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THE STOCK MARKET IN VIETNAM
Development Challenges
The development of capital markets is a priority on the government of
Vietnam's economic agenda. In a speech made at the National Workshop
on Four-Year Implementation of the Enterprise Law in November 2003,
Prime Minister Phan Van Khai stressed the importance of developing
and stabilizing the country's various markets, including capital
markets, in order to create a positive environment for businesses to
grow. In that meeting, representatives of banks articulated that
since most bank deposits are short-term, their main business is
provision of short-term credit; they urged companies to consider the
issuance of bonds and stocks as a better alternative for raising
medium- and long-term finance. This bulletin focuses specifically on
obstacles facing the stock market and public share issues in
Vietnam.
Limited
quantity and quality of shares listed on the Securities Transaction
Center (STC)
Vietnam's first and only
stock market has been operational for more than three years, with
the number of listed firms gradually increasing from two to 22 over
that time period. The size of the market, however, is still
extremely small in comparison to the size of the economy and its
demand for long-term capital.1 All of the listed firms in Vietnam
are relatively small companies, and as such, their shares are not
particularly attractive to potential investors. To date, no large or
high profile SOEs have sought, or been given approval, to issue
public shares and list on the STC. The number of large, domestic
private companies that meet the listing criteria is also still
limited. In addition, there have been no initial public offerings (IPOs)
to raise money to date; only existing shares have been listed. As a
consequence, the market is considered unattractive as an investment
avenue, relative to other instruments and opportunities, by many
investors.
Lack of
active participation by institutional investors
The low level of activity
in the STC can also be attributed to weaknesses on the demand side.
Most investors in the STC are individuals, seeking to make gains
through short-term speculation, rather than long-term investment
strategies. This lack of robust demand for listed shares has
contributed to the market's instability, and consequently, has
deterred some firms from listing on the STC.
Institutional investors,
both domestic and foreign, have generally not been active in
purchasing shares of STC-listed firms for a number of reasons beyond
the relative unattractiveness of the listed shares themselves,
including: various regulatory inadequacies, including insufficient
protection for minority shareholders; lack of standard requirements
on financial disclosure and information transparency; unclear
stipulations on tax obligations for foreign investors; limitations
placed on the percentage of total shares that a foreign investor may
hold in a local firm; etc.
Insufficiently regulated informal market is larger than the
official market
Public share issues
conducted outside the STC are quite active; however, there is no
legal framework regulating these activities at present. For every
listed firm, there are an estimated 30 firms raising funds from
public investors in the informal, or over-the-counter (OTC) market.2
Of the nearly 1,000 SOEs that have been equitized to date, less than
3% are currently listed on the STC; it can be reasonably assumed
that shares in many equitized firms are being traded on the
unofficial market.
In developed economies,
the OTC market can be much larger than the centralized stock market,
at least in terms of the number of companies participating. In those
countries, there are laws regulating the sales and trading of shares
on the OTC that are aimed at protecting investors. This is not yet
the case in Vietnam, and as a result, there is a general concern
from both government regulators and firms that this informal market
runs a higher risk of falling victim financial scandals. Such a
scenario could damage investor confidence as a whole, and have an
indirect, adverse impact on the infant STC.
Policies
and legal framework for capital market development are inconsistent
and inadequate
The government is
determined to develop Vietnam's securities market, as evidenced by
the recently-promulgated Decree 163/2003/QD-TTg, dated 5 August
2003, which sets out an ambitious target of achieving a total
securities market capitalization of 2-3% of GDP by 2005, and 10-15%
by 2010. However, some of the current regulations and implementation
steps appear to be inconsistent with this strategy. For example,
according to the most recent regulation on equitization (Directive
01 dated January 2003), the State shall continue to hold at least a
51% stake in equitized SOEs that have registered capital above 5
billion VND and are profitable. Under this regulation, for the
nearly 2,000 SOEs earmarked for equitization by 2005, there will be
very few cases where the private sector can become the majority
shareholder in large equitized SOEs.
Small
scale and low level of transparency among Vietnamese enterprises
Private Vietnamese
enterprises have only begun to develop over the last decade, and
since 2000 in particular. Most private firms are thus small or
micro-enterprises and tend to be run in an informal, household
manner. In addition, Vietnamese private firms often maintain opaque
financial accounts and display a low level of corporate
transparency. This is due partly to companies' deliberate
intentions, habits and inadequate training; but is also a result of
lack of regulatory oversight on standards of information disclosure,
auditing and accounting. For example, it is estimated that only
15-20% of companies carry out financial reporting as required by
Enterprise Law.3 The lack of adequate accounting, auditing and
transparency standards constrains the development of equity
financing, as well as other forms of funding for the corporate
sector, since the risks and costs for investors becomes
significantly greater. |
