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THE UNIFIED ENTERPRISE LAW:
Another step towards an enabling business environment
The
current Enterprise Law, which came into effect in 2000, is widely
recognized as one of Vietnam's most successful law-making efforts to
date. However, the law only pertains to the domestic private sector.1
To attract more investment from both the domestic and foreign
private sectors and to comply with Vietnam's international
commitments to create an equitable business environment, the
Enterprise Law must span all corporate entities and economic
sectors. A Unified Enterprise Law (UEL) is currently being drafted
and discussed; it is expected to be submitted to the National
Assembly later this year. This bulletin summarizes the key features
in the current draft of UEL as well as some implications for
businesses.
More
equitable treatment of enterprises across sectors and ownership
types
The UEL is expected to
combine, and gradually replace, existing regulations that govern the
establishment, organization and operations of businesses, including
those currently contained in the Enterprise Law, the Law on Foreign
Investment and the Law on State-owned enterprises (SOEs). The UEL
seeks to establish a uniform legal framework for enterprises of
different legal forms, regardless of their ownership profiles.
However, the eradication of unequal treatment of firms across
different economic sectors will depend on a number of factors.
Although the rights of foreign investors will be liberalized under
the new UEL, they will still be prohibited from, or restricted in,
doing business in some industry sectors that remain open to domestic
firms. Precisely which industries remain restricted or prohibited
has yet to be decided, but will be listed in the Common Investment
Law (CIL) that is being prepared in parallel. This means that any
prohibited or restricted lists provided by the CIL must be compliant
with Vietnam's commitments in international agreements as well as
with the principle of non-discrimination in its economic development
policies.
It is anticipated that SOEs in their current form will not be
governed by the UEL unless they convert into either a limited
liability or shareholding company. Whether or not all SOEs will have
to be converted, and when this should happen, remains undecided. But
if SOEs do remain outside the UEL, then the attempt to create a
level playing field, under this law, will be incomplete.
More
freedom for businesses
Business freedom refers to
the right of a firm to make any and all decisions pertaining to its
own business, such as investing or mobilizing funds, as long as it
complies with the law. Enhancing business freedom requires
minimizing unnecessary interference and disruption from governmental
agencies and local authorities.
One of the main changes in the current draft of the UEL is the
significant liberalization of rights of foreign invested enterprises
(FIEs). Under the draft UEL, FIEs are entitled to do business in all
sectors that are not prohibited or restricted, rather than being
limited to the specific business lines stated in their initial
investment license. Further, new foreign investors will be subject
to the same kind of registration procedures as domestic firms,
rather than going through the licensing process that currently apply
to them. As a result, establishing a new FIE in Vietnam will be
simpler, faster and cheaper than at present. Foreign investors will
also be entitled to select the form of corporate entity that is most
suitable for their business; for example, they will be able to set
up joint-stock companies to more easily raise funds on the stock
market. In addition, the 30% cap on foreign ownership in local
companies will be removed in most fields. Finally, though
regulations on the maximum foreign ownership stake will remain in
some specific business areas, these will be applied in a clear and
transparent manner. Such changes should increase the attractiveness
of Vietnam to foreign investors.
It appears that the terms of the UEL will be more attractive for
converted SOEs than the current Law on State-owned Enterprises.
While domestic private and foreign investors are broadly able to
make independent decisions related to their own businesss, under the
SOE Law, SOEs are directed by different administrative agencies
(often in an inconsistent way). More specifically, line ministries
often decide SOEs' business strategies, the Ministry of Home Affairs
controls their personnel policies, the Ministry of Planning and
Investment approves their investment projects, the Ministry of
Finance grants funds, etc. SOEs that convert and come under the UEL,
will probably have greater autonomy to conduct business, be able to
improve their internal management structures, and rely less on state
funds.
More
effective framework for corporate governance
The UEL seeks to create a
uniform legal framework on corporate governance practices,
applicable to all Vietnam-based corporate entities (whether they be
private, converted SOEs or FIEs), and compliant with international
best practices. This should help improve the efficiency of
management in firms, strengthen the competitiveness of Vietnamese
enterprises, and enhance their capacity to integrate into the
regional and international economy. This unified framework should
also help resolve a number of issues in the management of converted
SOEs, such as: the lack of clear-cut rights and responsibilities
between the owners and the management; the "dual roles of
ministries" (hanh chinh chu quan); and complicated mechanisms for
personnel recruitment and appointments, etc. Unlike the current Law
on Foreign Investment, which only provides guidance on how to
balance voting power among parties in joint venture FIEs, the UEL
will also govern such issues within wholly foreign-owned FIEs.2
Some shortcomings in the existing Enterprise Law are addressed in
the draft UEL; for example, better protection of the interests of
minority shareholders and creditors, clearer guidelines on
information disclosure and transparency, the responsibilities of
shareholders, clearer delineation of responsibilities between the
company owner and management, and specific rules in governance
practices in joint stock companies and partnerships.
In addition, the UEL will contain a chapter on corporate groups. The
corporate group is a fairly common business model elsewhere, but a
new concept for Vietnam. Introducing this model will provide new
opportunities for foreign investors, create an alternative
development strategy for converted SOEs, and enable domestic firms
to expand their business more effectively, and better control
investment risks.
More work still needs to be done...
The UEL is intended to be favorable to the business community.
Following the principles set out in the Prime Minister's guiding
principles developed at the outset of the drafting process,3
the draft aims to i) further liberalize business freedom so that
investors and enterprises of all economic categories have the right
to invest and do business in all sectors and areas allowed by the
law; ii) further reform the public administration to better function
in a market economy and increase transparency; and iii) comply with
international principles and practices, as well as Vietnam's
commitments in multilateral and bilateral agreements. The feedback
on the draft from both the domestic and international business
communities has been mostly positive to date.
However, its introduction and enforcement will not be fully
effective unless other laws and regulations pertaining to business -
such as the SOE Law and CIL - are consistent with it. Thus a
comprehensive review of all relevant legal documents is necessary in
order to resolve all inconsistencies. In the context of the UEL and
CIL, the two key business laws being drafted together, it is crucial
(though complex) to clearly define the scope and application of each
law in order to maximize effectiveness in practice.
(1) The private sector contributes
around 10% of GDP, 27% of total investment capital, and employs 5%
of labour force. SOEs and FIEs contributing more than 50% of GDP are
out of the scope of the current Law on Enterprises. Nguyen Dinh Cung,
An Evaluation Report on advantages and disadvantages of the
Enterprise Law 1999, September 2004.
(2) In fact, some foreign invested enterprises are applying the
corporate governance principles from the Enterprise Law 1999 which
are for domestic private enterprises. VCCI, Review of related legal
documents on business establishment, organization and operations,
December 2004
(3) Prime Minister's Research Commission, Proposal on guiding ideas
and major content of the Unified Enterprise Law and Common Law on
Investment Promotion and Protection, April 2004. |
