predecessors. These circulars, however, focus more on consolidating various preceding circulars that used to regulate different types of investment funds.
Circular 98 regulates the operation of member funds, exchange traded funds, open end funds, closed end funds, real estate investment funds and securities investment companies.
Circular 99 does not contain many amendments compared to its predecessor. The most noteworthy addition of Circular 99 are the detailed provisions regarding indirect outbound investment. In particular, fund management companies must be approved by the SSC and granted a quota by the State Bank of Vietnam before performing indirect outbound investments. Fund management companies must comply with other relevant laws and certain principles while performing indirect outbound investment.
Huyen Pham / Senior Associate
Duc Tran / Associate
This legal update is not an advice and should not be treated as such.
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