Financial experts participating in a seminar on FII attraction held in Hanoi last week shared the same viewpoint: Vietnam needs to quickly amend its current policies to welcome a wave of FII.

Nguyen Thi Lien Hoa, Director of the Market Development Department of the State Securities Commission (SSC), said that the opportunity for attracting FII was knocking for Vietnam but that legal issues were still hindering investors.

In way of an example, she said that FII was being controlled by both the Law on Investment and the Securities Law. Direct investment sources are fine-tuned by the Law on Investment while FII is controlled by the Law on Securities. However, if an investment fund holds more than 5% of the stocks of an organisation or it is a member in this organisation’s management board or directorate, the Law on Investment will be applied.

The policy to protect investors is not strong enough while the accounting system is not standardised to be appropriate to the world. The too-strict forex management mechanism is also a restriction to FII.

According to Don Lam, General Director of the VinaCapital Fund, Vietnam doesn’t have any legal document directly monitoring the organisation and operations of investment funds in general. The current rules on FII are too strict. For example, the rule that foreign investors are only permitted to hold 30% of shares in Vietnamese businesses is a barrier to investors.

“Such a restriction causes many difficulties for foreign investment funds. Firstly, it forces them to divide investment into small parts. Investment costs increase while they lose the opportunity to focus investment in the best companies. This restriction also limits foreign investment funds from combining direct and indirect investment,” Mr Lam added.

Deputy Finance Minister Tran Van Ta also agreed that the current rules on FII were too strict and said that Vietnam would have to loosen them.

“Actually we wish to attract more FII. Vietnam aims to draw around $140-150 billion of investment capital in the 2006-2010 period and if FII is only at $2 billion like now, that will be inadequate. We declare that changing policies is an urgent need,” Mr Ta said.

According to Ms Hoa, a system of financial-tax policies to encourage the long-run and stable operation of foreign investment funds in Vietnam is the thing that the Vietnamese government must consider.

“Vietnam needs to have good and long-term supportive policies to encourage fund management companies in order to attract foreign medium- and long-term investment sources,” she said.

Vietnam currently has 19 investment funds with a total capital of nearly $2 billion. This is an impressive number in the context that legal regulations are still strict now. However, Ms Hoa said that Vietnam could have more funds and more capital if policies were strong enough.

“Equitisation of state-owned enterprises is at the starting phase with only 8% of state capital equitised. In the next few years, many big state companies will be equitised and they will attract much more FII. In addition, the 230,000 small- and medium-sized enterprises in Vietnam are also good targets for funds. The current problem of Vietnam is changing its policies to facilitate this flow of capital,” Ms Hoa said.