Corporate bonds

Corporate bond market gaps | Business

Illustrative photo

At the end of 2021, the corporate bond market accounted for 16.6% of GDP, with a value of nearly VND 1.15 trillion. In 2021 alone, around 520 trillion in corporate bonds were issued by real estate companies, valued at VND 214 trillion.

Legal gaps

Despite the continuous adjustment of regulations regarding the issuance of corporate bonds, for example by modifying Decree 163/2018 by Decree 81/2020 and another new Decree 153/2020 published on December 31, 2020, the The corporate bond market is constantly finding flaws in its functioning. All decrees adhere to a principle that the use of capital from the issuance of corporate bonds must ensure the correct purpose in accordance with the issuance plan, in accordance with Article 5 of the latest decree.

That is, according to the bond issuance record, the issuer always requires the issuing company to explain the purpose of the bond. Section 5 and Section 13 of Executive Order 153 state that companies are permitted to issue bonds for only three purposes. First, implement investment programs and projects; second, increase the size of working capital; and third, restructuring the source of capital of the company itself.

According to the bond issuance process specified in Article 11 and the power to approve the issuance plan specified in Article 13 of Decree 153/2020, bond issuing companies will all establish their own records in accordance to regulations and approvals without going through state management agencies. This shows that approval of the issuance plan, which partners to sell to and how to use the money raised is entirely the prerogative of the companies.

That is, the company itself must fill out the application in accordance with the regulations, using the money in accordance with the purpose of the entry on file. In the three decrees issued, the inspection of records, the supervision of capital use purposes is completely without any intervention, management or supervision of a state management organization, and fully supported by the enterprise concerned.

Therefore, it is unclear whether the money after being successfully mobilized from the bond issue will be used for the proper purposes in accordance with the provisions of the decree. It is difficult for subsidiaries and SARLs to have a control mechanism for this activity and to depend entirely on the role and impact of the parent company. The Tan Hoang Minh Group, through the role of subsidiaries, issued bonds and then reissued that money to purchase land and real estate.

Issuance plans

Article 14 of Decree 163/2018 and Article 13 of Decree 153/2020 mention that bond issuers must draw up an issuance plan and submit it to the competent authorities for approval, acceptance and as a basis for the disclosure of information. However, the competent authority is the company, and not the state management agency in accordance with clause 2 of article 14 of Decree 153/2020.

This is similar to clause 1 of article 14 of Decree 153/2020 which stipulates a series of documents, registers and criteria that must be included in the emission plan to be submitted to the competent authority by a company. Accordingly, if it is a business that companies have to decide, but if it is necessary to manage, there must be a state management agency that is represented under the securities law by the State Securities Commission (SSC).

According to the provisions of Article 39, the responsibility of the State Securities Commission is only through the role of supervising information disclosure and bond trading activities to make decisions for address violations in offer activities. Businesses can enter wrong records and there is no one to check. Even in the disbursement of capital where the object is indicated in the file, there is no one to check.

Article 38 stipulates the responsibilities of the Exchange, but also only mentions post-issuance content, such as information disclosure and bond trading. In Article 19, the content of the information disclosure before the bond offering will be transferred to the Exchange with the content announced in accordance with Circular 122/2020 of the Ministry of Finance. Thus, the department organizes itself to check whether or not the issue plan complies with the promulgated decree.

Submission of this disclosure of information to the Ministry should only be made one day prior to the date of offer, and the Ministry’s responsibility to monitor this record for a certain number of days is not mentioned. That is, the company actively issues, and the buyer is solely responsible for his own understanding of the regulations to assess the documents.

The case of the Tan Hoang Minh group shows that bond buyers are mostly passive. In the filing for the issue of the bond package WTPCH2125003 worth VND 3,230 billion, issued by the Winter Palace Joint Stock Company on December 16, 2021, there is no mention of the purpose of the bond. use of capital, whereas the two previous batches of bonds issued separately mention the purpose of the use of capital.

This part could be a company error and not reported. The more passive buyers are, the more money they lend to companies whether they are put to good use or not, trusting the company completely. The decree does not mention that any competent authority can inspect and monitor the use of the money for proper purposes, as indicated in the plan.

The decrees all stipulate the expectation that companies raising capital will use it for a clear and specific purpose for investment programs and projects, or complete the scale of working capital, investment capital in works and projects, but may not use it to acquire, annex, own shares or redeem shares of others.

However, due to the lack of regulatory authority, the interpretation of these terms varies. This lets companies freely misuse capital. There is an opinion that if additional checks are not carried out, some people who buy bonds today could become shareholders of companies or projects in the future using them as collateral.

Dr. Le Dat Chi Faculty of Finance, UEH