The “investment company” is a common concept in many countries, playing key roles in investment and stock markets. In the US, registered investment companies managed a record $9.5 trillion at year-end 2005.

In Vietnam too, investment companies are emerging, but few of them are ‘in business’ as the consequence of a young investment environment and less-enabling legal system. Most of the companies are in trade or manufacturing and take part in investment activities to make up profits.

An investment company is a company that merely makes financial investments in other companies, funds, or securities markets. ‘Holding company’ is one form. In some jurisdictions, there is a typical form, a ‘specific purpose’ company, or SPC, which is incorporated specifically to invest in real estate or trade in non-performing loans or asset ‘securitisation’. In the US, an investment company is a corporation, trust, or partnership that invests pooled shareholder dollars in securities appropriate to the entity’s and its shareholders’ investment objectives. The main types of investment companies are: mutual or “open-end” funds, closed-end funds, unit investment trusts and exchange-traded funds, a relatively recent adaptation of the investment company concept.

Under current Vietnamese law there is no clear concept of ‘investment company’. Except for securities funds and fund management companies, which are governed by the Securities Law of 2005 (takes effect January 1, 2007), a question remains with respect to which legal document regulates the establishment and operation of other funds, such as funds for investment in real estate only.

Likewise, the Securities Law governs the establishment and operation of securities investment companies, which require a company’s charter capital of at least VND50 billion. There is also concern about whether it would be possible to legally incorporate an investment company just for doing investment activities except in securities.

But in theory, it should be possible, given that the business function of “investing in other enterprises” is not prohibited by prevailing legal provisions (under the laws on enterprises and investment), and “investing by means of making capital contribution to other enterprises” is a right inherent in all companies. However, there might be some hardships in business registration, in investment registration or appraisal, and in acquisition of shares of other companies.

When undertaking procedures for business registration (or incorporation), it is practical that business registrars shall base their assessment on an issued list to give and state the company’s business activities in the business registration certificate (the obsolete list was issued in conjunction with the Inter-ministerial Circular 07/2001/TTLT-BKH-TCTK dated November 1st, 2001). In this list, the business function “capital investment” is included in financial activities. If business registrars consider “investment activity” a function of a finance company, the establishment thereof will be subject to certain conditions such as minimum legal capital. In the prevailing environment, investment companies are unnecessarily categorized as financial companies, given that financial companies shall do many other activities and services, not only investment. Although the said circular allows incorporators to select a business line not included in the list, the possibility of getting the function “doing investment activities”, being not a finance company, is still uncertain.

The second hardship relates to the unclear provisions on investment project registration or appraisal. According to the current legislations, investment registration or appraisal is a must beside the requirement on business registration (or incorporation). For local incorporators, if total investment is less than VND15bn and not belonging to conditional sectors, they do not have to register the investment project. Beyond that amount, and for foreign investors, they are all required to register or appraise one investment project at the time of establishment. A trait of investment companies is that they may not have a real investment project at the time of incorporation. They will be looking for investment opportunities. In some cases their registered capital is just symbolic. Vietnamese laws are silent on the possibility for foreign investors to establish a company first and then promote and register investment projects later.

Given that the legal definition of “investment project” is unclear under the laws, a solution for incorporators is that they may first register a small investment with simple management and office. Later on, every time an investment project is promoted, they may undertake registration procedures and add up the company’s total investment. Vietnamese laws should be made clear on whether buying shares in other companies would be considered “an investment project”.
The last thing noted is about the acquisition of shares. Foreign investors are likely still limited with respect to maximum share acquisition in another enterprise of certain sectors. That would be the limitations to be proposed for portfolio investment, not direct investment, where investors do not engage directly in management of invested capital. Pending promulgation of legal guidelines, many are still wondering what the legislators’ idea of differentiation between direct or indirect engagement in management of invested capital under Article 3 of the 2005 Law on Investment is. Once a buyer acquired a certain amount of shares in a company, that buyer shall take part in board of management’s or shareholders’ meetings. Would that be considered direct engagement in capital management?

Source: www.bizconsult-vietnam.com