Foreign ownership: more room will be provided, but how much?

Monday, May 5, 2008
There are many signs that show that more room will be provided for foreign investors in local companies. However, it remains unclear how large the rooms will be.
Decision No 745 by the Ministry of Finance on the action programme to stabilise the market and curb inflation in 2008 stipulated that the Department for Enterprises’ Finance and State Securities Commission are assigned to amend Decision 238 on foreign ownership ratio in listed companies, and the report must be submitted in May 2008.
The currently applied Decision 238 dated September 29, 2005 stipulates that the maximum foreign ownership ratio in local listed companies is 49%.
As such, the plan to raise the foreign ownership ratio in Vietnamese listed companies from the current level of 49% is being considered.
Providing more room for foreign investors is considered desirable in the context of Vietnam’s deeper integration into the world’s economy. As the market is falling, domestic investors are trying to sell shares to cut losses. However, foreign investors still want to buy more shares.

The state has not wanted to offer a higher proportion for foreigners as it fears that a withdrawal of foreign investors from the stock market could lead to the collapse of the market.

However, the viewpoint should be reconsidered. In fact, if the market falls unexpectedly, investors of all nationalities would want to escape from the market.

A lot of foreign investment funds are willing to hold more than 50% of stakes of a company so that they have the right to be involved in planning business for the company and optimise profit. The most important thing for a company is business results, not the nationality of its members.

There are three scenarios for increasing foreign ownership ratio:

1. The ratio is raised from 49% currently to 50%. This would discourage investors as they expect a higher increase; therefore, there would be no active response in the short term.

By April 26, the room for foreign investors in 13 companies was fully occupied. 12/13 companies are not listed among the top 10 companies that have the highest market capitalisation.

If the ratio increases by 1% and foreign investors buy all the stakes they are allowed to buy, this will not be able to make the VN Index increase in the short term.

2. The ratio is raised to 50%, while the roadmap for further raising foreign ownership ratio is announced.

This would bring long-term positive effects. Foreign investors would know the details of the roadmap on raising foreign ownership ratio so that they could create suitable investment plans.

3. The ratio is raised above 50%. The demand will be higher from foreign investors, which will also help push domestic demand up. In 2005, when the foreign ownership ratio was raised to 49%, the market became prosperous right after that.

Nevertheless, analysts have warned that investors should not expect the foreign ownership ratio increase too much. The 13 companies which have the current foreign ownership ratio of nearly 49% may still be the choices of foreign investors. However, the foreign demand increases will not help much in making the market prosperous, as the VN Index is being influenced by the share items of the 10 companies with the biggest market capitalisation value, not the 13 share items with the highest degree of foreign participation.

13 share items on HCM City Stock Exchange that have no more room for foreign investors