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Events & Issues: Repairing the Business Law Road

The article titled: “Events & Issues: Repairing the Business Law Road” from Paralegals of Phuoc & Partners, Ms. Nguyen Thi Nga and Ms. Nguyen Thi Minh Thu, is published on The Sai Gon economic times, dated 25 January 2018 (1.415).

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The Ministry of Planning and Investment has submitted a statement requesting to formulate the Law amending and supplementing some articles of the Investment Law and Enterprise Law, and introduced the draft of this law, to collect feedback. Whether the items to be amended this time can satisfy the actual demands of the current situation in investment and business, such as the urgency, consistency and compatibility of the legal system, and whether they can create an investment and business environment which is transparent and fair? How do we amend the law or what should be done to fulfil these demands? The Saigon Times would like to open a forum to discuss this issue.

Amendment of the Investment Law and Enterprise Law leaves a lot to be desired

 

The Ministry of Planning and Investment once again plans to amend the Investment Law and Enterprise Law though they were just amended in 2014. The draft law has just been announced, and which has been released to the public to for feedback, presents some noteworthy proposals. However, there are still many inconsistencies, and difficult viewpoints in response, to how to amend this law.

REMOVING 21 CONDITIONAL BUSINESS LINES

The Ministry of Planning and Investment plans to remove another 21 conditional business lines in the new Investment Law, such as the services of logistics, marine transport, shipping agent, production and publication of films, tour operators, art performance, fashion demonstration, model and beauty contest, and others.

This is a positive point from the draft law because it’s not important how many conditional business lines are removed, what’s important is the draft law advocates the tendency to widen the right to freedom of business and create a clear investment environment, encouraging enterprises to join the market and assuring them of the business environment.

In the process of collecting opinions for the draft law, hopefully there will be more voices from associations and enterprises to get more business lines removed.

CHARTER CAPITAL CONTRIBUTION TIME LIMIT: IT USED TO BE THREE YEARS, NOW THREE MONTHS, AND SO MIGHT IT BE THREE YEARS IN THE FUTURE?

A noteworthy proposal in the draft law is the time limit for shareholders or members to contribute charter capital. It is expected that the time limit will be extended to three years from the date of incorporation.  The reason is that the time limit of 90 days as prescribed by the 2014 Enterprise Law is too short, causing difficulties to members and shareholders in contributing capital, especially the enterprises with large charter capital. This proposal may create much controversy.

The capital contribution time limit is considered a tool to avoid the registration of unreal capital which happened after the 1999 Enterprise Law was adopted. To revive the entrepreneurial spirit and encourage establishing enterprises, the 1999 Enterprise Law did not prescribe this time limit strictly. Therefore, this led to a situation where enterprises randomly registered unreal capital up to tens of billion dong to create a “boastful image”, though none of the capital had been contributed. In light of this situation, the 2005 Enterprise Law restricted the time limit of a joint stock company to three months, counting from the incorporation date but still allowing members of a limited liability company to contribute charter capital within three years. The 2014 Enterprise Law prescribes the most restrictive time limit of three months which is applicable to limited liability companies and joint stock companies as well. As a habitual response, enterprises complain the law is more restrictive.  However, we cannot avoid the fact that there must be a deadline for capital contribution which is the basic obligation of company members or shareholders and also their responsibility toward business partners of the company. However, is this regulation too easy on company members or shareholders when the draft law reuses the three-year time limit, and does this encourage them to “do business without capital”? I think three months is too short but three years is too long. The draft law needs to use statistics on the actual duration of capital contribution during the last time to propose a reasonable time limit.

OUTBOUND INVESTMENT: OPEN DOORS FOR ENTERPRISES TO GET OUT TO THE WORLD

A bright point in the draft Investment Law is the proposal to remove the procedure for issuing outbound investment certificates which have been applicable to Vietnamese enterprises’ outbound investment projects. The draft law replaces this licensing mechanism with the registration mechanism for remitting investment capital abroad at the bank. This new mechanism is more open but deals with the substance of the issue. Outbound investment is, on the large part, procedurally governed by the law of the country in which the capital is invested, and the Vietnamese law does not have much influence on this investment. What the Vietnamese authority can control is the capital transferred from Vietnam. Therefore, managing capital sources through the registration mechanism for remitting investment capital abroad is a focused and clever option.

With this new mechanism, Vietnamese enterprises are in a proactive position to seek opportunities to make outbound investments, and when they need to remit capital abroad, they just have to register with the bank without the need of an investment certificate.

There will be of course many opinions against this proposal, especially from the perspective of foreign exchange control. The main reason is the fear of “foreign currency drain” which causes many state management agencies to have an aversion to outbound investment. A revolution in thinking is needed for this proposal to become a reality.

MORE OPEN TO M&A TRANSACTIONS IN FOREIGN CAPITAL…

Pursuant to the 2014 Investment Law, if foreign investors wish to contribute capital to, buy shares or portions of contributed capital of enterprises in Vietnam, they must obtain an approval on contributing capital or buying shares prior to conducting the transaction. Foreign investors must, in many cases, obtain this approval when they want to increase the charter capital of enterprises in Vietnam, though the ownership percentage is not changed. These regulations of the 2014 Investment Law are fairly strict but are not really necessary in many cases.

In order to remedy the shortcomings of the 2014 Investment Law, the draft law prescribes clearly that only when the capital contribution, or the purchase of shares or portions of contributed capital, increases the foreign investor’s ownership percentage in the charter capital of economic organizations of a conditional business line, must the investor obtain an approval on the capital contribution or the purchase of shares.  This regulation creates advantages for merger and acquisition transactions by foreign investors and helps the M&A market become more active.

…BUT MORE RESTRICTIVE DUE TO NATIONAL SECURITY

As a new move, the draft law requests foreign investors to obtain an approval on the capital contribution, or the purchase of shares or portions of contributed capital if they wish to invest in enterprises which have important infrastructure works or use land located in areas related to national defence and security. National security is the reason to justify this new proposal. I think this regulation is appropriate since the Investment Law needs a safety pin for the projects which influence national security.

However, I am still wondering about the effectiveness of the Investment Law when it is used to soothe worries about national security. Issues related to national security must technically be governed by the law on security instead of the investment law. For example, according to the draft law, the requirement to obtain an approval prior to investment is only mandatory when the foreign investor plans to invest in an enterprise which has important infrastructure works or uses land in areas sensitive to national defence and security. However, there are now so many domestic enterprises which are owned by Vietnamese legally but actually managed by foreigners and where the capital is from abroad. Thanks to the “domestic cover”, investment with this foreign element can easily escape from the restriction of the Investment Law. In other words, the Investment Law is helpless in this case. These circumstances can be governed by the law on national security.

Moreover, this regulation must be implemented with great care; otherwise it will be become a barrier to the goal of economic development in border and coastal areas.