Stock Market Stabilisation and Development: Systemic Solutions

A fundamentally systemic solution to stabilise and develop the stock market has been sent to the Prime Minister and the Finance Minister by the Vietnam Association of Financial Investors (VAFI). Notable solutions proposed by VAFI include requiring quarterly financial statements from securities companies and that listed companies be reviewed, disqualified companies be delisted, investors’ money be separated from securities companies, and the number of securities companies be reduced.

 

Mr Nguyen Hoang Hai, VAFI General Secretary , said: The job to be done right away is to require reviewed quarterly financial statements, audited by independent auditing firms, from all securities companies and listed companies on the Hochiminh Stock Exchange (HOSE).

 

Although the mid-year financial reports are now reviewed by audit firms, many companies deliberately cook the books to create statements attractive to investors in the first and third quarters, which are free from the review requirement. This caused serious disparities in financial data between listed companies and audit firms.

 

"The reviewing of quarterly financial statements aims to prevent companies from cooking the books to facilitate a share offering or help managers sell shares at high prices. Quarterly reviewing will make investors feel more at ease, particularly those with limited knowledge of corporate finance,” Hai said. Besides, VAFI recommended auditing financial reports of all securities companies, even unlisted ones, citing that a higher proportion of securities firms reportedly falsify financial data than companies operating in other industries. The unclear operations of some securities companies are threatening the safety of the entire system and the assets of investors.

 

He added that VAFI has not proposed applying the reviewing of quarterly financial statements of companies listed on the Hanoi Stock Exchange (HNX) because auditing companies need to increase personnel to avoid overloading and ensure the quality of auditing.

 

Remarkably, VAFI proposed the immediate delisting of disqualified companies. According to statistics, many companies have incurred losses for years, failed to repay debts, not provided for the loss of securities prices or exchange rates, or overestimated assets. Their registered capital is not enough for listing. These companies are called “ghost ships.”

 

However, shares of these companies are still speculated and manipulated by some investors to catch the attention and involvement of others. The performance of such stocks harmfully affects the market.

 

According to Mr Hai, another job to be done immediately is to separate investors’ money from accounts managed by securities companies. Three years ago, the State Securities Commission of Vietnam (SSC) revealed a plan to bring investors’ money out of securities brokerages and allow investors to open accounts at commercial banks to safely protect their money, but this was not put into place.

 

Some securities firms have recently faced insolvency and were publicly warned by the Vietnam Securities Depository (VSD). Many lost liquidity because they lacked even the VND1 billion to settle the payment for the VSD, although the required capital for brokerage business is VND25 billion.

 

Worse still, in recent years, many employees, board chairmen and general managers of securities companies appropriated capital of investors and commercial banks. One bank reported the loss of hundreds of billions of Vietnamese dong because a securities company chairman swindled it and then fled. This poses the threat that investors may lose their money.

 

As regards the feasibility of this solution, according to the VAFI’s study, most companies meet these standards and just a few companies fail because they do not have enough legal capital. For this reason, they should not be allowed to perform stock brokerage business.

 

According to Mr Hai, in the medium term, Vietnam needs to reduce the number of securities firms from 100 down to 25. He pointed out that a majority of the over 100 stock brokerage houses are now operating like pawn companies. An excessive number of securities companies only serves to create unhealthy competition and a shortage of quality personnel. All companies have to attract investors and they even allow financial leverage with value fivefold greater than the original value of investors. Excessive lending has turned securities into something like casinos. Subsequently, a vast majority of investors suffer losses on the stock market.

 

But, it is not easy to bring the number of securities companies down to 25. According to VAFI, the government should ask State-owned or State-controlled enterprises to dissolve, sell and withdraw from securities companies where they hold controlling stakes. Besides, securities companies must increase their legal capital from the current VND300 billion to VND600 billion by 2013, and to VND1,200 billion by 2015.

 

“With the above solutions, it will be easier to restructure the securities company system, attract more capital from foreign securities companies and protect the assets of shareholders," Mr Hai confirmed.

 

Besides, Mr Hai added that the Stock Exchange needs to go public and select foreign strategic investors, and the Vietnam Securities Depository needs to merge with the Stock Exchange. It is also necessary to set up a new stock exchange to lay the groundwork for the formation of a “modern civilised supermarket” of international standards managed by the Vietnam Stock Exchange. To create an international standard stock exchange, it is vital to have high criteria for market members. Accordingly, a listed company must have chartered capital of over VND200 billion, operate for more than 10 years, maintain a return on equity (ROE) of over 30 percent for five straight years, and suffer operating loss in only one year. Besides, their equity offering needs to be underwritten (the rate of underwriting of 20 percent or more). If they fail to meet these requirements, their shares will be listed on bourses with lower standards.

 

Particularly, according to VAFI, the Government must define the stock market as a leading economic front and securities investment must be regarded as a key economic sector and be granted preferential corporate tax, as applied to high-tech companies. The room for foreign investors needs to be widened in unconditional industries. Value investments should be encouraged.