Corporate bonds

Legal provisions on corporate bonds and solutions to protect bond investors in Vietnam

(Published in Vietnam Law Magazine) Corporate bonds have been a hot topic in recent days as many large corporations have issued corporate bonds to raise capital. This article analyzes the current regulations on corporate bonds and its gaps and offers recommendations to protect investors in the Vietnamese bond market.

Current corporate bond regulations and existing legal issues

It can be said that in the existing capital market, corporate bonds are an important lending channel to help companies obtain capital to carry out their projects and ensure the progress of their business in a context where obtaining of a bank loan is more difficult when the bank manages and supervises more and strictly the granting of loans.

Regarding the issuance of corporate bonds, Government Decree 153/2020/ND-CP (Decree 153) establishes clearer rules on the procedures for issuing corporate bonds, for example, principles of corporate bond issuance and the use of bond capital; the basic terms and conditions of the bonds; entities likely to purchase bonds; bond issue conditions; bond issuance process; bond issuance plans and powers to approve such plans. The decree provided a clearer mechanism to regulate the issuance of bonds and protect investors investing in this financial instrument.

However, there remain loopholes in Executive Order 153 which companies have used to circumvent the law, thus illegally raising capital from not only professional investors but also retail investors. Indeed, according to Executive Order 153, for non-convertible bonds without warrants, bond buyers are professional securities investors as defined by securities law. As stated in Section 11 of the Securities Act 2019, professional investors in securities are investors with financial capacity or professional qualifications in the field of securities, including:

(i) Commercial banks, branches of foreign banks, finance companies, insurance companies, securities companies, securities investment fund management companies, securities investment companies, securities investment funds, international financial institutions, off-budget public financial funds and public financial institutions that are authorized to purchase securities;

(ii) Companies whose registered capital has contributed more than VND 100 billion, listed organizations or trade registration bodies;

(iii) Holders of securities practice certificates;

(iv) Individuals each holding securities listed or registered for trading with a value of at least VND 2 billion, as certified by the relevant securities company at the time it is recognized as professional investor in securities; and,

(v) Individuals each earning a taxable income of VND 1 billion or more in the last year at the time they are identified as a professional securities investor according to the tax declaration file submitted to the tax office or the taxpayer’s tax deduction document.

Thus, in addition to the entities referred to in points (i) and (ii) above, a natural person who wishes to become a professional investor in transferable securities must meet only one of the three remaining conditions. However, it can be seen that in the case of Tan Hoang Minh, retail investors still consider that they hold bonds issued by Tan Hoang Minh without fulfilling the above conditions.

The reason for this is that Tan Hoang Minh’s subsidiaries issue bonds for the purpose of using them to cross-invest in other member companies of Tan Hoang Minh’s ecosystem, instead of raising capital for the company by directly offering bonds. However, the main buyer of the bond, which is the holder, is the Tan Hoang Minh group. From there, in the form of a phantom contract called “Investment Cooperation with Tan Hoang Minh Hotel Trading Service Co., Ltd.”, Tan Hoang Minh raised nearly VND 10 trillion from private investors. .

In fact, individual investors are basically not holders of Tan Hoang Minh bonds, although many of them believe that they are bond holders, and many others mistakenly believe that Tan Hoang Minh bonds Corporation have been authorized by the State Securities Commission of Vietnam.

However, according to the current securities law, the National Securities Commission of Vietnam strictly authorizes and manages only corporate bonds issued by public companies. With respect to private corporate bonds, companies follow the principles of self-borrowing loans, self-paying debts and self-responsibility for efficiency in the use of capital and ability to repay debt. debt, without having to obtain the approval of any authority. In addition, investors will need to self-assess, be responsible for their own investment decisions and assume all risks arising from investing in and trading in the bonds of such companies.

The state does not guarantee that bond issuers pay in full and on time the principal of the bond and the interest at maturity as well as other rights for bond buyers. Therefore, if a bond issuer loses money and cannot afford to pay, investors may not get paid for the bonds, as private corporate bonds issued in Vietnam are mostly sourced from companies not yet rated, and many types of bonds are unaccompanied by a guarantee of payment.

In addition, the management and supervision system is alarming. Although Executive Order 153 requires a bond issuer to clearly state the purpose of the bond issue in the bond issuance filing, the bond offering process (Section 11 of Executive Order 153) and bond issuance plans, as well as the power to approve and accept bond issuance plans (Article 13 of Decree 153) still lack management and oversight by competent public bodies.

Specifically, Executive Order 153 states that a company is only allowed to issue bonds for three purposes, namely to implement investment programs and projects; increase the size of working capital; and to restructure its own capital, and these objectives should be clearly stated in the company’s bond issuance plan. However, the bond issue plan is subject to the approval of the management of the company itself, such as the general meeting of shareholders, for joint-stock companies, or the chairman of the board of directors, for limited liability companies.

In addition, Article 41 of Decree 153 also stipulates that supervision of the raising and use of capital through the issuance of bonds and the payment of principal and interest on bonds is the responsibility of the Board of Directors, the general meeting of shareholders, the council of members, the President of the company, or the owner of the company in accordance with the decree and the charter of the company. Due to the lack of management and supervision by relevant government agencies, companies can arbitrarily mobilize and use capital for improper purposes, thereby causing serious harm to investors.

Regarding the issue of disclosing false information or concealing information in the issuance of bonds, according to Decree 156 of 2020, a company can be fined between 400 and 500 million VND and , depending on the nature and severity of its breach, may be subject to one or more corrective action(s).

In the case of Tan Hoang Minh, this company is required to recover the securities already offered for sale or issued; return to investors the sums of money used to buy securities plus interest calculated at the rate indicated on the bonds. However, if the offense is serious, the company may be deemed to have intentionally disclosed false information or concealed information in connection with securities activities under Section 209 of the Penal Code 2015 (revised 2017 ) if there are indications of this crime.

However, the disclosure of false information or the concealment of information during the issuance of bonds occurs even more frequently due to the absence of a management and monitoring mechanism applied by the competent state agencies, as mentioned above. State authorities only intervene when investors suffer heavy damage or violations are too obvious.

Solutions to monitor bond issuances and protect bond investors

It can be seen that the manipulation of the bond market in the past by corporations has shown that the control and management by state management agencies seems inadequate, causing serious losses and damages to investors.

Therefore, the first solution is for the state to provide a clear legal framework and a mechanism for all bond issuers to collate transaction data into a single focal point. Especially in the current era of Industry 4.0, the state should apply various tools to strictly monitor and manage the issuance of bonds, thereby detecting violations early. This can limit false and hidden information in the bond market and thus create a transparent environment for investors.

Second, given that investors still lack information and knowledge about financial products as well as about bond issuers, the state could consider setting up a mechanism to assess the level of credibility of bond companies.

Accordingly, investors can rely on corporate credit rating results from published databases or risk assessment analyzes from credit rating agencies to assess relative interest rates and associated risks. bonds issued by companies in the same sector or in different sectors. Based on this, investors can make the right choice and avoid risks.

Third, the state should also consider establishing an investor protection mechanism, because although it is possible to assess the credibility of a company, it is difficult for investors to monitor the payment of interest and principal, the financial situation as well as the company’s compliance with the terms of the bond contract.

Therefore, when the issuing company goes bankrupt or becomes insolvent, investors do not receive any compensation for their investments. It is proposed that the state consider issuing legal provisions for the establishment of organizations with the above functions to monitor the bond issuance process and protect investors in case of harm.

This article was published in Vietnamese law and legal forum.