As part of its accession to the WTO, Viet Nam has committed to allow foreign involvement in numerous service sectors that were formerly tightly controlled.

Foreign investors are keen to acquire stakes in domestic enterprises operating in such sectors in order to establish a presence in the Vietnamese market. However, there is confusion over the level of foreign involvement required under WTO commitments.

The WTO commitments on purchasing equity in Vietnamese companies are contained in Viet Nam’s Schedule on Commitments on Services. They only apply to enterprises that supply services. Foreign investment in non-services enterprises - for example, manufacturing units - is not subject to WTO commitments and is purely regulated by domestic law.

In the schedule, Viet Nam will allow various levels of foreign investment in specific service sectors. For example, in the express delivery sector, Viet Nam has committed to allow enterprises with 51 per cent foreign ownership within five years of WTO accession, with 100 per cent foreign-owned enterprises permitted thereafter.

Foreign investment into existing domestic service companies is capped across the board at 30 per cent until January 11, 2008, unless otherwise provided by Vietnamese law. Thereafter, the 30 per cent cap will be eliminated and the limit shall revert to the specific limitation on foreign ownership provided for each sector, except for buying shares in joint stock banks and "for the sectors not committed" in the schedule.

This provision is proving difficult to interpret in practice. The key issue is determining whether Vietnamese law "otherwise provides" for a higher foreign ownership limit than 30 per cent.

Without such provision, presumably foreign ownership will remain capped indefinitely at 30 per cent for the countless service sectors that are not mentioned in the schedule, which would be an odd result.

At present, according to Decision No 36 of the Prime Minister issued in March 2003, foreign investors are only permitted to purchase shares in Vietnamese companies operating in certain industries, and foreign equity ownership is capped at 30 per cent. For listed companies, the cap is set at 49 per cent by Decision No 238 of the Prime Minister dated September 2005.

Decision 36 was made pursuant to the Law on Domestic Investment Promotion, the Law on Foreign Investment and the Law on Enterprises, all of which have been repealed by the new Law on Investment and Law on Enterprises which took effect in July 2006. Decision No 238 was made pursuant to Decision 36, making it arguable that Decisions 36 and 238 are no longer valid.

Instead of restricting foreign investors to certain business lines and imposing a general cap on the level of foreign investment, Article 25.1 of the new Law on Investment provides that both domestic and foreign investors may purchase shares in companies operating in Viet Nam, although "the ratio of capital contribution and share purchase of foreign investors in a number of sectors, industries and trades shall be regulated by the Government." This suggests that foreign investors are able to purchase uncapped equity stakes in any domestic enterprise, unless it operates in a sector in which foreign involvement is specifically restricted by further Government regulation. Because there is no Government regulation restricting the ability of foreign investors to purchase shares in domestic companies (other than the limits in the WTO commitments themselves), it is arguable that Article 25.1 constitutes an "alternate provision" of Vietnamese law and hence that the 30 per cent cap does not apply.

On the other hand, Article 10 of Decree 108 implementing the Law on Investment provides, "When an investor contributes capital to, purchases shares in, merges or acquires an enterprise in Viet Nam, such investor must comply with the provisions in international treaties of which Viet Nam is a member on ratio of capital contribution, forms of investment and schedule for opening the market…" So, the 30 per cent foreign ownership cap in the schedule is a "provision" of an international treaty with which the investor must comply.

The Government recently released a draft decision to replace Decision 36. Article 3 of the draft seems to allow foreign investors to purchase shares without limit in all domestic enterprises other than those operating in investment areas subject to international commitments. This logic is circular, as the domestic law directs the reader to WTO commitments, which in turn refer us to back to domestic law. The Government should consider amending the draft to clarify whether the 30 per cent cap on foreign ownership applies to the first year of WTO membership. To reflect the liberal policy of the new Law on Investment, it is hoped that foreign investors will be allowed to purchase shares without limit in such enterprises, as all sensitive sectors are already covered in the schedule.

Recently issued Notice No 20/TB-VPCP of the Prime Minister, dated January 29, 2007 indicates that the limit on foreign shareholding will not be adjusted in the short-term so as not to overheat the sharemarket. Hence, the issuance of the draft decision has been delayed. As soon as the market stabilises, however, investors would appreciate action on this issue.

Source: VietnamNews