May 03, 2014
In this article, a law expert points out discrepancies in the definitions of “foreign investors” in the enterprises law and the investment law as well as their bylaws, which have resulted in unequal treatment of foreign entrepreneurs.
In the Enterprise Law 2005 and the Investment Law 2005, the definitions of “foreign investors” or “foreign-invested enterprises” are rather identical with each other. At the time of promulgation, many opined that Vietnam had created a legal environment which was uniform and equal for different categories of enterprises and investment sources. However, a short time later on, such a spirit of uniformity gradually faded away.
Different interpretations
During 2005 – 2009, when two laws were in force, what was meant by “foreign investors” was set by at least four instructional documents which resulted in different interpretations and applications (table 1). And this did not take into account other legal regulations, such as the Commerce Law. That ambiguity led to a far-reaching averse consequence that has still lingered until today when local and sectorial authorities interpreted and applied the relevant regulations quite subjectively. There once was a time when local government granted business registration certificates to foreign investors in line with the enterprise and investment laws. However, at the same time, authorities in other localities refused to issue certificates of the same value to enterprises with a foreign stake. This adverse consequence affected the legal status of the foreign-invested enterprises in question.
In 2010, the Government promulgated Decree 102/2010/ND-CP in an attempt to unify different interpretations of “foreign investors” (table 2). However, those bylaws long established have prevented this good intention from being fully materialized.
Adverse consequences
The confusion in what “foreign investors” means has had repercussions for treatment of “foreign-invested enterprises”. A case in point may be Mekophar, a pharmaceutical company, which had to seek delisting in July 2012 to escape from the noose tied around the “neck” of foreign-invested companies.
Mekophar’s dilemma stemmed from the fact that the State supervisory agencies in charge had adopted different interpretations of the right to buy offered shares or additional capital contribution of foreign investors in line with Vietnam’s commitments to multilateral treaties (World Trade Organization, for instance) or bilateral pacts (Vietnam – U.S. bilateral trade agreement). The differences have narrowed down the business scopes of Vietnam-based companies having foreign capital contributions worth as little as one Vietnam dong. Mekophar is the only exception in which a business has to accept the swap of “foreign capital” for “market position” of domestic-invested enterprises. This confusion has left foreign investors down and out plagued by ambiguity and a lack of commitments from legal regulations as well as policies on foreign investment attraction.
The inequality in different business categories applies to not only wholly domestic-owned enterprises and their foreign counterparts, but also State-owned enterprises (SOEs) and those in other economic sectors.
As said earlier, the Enterprise Law 2005 provided a solid foundation for a unified legal institution for businesses across different ownerships. However, on the implementation process of the law, SOEs were favored. For instance, no “joint stock corporations” are specified in the Enterprise Law 2005. Yet such corporations where the State clinched the controlling stake mushroomed. While the law allowed only joint stock companies to issue shares, SOEs in the form of limited liability companies were able to do exactly the same.
These above-mentioned issues should be adequately tackled in the revised Enterprise Law and the Investment Law. Equally important is that the State has to take effective measures to suppress its own desire to issue instructional regulations which are overlapping or conflicting.
Minimizing these malpractices will not only entice foreign investors into doing business in Vietnam but also represent the State of Vietnam’s commitments to international investment communities. All is to build the good image of a nation where the rule of law reigns.
(By Nguyen Hung Quang, lawyer – NHQuang & Associates Law Firm)