Firms required to have underwriting for share issues

 

 

Vietnam’s stock market has been operating for eight years; however, it has been not good time for listed and unlisted enterprises to mobilise capital via share issuances until 2006 and 2007. The six remaining years were described as time for growth, recession, crisis and recovery, and there were little opportunities for enterprises to successfully issue shares to public during this period of time.

 

Between 2006 and 2007, companies took advantage of opportunities from the stock market's hot growth to issue additional shares and new shares to public en masse. Many enterprises increased their registered capital consecutively in a short period of time. Many public firms had exaggerated their share prices by many ways such as picturing development potentials of their business, painting the truth in pink and limiting to announce shortcomings in the corporate performance. The authorities' loose rules in approving extra share issues and the easy share buying of investors had helped stimulate the movement of issuing shares of companies to raise registered capital, which sharply increased share supply. As a result, the market fell into the situation of share oversupply and thin demand.

 

The fact showed that many listed companies offered shares at very high prices and used the proceeds at wrong or ineffective purposes, losing confidence from investors.

 

According to the assessment of Mr Nguyen Hoang Hai – General Secretary of the Vietnam Association of Financial Investors (VAFI), the oversupply under the control and the eroded confidence of investors were the root and fundamental reasons for the crisis of the stock market over the past time.

 

“Investors and parties participating into the market have many times suggested authorities to tighten the control over the share issues to public. However, the problem is the method of effective control to ensure healthy administrative procedures, and ensure opportunities for raising capital of listed companies and the quality of public share issuances”, Hai said.

 

 

In the recent times, market managers including the State Securities Commission (SSC), the Ministry of Finance, and the State Bank of Vietnam (SBV) have launched many administrative measures to slow down or delay issuances of shares to public in order to ensure the stability of the stock market. This is an acceptable temporary solution while no other better measures are found to replace. VAFI said authorities should not apply administrative measures in approving applications for share offerings in the long term because the assessment of issue effectiveness from state officers is not a good element to ensure feasible offerings and protect individual investors. In addition, the process of approving share issue documents of the SBV, SSC and the Ministry of Finance has still been cumbersome and time-wasting in the past time, and companies had to implement a lot of unnamed procedures at large consultancy costs. The consideration and approval in long duration (between six and nine months) didn’t mean to ensure the quality for share offerings or protect benefits of investors, but they were only cumbersome procedures.

 

In the draft of amending the Decree No.14, the SSC proposed that share issuances with the par issuing value of over VND100 billion must be underwritten. VAFI said the measure, under careful consideration, would be not feasible because enterprises could dodge the law by dividing their share issues into many tranches with par issuing value of under VND100 billion. On the other hands, the majority of public companies in Vietnam have small capital scale, so an issue of shares worth over VND100 billion in one tranche will hardly occur. The above regulation, therefore, would not protect the benefits of almost retail investors.

 

“It is necessary to require compulsory underwritings for all share issuances to public, regardless of the scale of issues”, Hai affirmed. He noted that the compulsory underwriting will be implemented in two methods: pledging to underwrite 100 per cent of total shares offered, and pledging to underwrite at least 30 per cent of total shares offered to public.

 

Hai explained that only companies with effective business performance combined with feasible issuing plans and reasonable offering prices can have rights to select prestigious and financially-strong securities companies to underwrite their issues, which can help ensure the success of these issuances. No stock broker will be ready to underwrite the issues of enterprises with ineffective operation, infeasible capital-using plans and expensive share prices. Therefore, the regulation on compulsory underwriting for all share issuances will help remove low-quality share supplies and weak securities companies, and help raise responsibility of firms for their issues in order to protect investors in the market.

 

However, the problem is that ineffective enterprises will find hard to raise fund via share issues. Hai said they can mobilise capital by issuing individual shares to institutional investors and their strategic partners. Strategic partners (operating in the same business fields) will support these enterprises to better enhance corporate administration. “The new regulation will boost the process of improving the shareholder structure, enhancing individual share issue structure, raising the ownership of institutional investors in joint stock companies”, Hai said.