Foreign investors have the option to set up a commercial presence or purchase shares of an existing financial institution in Vietnam. In Part 2 of the regulations for foreign banks setting up a presence in Vietnam, we will provide a more detailed view of the specific requirements and procedures that foreign banks must follow to successfully establish a presence in the country. This includes an examination of the various forms that foreign banks can take, such as representative offices, branches, wholly-owned foreign banks, and joint ventures, as well as the specific conditions that must be met to obtain the necessary banking license from the State Bank of Vietnam (SBV). By exploring these issues, we can better understand what it takes for foreign banks to enter the Vietnamese market and contribute to the country’s ongoing economic development.

We will discuss about 3 new forms of investment are: BCC, Strategic Partnership and M&A 

Business Cooperation Contract (BCC)

A Business Cooperation Contract (BCC) is a contractual agreement between two parties, either a Vietnamese and a foreign bank or all foreign partners, with the goal of establishing a cooperative business relationship. The parties agree to share profits or products in proportions that are decided through negotiations. Unlike other forms of investment, a BCC does not require the establishment of a new legal entity. Instead, a coordinating board is formed to execute the BCC. Investors have the freedom to negotiate the details of the contract, as well as the coordinating board. BCC contracts can be categorized in numerous ways, such as jointly controlled assets or operations, or the sharing of earnings based on revenue before tax or net profits.

General guideline: 

The foreign investor needs to apply for an Investment Registration Certificate and depending on the size of the project, it might be required to apply for an Investment Policy Decision first. The Department of Planning and Investment is the central body responsible for coordination and guidance in this process. Once the Investment Registration Certificate is approved, the investor can go ahead with investment activities and begin implementation of the project in accordance with the provisions of the BCC contract.

Pros and Cons of this form: 

Through the use of a BCC, foreign investors are able to quickly access the market through established domestic partners, allowing them to immediately generate profits. This arrangement is most beneficial when a foreign partner possesses considerable expertise and the domestic partner has strong connections and access to local permits and tangible assets. Among the notable features of a BCC is the absence of a distinct legal entity. This can be advantageous for many investors as it saves a significant amount of time and money, and eliminates the need for a complicated dissolution process once the project has been completed. However, the absence of clear regulations on the implementation of the BCC contract can be viewed as a risk for investors. The parties involved are solely responsible for the outcome of their negotiations, with only high-level guidelines from the Law on Investment and the Civil Code to serve as reference.

Strategic Partnership

Description:

Strategic Partnership represents an investment format that provides more flexibility by avoiding confinement to particular products or projects. This investment can take on different forms, which can be classified as: (1) contractual arrangements, (2) equity investments, and (3) joint ventures.

Contractual arrangements: Involve non-equity alliances such as distribution agreements, outsourcing relationships, franchise or licensing agreements, and R&D partnerships.

They also include symbiotic relationships, where organizations that serve seemingly unrelated markets collaborate

– Equity investments: involve one financial institution taking a minority ownership interest in a partner

– Joint ventures: Involves 2 or more independent financial institutions forming a third entity. Each company contributes resources and shares control (and profits or losses) of the venture. 

In order to be eligible for this investment structure, the foreign investor must possess a favorable credit rating from an international agency as well as meet certain asset requirements. Specifically, an investor can own 10% of shares if they have total assets of at least US$10 billion, or they can qualify as a strategic investor if their total assets reach US$20 billion.

General guidelines: 

Similar to BCC, strategic partnerships operate under the provisions of the Civil Code and the Investment Law. The genral process of establishing a strategic partnership follows these 6 steps:

– Strategic partnership 

– Partnership planning

– Partner engagement

– Partnership execution 

– Partnership governance

– Termination consideration

Pros and Cons: 

For global financial institutions or banks looking to enter the Vietnamese market, Strategic Partnership seems to be an attractive market entry option. This type of investment offers ample opportunities for investors with varying degrees of knowledge and experience in the Vietnamese market. Nonetheless, due to the complexity of strategic engagement that impacts critical business areas, thorough selection processes are carried out by banks, leading to extended negotiation periods. These periods could span between 2 to 3 years as banks exercise caution and meticulousness in their selection.

Opportunities for foreign investors:

During the recent Annual General Meeting of Shareholders, several banks such as OCB, LienVietPostBank, SCB, Ban Viet Bank, Nam A Bank, VPBank, and NCB, expressed their interest in seeking foreign strategic partners. In an effort to enhance their appeal, many banks have taken steps to “lock” foreign rooms and reserve a portion of the foreign ownership ratio for strategic investors. As per regulations, the maximum allowable limit for foreign strategic investors in terms of shares is 20% of the charter capital, while the total foreign ownership cannot exceed 30%. Clearly, Vietnamese banks are eagerly welcoming international partnerships based on these developments.

M&A

Description:

The phrase “mergers and acquisitions” (M&A in short) refers to the broad spectrum of mechanisms employed to consolidate firms and their assets. These mechanisms include mergers, consolidations, tender offers, asset purchases, and management takeovers achieved through various financial methods. As per the current policy guidelines in Vietnam, M&A represents an attractive and favored form of investment due to its alignment with recent regulations and simplified administrative processes in contrast to more traditional investment methods.

General guidelines:

There are specific requirements that need to be met for mergers and acquisitions (M&A) to proceed despite its relative openness. Circular 36/2014/TT-NHNN, one of the several legal documents that regulate the banking sector, only permits the merger or consolidation of credit institutions in certain forms. These forms include the merging of a commercial bank or a financial institution into another commercial bank, or a financial institution into another financial institution. Apart from Circular 36/2014/TT-NHNN, the Law on Credit Institutions 2010, as well as other related laws, also offer regulations on M&A activities in the banking sector.

Completing a bank M&A involves a seven-step process as outlined by the State Bank of Vietnam. First, bank managers must develop an M&A strategy that clearly defines their goals and expectations from the merger or acquisition. The second step involves determining the criteria for selecting potential M&A partners. The third step is the planning stage, which involves collecting necessary information, preparing legal issues, and establishing teams and committees for implementation. The fourth step is the appraisal, followed by the drafting and signing of contracts in the fifth step. The sixth step is to release the committed capital, and the final step is the completion of the M&A process.

Pros and cons: 

One significant advantage of M&A is its alignment with the Vietnamese government’s policies and directions on banking restructuring. Moreover, public disclosure of information on business performance and investment activities, as well as listing on HOSE or HNX, is mandatory for commercial banks. These requirements promote transparency, benefiting investors. Additionally, M&A can lead to business efficiency by scaling up operations. Parties involved in an M&A deal can access each other’s resources, increase market share, and leverage customer relationships, ultimately improving competitiveness and creating new business opportunities.

On the other hand, Vietnam lacks a standard legal framework for M&A, which can cause problems for investors. Given the multitude of laws and regulations to examine, navigating the transaction and operation may prove difficult. Even authorities find it challenging to manage and give comprehensive instructions. Furthermore, the Vietnamese side of M&A still lacks experience, particularly in due diligence. Hence, foreign investors should anticipate leading them through the process.

Opportunities for foreign investors: 

Several factors are driving the growth of the banking M&A market in Vietnam. Firstly, the Government aims to streamline the number of credit institutions, encouraging domestic interbank mergers that have proven successful in many state-owned banks. Secondly, Circular 22/2019/TT-NHNN mandates that commercial banks report their capital adequacy ratio (CAR) and other regulatory ratios to the State Bank of Vietnam (SBV), based on Basel II standards. Meanwhile, the European Union-Vietnam Free Trade Agreement (EVFTA) could facilitate the entry of European financial firms into the Vietnamese market. A significant change introduced under the trade agreement is that European investors can now increase their ownership ratio to a maximum of 49% in two Vietnamese banks.

Conclusion

In conclusion, Vietnam’s regulatory framework for foreign banks entering the market through various forms of investment such as BCC, strategic partnership, and M&A is rapidly evolving to support the country’s growth story. Foreign banks have brought in expertise, technology, and capital, driving innovation and efficiency in the finance industry. Furthermore, they have played a vital role in introducing international best practices and standards, ultimately benefiting the Vietnamese economy. Moving forward, one can expect the regulatory environment to continue to evolve as Vietnam seeks to attract more foreign investment while balancing the interests of local stakeholders, ultimately positioning itself as a leading financial hub in Southeast Asia.

HMLF is always available to offer assistance in understanding the procedures with authorities.

Harley Miller Law Firm “HMLF”
Head office: 14th floor, HM Town building, 412 Nguyen Thi Minh Khai, Ward 05, District 3, Ho Chi Minh City.
Phone number: +84 937215585
Website: hmlf.vn Email: [email protected]

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