The foreign ownership cap in public companies is regulated mainly by the Law on Securities (LOS), the Law on Investment (LOI), and their implementing regulations. In an effort to innovate the investment environment, draft amendments of the aforementioned laws have been proposed to the National Assembly for discussion in order to, among other things, address foreign ownership issues in public companies, including those discussed herein.

Current regulations and issues
Under the current regulations, the foreign ownership ratio in a public company is capped at ratios specified either by international treaties to which Vietnam is a party or by Vietnamese laws, if any, or at a maximum of 49% if the public company engages in a line of business which is conditional to foreign investors but has no specific provision on foreign ownership ratios. In cases other than the ones listed above, foreign ownership in public companies is unlimited, unless otherwise capped by the charters of those companies.

Foreign investors and public companies have encountered two main difficulties in relation to the foreign ownership cap due to the above regulations. First is a difficulty in clarifying which lines of conditional business are applicable to foreign investors and the respective cap. Currently, the list of lines of conditional business is promulgated under the LOI, however, it fails to separate the lines of conditional business applicable only to foreign investors; meanwhile, the database containing information on the lines of business conditional to foreign investors, located on the portal of the Foreign Investment Authority, is not sufficient to identify all allowable foreign ownership ratios of all the lines of conditional business.

This situation has led to uncertainty and created a burden for both foreign investors and public companies, and has required them to seek opinions from relevant authorities to confirm the foreign ownership ratio in their transactions on a case-by-case basis. Second is the unclear mechanism by which public companies comply with regulations on business conditions whenever the foreign ownership ratio in those companies changes. Given the nature of securities trading transactions, the status of a public company may change from a local to a foreign-invested company on a daily basis. In this case, the laws are unclear as to how the public company shall comply with ordinary investment procedures and business conditions which apply differently to a local public company and a foreign invested one.

Recent developments
In earlier versions of the LOS's amendment draft, the foreign ownership limitation of 49% in a public company was removed, creating an understanding that foreign investors can purchase 100% of the shares of a public company regardless of whether the company is engaging in business that is conditional to foreign investors, so long as there is no specific restriction under the international treaties or applicable Vietnamese laws. However, in the latest draft, the above provision has been removed and the LOS's amendment draft leaves room for the government to decide the specific foreign ownership ratios, conditions, orders and investment procedures for foreign investors in the public companies.

At the same time, the LOI's amendment draft proposes separating the list of lines of business that are conditional to foreign investors from the list of lines of business that are conditional generally to both foreign and local investors. In particular, article nine of the LOI's amendment draft delegates to the government the job of announcing the list of lines of business which are conditional in terms of market accession to foreign investors. Pursuant to an explanation by the Standing Committee of the National Assembly, the LOS's and LOI's amendment drafts were prepared to ensure consistency with one another. Therefore, it is expected that the amended LOS and LOI will settle the issue of determining the foreign ownership cap in public companies.

However, the LOS and LOI amendment drafts do not seem to focus on dealing with the second difficulty. Whether public companies must actively adjust their business operations or registered lines of business in conformity with the foreign ownership ratio in their companies remains a grey area. On one hand, some may argue that these companies must follow the applicable laws to ensure their compliance by removing certain lines of business or by ceasing to conduct them.

On the other hand, some may argue that it is impossible for a public company to follow ordinary procedures and comply with the conditions applicable to a foreign-invested company whenever the foreign ownership ratio in the company fluctuates. In that sense, the state authorities should be in the position to control the foreign ownership in the public companies. The latter seems to be practically reasonable.

In a case where a public company actively negotiates with foreign investors for its acquisition (private placement, for instance), the parties have time to consider the cap and adjust the lines of business to achieve the goal. In this case, compliance with both the LOS and other relevant laws, including the LOI and Law on Enterprises (LOE) could be possible. In a case where a public company passively absorbs foreign investment via share transfer transactions among their shareholders on the stock exchanges, the company should not be in the position to adjust or stop their lines of business. Unfortunately, neither argument has been confirmed by any regulations so far, including the current amendment drafts of the LOS, LOI, and LOE.

Having said that, the LOE's and LOS's amendment drafts officially introduce the concept of non-voting depository receipt (NVDR), which serves as an alternative option for investment by foreign investors without affecting foreign ownership restrictions. Conceptually, by purchasing NVDRs, investors shall receive the same rights, benefits, and obligations as those who purchase a company's ordinary shares, except for voting rights. Accordingly, the foreign ownership cap and issues mentioned above may not arise in this investment scheme, thus making it attractive to foreign investors who do not plan to manage public companies.

The amendments are expected to pass by end of this year for the LOS, and mid-2020 for the LOE and LOI. If passed, these amendments may prompt a new wave of foreign investment into Vietnam. However, since further guidance from the government is essential to understand the whole policy, it is still too early to draw any type of conclusion.