The market for corporate bonds, especially bonds issued via private placement, is in a crisis and there is no way out at the moment. One of the key reasons is the irrelevance of regulations.
Legal ambiguity
First, the term “corporate bond” is misunderstood in the Vietnamese context. Corporate bonds are issued by only corporations while there are no bonds issued by partnership and private enterprises.
Second, all limited liability and joint-stock companies have the right to issue corporate bonds. However, the 1990 Company Law and the 1999, 2005 and 2014 Enterprise Law only provided regulations on bond issues by joint-stock companies, not limited liability ones. Meanwhile, Decree 120-CP issued in 1994 allowed bond issues by State-owned enterprises; and Decree 52/2006/ND-CP specified bond issues by State-turned-shareholding and joint-stock companies. When Decree 90/2011/ND-CP and other regulations came out, limited liability companies could issue bonds.
Third, a conflict exists in Point 2, Article 128 of the 2020 Enterprise Law. It specifies that bonds issued via private placement can be offered to “fewer than 100 investors, excluding professional investors (which means bonds can be offered to fewer than 100 non-professional investors). But the next line of Point 2 specifies that such bonds can be sold to strategic and professional investors only. It is incomprehensible whether non-professional stock investors can buy bonds through private placement or not, until Decree 153/2020/ND-CP in its Article 8 bans bond offerings to non-professional investors.
Illogical regulations
First, since 2018, as many as eight laws and decrees have come out, regulating the issuance of corporate bonds via private placement (the 2006 and 2019 securities laws; the 2014 and 2020 enterprise laws; and many decrees), but there remain many inconsistencies.
Second, joint-stock companies that are not listed are disallowed to offer bonds via private placement in mass media in accordance with Point 2, Article 128 of the 2020 Enterprise Law. That means such bond offerings must be conducted “half secret half public” while such transactions should be made transparent for the market, the media and the people to follow.
Third, the offering of bonds via private placement by companies that are not listed apparently does not relate to the stock exchange, but a pre-offering announcement and the sale outcome must be reported to the stock exchange, per Points 2 and 3 of Article 129 of the Enterprise Law. This provision also contradicts Article 128 which specifies that “the offering of bonds via private placement by public companies” and the “public offering” only must follow legal regulations on securities.
Fourth, Decree 65/2022/ND-CP, which amends and supplements Decree 153/2020-CP and which introduces tougher conditions for recognizing professional investors, took effect on the date of issuance (September 16, 2022), prior to the announcement of the decree. Such a move further shocks the market, and hesitant investors now could not buy bonds.
Legal corridor needs amendment
First, it is necessary to adjust the legal corridor governing private placement to rescue and develop the bond market, not because of a lack of regulations but overregulation. As enterprises are thirsty of capital, especially medium- and long-term funding, issuing debt is the most viable avenue that should be encouraged rather than restricted.
Therefore, conditions should be lessened rather than strengthened towards bond sales. Bond issuing conditions must not be stricter than those for access to credit, and it must not be mistaken that all bond issues are guaranteed in terms of safety. Corporate bonds – except bank bonds – carry a relatively high risk. Even bank deposits sometimes come with risks though they are seen as the most secure investment channel. If high safety norms are required of corporate bonds, companies would not able to meet conditions to sell bonds, and will resort to other channels that are less transparent and riskier.
Second, amendments should not be made to require that bond issues come with collateral and are underwritten, and proceeds must be used for the exact purpose as stated. If bond issues must have assets as collateral, it is apparently more stringent than taking out bank loans, which is illogical. If bond issues must be underwritten for repayment, it is also unviable as such a condition is similar to a bank’s lending procedure. If proceeds from bond issues must be used for the exact purpose, it is also unreasonable because even bank loans with stringent conditions are sometimes used for other purposes than promised.
Third, a total ban on non-professional investors to buy bonds via private placement, with an aim to convince them to make bond purchases through investment funds or to simply put their money into banks for safety, should not be enacted. Such a move does not suit reality in Vietnam, with strange but widespread peculiarities as follows. Apart from nearly 900,000 enterprises, Vietnam is also home to around five million household businesses. Apart from real estate practitioners, there are also millions of people active in the real estate business. Apart from methodical investments on the stock exchange or made via investment funds, there are also millions of people placing their bets on all types of risks ranging from Ponzi schemes to cryptocurrency, gold and forex trading, and even illegal gambling.
Fourth, measures to coerce bond issuers to buy back their bonds need to take into account the cash flows of the issuers and the feasibility of the measures themselves. It sounds logic to force violators to do the remedy, but there should be leeway if they cannot afford the buyback, such as permission for them to issue new bonds to raise funds to buy back prior bonds, or subject them to sanctions when they repay bondholders late. There should be no discussions over commercial banks or the State buying back corporate bonds to safeguard bondholders’ interests, as such a move not only is illogical but also goes against the nature of this financial activity (There is no legal ground for this move now).
Fifth, as corporate bond is a debt instrument, the question is whether the coupon rate needs to be capped at 20% a year as per the 2015 Civil Code, or should the coupon be floated, meaning allowing for a higher risk? The law should clarify that bond coupon rates are not capped, simply because there should be various types of bond with varying degrees of risks, and thus different coupons.
Sixth, the practice of credit rating needs to be maximized, and not limited to a few cases of public bond offerings pursuant to Article 19 of Decree 155/2020/ND-CP. This practice must be first encouraged, and then made compulsory so that instead of overseeing thousands of bond issuers and millions of investors, State management agencies only need to control and improve tens of credit ratings firms. Credit rating can replace numerous other conditions and requirements.
Seventh, it is of paramount importance to adhere to the requirements of information disclosure regarding securities in a full, accurate and transparent manner, and violations by issuers as well as all relevant stakeholders over bond issues must be promptly uncovered and sanctioned heavily.
(*) Director of ANVI Law Firm, Arbitrator of VIAC
