Le Ho Khoi – SSC

I. Financial market

1. Conception of financial market

Financial market is a market where financial sources have been transferred from a person with redundant capital to the one lack of capital. Financial market is a consolidation of demand and supply relations.

The most fundamental function of financial market is leading capital from a person of superabundance to the one in need of capital.

2. Classification of financial market.

Financial market can be classified based on different criteria such as:

2.1. Based on capital mobilization measures on financial market by utilizing financial tools, there will be credit market and equity market.

a. Credit market

- Short-term credit instruments: credit tool with maximum maturity term is 1 year

- Medium term credit instruments: credit tool with maturity term from 1year to 10 years

- Long term credit instruments: credit tool with maturity term more than 10 years.

b. Capital market

Capital market is a market where a person in need of capital mobilizes money by issuing shares. Those shares are entitled to get distribution on net profits and assets of issuing companies.

2.2. Based on stock purchasing for the first time (new stocks) and for the next times after the first issuance, financial market is divided into market level 1 and market level 2. (Primary market and secondary market)

2.3. Based on nature, functions and operational mode of financial subjects as well as financial instruments trading on the market, financial system is divided into 3 main markets that are monetary market, exchange market and capital market.

3. Roles of State on financial markets

3.1. Creating legal environment for the establishment and operation of financial market

3.2. Providing economic environment for the set up and development of financial market

3.3. Supervising operations of financial market

II. Securities Market

1. Conception

Securities market is a place where financial instruments with time schedule of more than one year have been issued and traded, or long-term capital supply-demand relationship has been solved. Securities market is high level financial regulatory and is indispensable for market-oriented economy, where joint stock companies play a crucial role.

2. The roles of securities market

- Providing medium and long term capital to the economy efficiently

- Diminishing costs for capital mobilizing and transferring, preventing from monopoly of banking system

- Creating capital mobilization instruments for enterprises as well as providing investment opportunities (tools) to public and investment organizations.

- Facilitating equitisation process of SOEs by creating standard share price for Government and investors for public offering.

- Consolidating and providing reliable and faithful information in full to investors.

- Regulating share issuance

- Attracting foreign currencies through stock selling to foreign investors or foreign indirect investment.

3. Classification of stock market

Stock market is divided into 2 kinds of market:

+ Primary market (new issue market)

Those stocks that are sold to the market for the first time called new issue stocks. The market where the new issue stocks are sold and bought called primary market or issue market.

+ Secondary market

Secondary market is a place where stocks are sold or bought after the stock sale at the primary market. In the secondary market, profit gained from the sale of stocks belongs to investors and stock traders, but not belong to stock issuing companies.

Secondary market including:

- Stock exchange (trading floor or non trading floor)

Stock exchange presents for trading market through auction where sellers and buyers are competitors in trading deals, based on which the competitive price has been set up.

- OTC trading market: OTC market presents for a negotiation market, where a seller negotiate with buyers. All dealings occur outdoors of stock exchanges; this method is usually used by small and medium companies that do not satisfy certain requirements for listing.

4. Securities market participants (subjects)

+ Investors: investment organizations (insurance companies, investment companies, fund management companies and stock investment funds…etc) and individual investors.

+ Stock issuing subjects: Joint stock companies (issuing stocks and bonds), companies liability limited, Government, local authorities, branches, state owned enterprises (issuing bonds)

- Stock: is a kind of documentary (in paper form or recorded in electronic system) issued by joint stock companies to identify lawful ownership right of the stockholders in relation to issuers’ assets.

- Bond: is a kind of convertible documentary issued by legal status organizations or central government or local authorities to identify the right of creditor of the bondholders in receiving interests and principal upon its maturity?

+ Trading subjects/securities services providers/securities market: stock exchange, OTC trading system, securities companies, banks that possess business license in stock trading, organizations having stock deposit license

+ Management and supervision on stock market operations: SSC and other state management agencies.

5. Vietnam Securities Market

5.1 Current legal framework on securities market

General legal normative including:

- Civil Code issued on 28/10/1995 and guiding circulars for implementation with regulations on conceptions of assets, asset ownership right and asset ownership right transfer related issues, measures ensuring contract implementation, delegation mechanism…etc. These are general maters and basis of the provisions on operations in security area and stock market.

- Law on State Bank and Law on Credit Institutions dated 22/12/1997 and guiding circulars.

- Law on State Enterprise dated 20/4/1995 and its guiding circulars.

- Enterprise Law promulgated on 12/6/2000 and guiding circulars on business registration, organizational and managerial structure, setting up of branches, representative offices, separating, merging of enterprises in general and of Ltd, joint stock companies in particular. Besides it also has provisions on information and reporting system of enterprises as well as on separate stock issuance.

- Law on Foreign Investment of Vietnam proclaimed on 23/11/1996; Law on amendments and supplements to the Foreign Investment Law in Vietnam issued on 22/6/2000 and guiding circulars.

- Laws on taxes

- Law on Enterprise Bankruptcy dated 30/12/1993.

- Resolution on Procedures for dealing with economic cases issued on 16/3/1994

Functional legal documents governing stock market and stock trading.

- Decree No 48/1998/ND-CP dated 11/7/1998 of the Government on stock and securities market.

- Decree No 17/2000/ND-CP dated 26/5/2000 of the Government on securities inspection

- Decree No 22/2000/ND-CP dated 10/7/2000 of the Government on administrative violation judgments in stock area and securities market.

- Decision No 172/1999/QD-TTg dated 19/8/1999 of the Prime Minister on establishment of security companies of credit institutions and listing on the stock market.

- Decision No 139/QD-TTg dated 10/6/1999 of the Prime Minister on participatory ratio of foreign partners in stock trading activities.

- Decision No 39/2000/QD-TTg dated 27/3/2000 of the Prime Minister on temporary regulations on tax incentives applied to stock trading activities.

Decisions, guiding circulars of SSC on organization and operation of security companies, funds management companies; members, listing, information disclosure and stock trading; deposit, clearing and stock trading, stock public offering and some other legal documentations promulgated by SSC and state competent bodies such as:

- Circular No 02/2001/TT-UBCK dated 28/9/2001of SSC on guidance for implementation of the Decree No 48/1998/ND-CP on stock and bond public offering.

- Circular No 01/2001/TT-UBCK dated 15/2/2001 of SSC on guidance for implementation of the Decree No 22/2000/ND-CP.

- Circular No 01/2000/TT-UBCK dated 17/4/2000 and Circular No 02/2000/TT-UBCK dated 14/11/2000 of SSC on temporary instruction of fees collecting system for clients of stock services trading organizations.

- Decision No 99/2000/QD-BTC dated 13/6/2000 of the Minister of MOF on the issuance of accounting system of securities companies.

Stock and stock market are very fresh conceptions not only for public investors but also for state management bodies of Vietnam. Therefore though many efforts have been taken during elaboration and completion of legal system on stock and stock market it is still impossible to avoid disadvantages and problematic issues regarding legal framework to facilitate the activation of the market. Following are some limitations relating to above-mentioned problems:

1/ Limitations in general legal framework

It is worthwhile to say that the biggest limitation of general legal framework regarding security companies is its incompletion and disadvantages.

2/ Limitations in functional legal system governing stock and stock market.

• Legal effect of functional legal system directly governing stock and stock market is not very high.

• Conflicts between functional and general legal documentations.

• Legal documentations specialized in securities market is incomplete and insufficient.

A number of crucial issues such as scope of stock issuing operation have been regulated in the Decree 48 (apply only for the securities listed on the stock market); regulations on operation of security companies just stop at general definition or conception…

SSC and policy makers should make a balance for necessary flexibility in order to set up an efficient and stable legal framework through intervention in long term (Law on Securities issued by National Assembly), medium term (Decrees issued by the Government) and short term (Guiding Circulars issued by SSC and relevant State bodies).

Below are several solutions and orientations for setting up and completing current legal system governing stock and security market.

A. Preparation for the formulation of Law on Security.

1/ Advantage

a) Higher level of legal effects

Law on Security is a document promulgated by the National Assembly, therefore it will be the legal document specialized in security and have the legal effect at highest level; this document will also facilitate to create more stable legal environment for the operations of security market compared with the existing unique Decree on stock and security market.

b) Larger scale of adjustments

Law on Security shall have quite large scale of adjustments. The law will define (stipulate) issues relating to stock issuance, various types of market (centralized, OTC), Security Association, trading, investment, State management and operations of Fund management companies, Investment companies, security companies, business activities of security companies on OTC market…etc, which have yet mentioned in the Decree 48.

c) Ability to solve conflict law.

Since the Law on Security is a legal document of highest legal effect (specialized in stock and security market), it obviously will be given the first priority to apply when the discrepancies between the regulations of the Law on Security and of other legal documentations on stock and Security market occur.

2/ Principles for identification of Security Law provisions.

- Law on Security should focus on identification of general principles for setting up an elementary legal framework on security market.

- It should also include specific regulations mainly on how to ensure appropriate implementation of the most basic principles (definitions, organizations of responsibility (in charge), conversed clauses…etc).

- On the other hand, the area of stock and security market is extremely rapid developing one that requires high level of flexibility and ability to satisfy demanding requests to be in line with the development of financial instruments.

The freshness of security market in Vietnam requires the flexibility and activation of legal documents that allow amendments and supplements in case the law makers fail to anticipate or foreseen those changes.

B. Synchronization of relevant general legal regulations such a Enterprise Law, Law on Bankruptcy, Criminal Law, Law on Disputes Settlement.

In case of lack of pre-conditions for setting up Law on Security, an Ordinance on Security can be considered as an alternative.

5.2. Vietnam Security Market.

After a number of years of positive preparation and studies, finally the year 2000 has been marked as a benchmark when the security market of Vietnam has come into official operation for the first time. It was also noted as an extremely significant event for the economic development of Vietnam in the country reform. First of all, it was confirmed as an inevitable result of more than 15 years - process of economic reform from highly centralized and planning economy to socialism oriented market economy. The coming to the light of Vietnam Security Market not only affirms the determination of Vietnam in the economic renovation, but also reflects development of Vietnamese economy in terms of quality and quantity that ensures the most necessary conditions for the operations of important institutions of the market economy such as security market and labour force market. .. On the other hand, official operations of security market in Vietnam in fact has opened opportunities as well as challenges for the economic development of Vietnam and created long term capital mobilization channels for the economy. Enterprises have been provided more financial instruments for attracting long term capital to promote business and production activities with reasonable fees; investors (individual and organization) have more chances to make full use of their investment capital in a safety and efficient manner; moreover the security market also ensures the efficient utilization of capital sources and timely provision of information on operations of economy to policy makers, entrepreneurs and investors circle.

Up to present in Vietnam a relative fully-worked security market with all necessary components has been mainly set up. State management agency on stock and security market was established; legal framework for the operations of security market initially formulated, that is the Decree No 48/CP of the Government on stock and security market and regulations of SSC on adjusting relationships raised on the stock market (primary and secondary market). It creates favourable conditions for the operation of stock market and make it function safely, equally, transparently and efficiently.

After 10 months running (Security trading center of HCMC has officially been inaugurated on 20 July 2000 and the first trading session was conducted on 27^th July 2000), security market of Vietnam gradually comes into stable operations. Stock listing, depositing, registration, trading and payment have been so far carried out fairy well. Besides STC successfully issued government bonds with total implementation value of 11.000 billion dong. 5 stocks have been listed on the STC with total market value of 2.000 billion dong. According to statistic figures, just for the year 2000 total stock trading value at SSC of HCMC reached 200 billion dong. The achievements for a new market like our stock market is considered as encourageable, specifically for Vietnam stock market that started in unfavourable conditions (economic growth rate slowdown due to the disastrous impacts of regional economic crisis of Asian countries in 1997-1998; foreign investment sturdily declined; domestic investment showed misty growth rate; banking system and SOEs though have been or undergoing restructuring turned out inefficient; bad influence of natural disasters such as floods in Mekong Delta area; knowledge and understanding of public, economists, policy makers as well as entrepreneurs on stock and security market is still modest…etc).

Looking back at the whole process of security market of VN from its establishment to present, it has showed a lot of problems and shortcomings that need to be dealt with: a. Firstly, security market of Vietnam is too small compared with the real potentiality of the economy. By the end of 2000, the trading volume of listed stocks at STC in HCMC reached approximately 1.200 billion dong and that number was 2.400 billion dong for government bonds and company bonds. The number of listed companies is modest (only 7 by the end of 2001)

b. Knowledge of public, economists, policy-makers and entrepreneurs on securities and securities market are very weak and modest. A lot of entrepreneurs are lack of basic understanding about security market and not aware of opportunities as well as challenges that security market brings about to the development of enterprises. Moreover, it was influenced by common psychology of East Asian people, that is being precautious and fear of new things or events (wait and see others doing first). Therefore among 100 companies that satisfy set requirements for listing on stock market (by the end of 2001) only 7 already listed. And 4 out of those 7 companies have capital contribution of foreign investors.

c. The fluctuations of listed stocks transaction prices during the passing time showed tense relations between supply and demand of stocks. According to the assessment of economists, though the demands for participating and investing in the stock market of public is in fact not very high but already exceeded stock supply in the market. It takes high pressure on the trading stock prices and consecutively pushes trading prices to the permitted ceiling limit. A lot of problems regarding listed stock evaluation have not been clearly identified.

d. Government bonds and company bonds, though listed, are mostly not transacted.

Particularly the government bond market can be considered totally frozen. Therefore the security market of Vietnam, in the full meaning of the word, is stock market.

e. Legal framework for the operations of security market, though issued, reflected incompletion. The highest legal documents governing security and security market are the Decree No 48/CP of the Government. Some other relevant issues such as securities issuance, securities issuance and listing of joint stock commercial banks…etc have yet been clearly identified.

f. Regulations on information publicity of business and production activities, ownership structure and management mechanism of enterprises have not been widely and consistently applied for all types of enterprises. It in fact exercised negative influence on the decision making process of many joint stock companies whether to list the company on the securities market.

g. Business activities of securities companies and other services providers in the securities market (such as securities custody members, banks appointed for payment) in principle have been carried out quite well to satisfy requirements and demands of investors and issuers. However, due to many objective reasons (small market volume; high profitable professional business have not been conducted; set up costs, expenses for human resources development and marketing are quite huge…etc) therefore most of them suffered from securities trading losses.

It is strongly recommended that the following problems should be addressed to make full use of favourable environment:

a. To increase provision of listed securities volume together with speed up restructuring and equitisation process in order to give a kick or momentum to the development of securities market and diminish the tensions in supply-demand relationship of the market. In the next 3 years, Vietnam is anticipated to have 1080 SOEs to be equitised with technical and financial support from World Bank and IMF compared with 500 SOEs that already have gone through the process for the period from 1998 up to the present. This is a very hard job that requires the synchronized cooperation of branches and ministries, specifically MPI, MOF, SBV, NECRD and SSC…etc.

b. To improve legal framework for the operations of securities market in Vietnam

c. Interest rate liberalization closely linked with banking system reform

d. Regulations on information disclosure to be issued and applied to all business & production entities without discrimination of ownership types.

e. Securities companies should take initiatives in their business and operations, specifically in