On June 26, 2007, the government issued Decree 109/2007/ND-CP (Decree 109) on the conversion of state-owned enterprises (SOEs) into joint stock companies, replacing Decree 187/2004/ND-CP dated November 16, 2004 (Decree 187).

Firstly, apart from independent SOEs, the new decree adds more types of enterprises to the equitisation list such as state-owned corporations, parent companies of economic groups, holding companies of parent-subsidiary consortiums and limited liability companies with 100 per cent state equities. This addition conforms with the policy and spirit of the government to reduce participation of the state in managing enterprises activities.

In addition, Decree 109 abrogates strategic investors’ right to purchase shares at preferential rates. This has been highly controversial for a long time. Under Decree 187, strategic investors were allowed to purchase shares with a discount of up to 20 per cent from the average winning price. Under the new regulations, strategic investors may purchase shares at a price not lower than the average winning bidding price.

Some argue that such regulations abolishing preferential prices for strategic investors are not necessary because normally, these investors have strong financial capacities and purchase shares for the purpose of enterprise management. They, therefore, would rather be given preferential treatment to purchase shares than price incentives. Strategic investors may not transfer shares within three years from the date when the new joint-stock company is granted its business registration certificate. Furthermore, now foreigners can become strategic investors. This is a practical requirement, especially in the equitisation of enterprises in fields requiring important mobilisation of capital, experience and power resources such as finance, banking and insurance.

Another outstanding aspect of Decree 109 is the detailed provisions on determining the value of enterprises, a move to end inaccurate evaluation of enterprises and state asset losses. During equitisation, the evaluation of enterprises can cause great losses to the state if land use rights are not correctly valued. Decree 109 clearly stipulates the basis on which to compute market value of land use right when enterprises go public.

Land prices shall be based on the area, location and purpose and then submitted to competent organisations for consideration. With existing land, enterprises have two options, lease land or allocate land under the Land Law. If the land is granted to the enterprise for use, the value of land use rights shall be added to the value of the enterprises in accordance with the price set by the provincial and municipal authorities.

Where enterprises prefer land lease options and pay rent annually, the land value shall not be counted towards the enterprise’s value. If enterprises pay all rentals for the leasing duration, the rental should be counted towards the value of the enterprises and the rental shall be based on the rate provincial and municipal authorities set forth for the period concurrent to equitisation.

In addition, according to Decree 109, new forms of first share sales will be applied, including underwriting and direct negotiation. In addition, the public auctioning method is imposed. Enterprises’ shares offered for sale which are worth less than VND10 billion will be auctioned at intermediary financial organisations. If their value exceeds VND10 billion, the auctions will take place at stock exchanges or securities trading centres. Economic groups and corporations have to organise separate auctions for strategic investors, based on the prime minister’s decision.

Moreover, filling the gap left by Decree 187, Decree 109 provides that charters of new joint stock companies should be prepared by the equitisation steering committee and given to investors before share sales. Enterprises eligible for listing shares on the stock market are requested to list and register transactions at stock exchange/securities trading centres during the equitisation process. These regulations aim to associate the equitisation of SOEs with stock market development, increased quantity and quality of listed companies and improved publicity and transparency under market principles.

Finally, Decree 109 contains other supplemented and amended points from Decree 187 to meet new requirements regarding the equitisation process of state-owned enterprises and to create a fair playground for both foreign and domestic investors.

Source: www.vision-asssociates.com