Under the previous legal regime, purchases of stock in existing unlisted domestic companies were governed by Government Decision No 36/2003/QD-TTg dated on March 11, 2003. Decision 36 restricted the scope of foreign investment in domestic companies in various ways. For instance, foreign investors were only permitted to purchase stakes in "domestic companies which engage in business lines as determined by the Prime Minister or published by the MPI from time to time." A list of 35 permitted lines of business was published in Decision No 260/2002/QD-BKH of May 10, 2002.

Decision 36 also capped the foreign stake in a domestic company at 30 per cent of legal capital, and foreign investors were compelled to nominate Vietnamese citizens or foreign individuals residing in Viet Nam to participate in management of the company. These restrictions were a major disincentive for foreign investors to make significant share purchases in domestic enterprises.

The new law is more investor-friendly. Article 25.1 states that "investors shall be permitted to contribute capital to and to purchase shares in companies and branches operating in Viet Nam." Instead of restricting foreign investors to certain business lines and imposing a general cap on the level of foreign investment, the new Investment Law provides that "the ratio of capital contribution and share purchase of foreign investors in a number of sectors, industries and trades shall be regulated by the Government."

This suggests that foreign investors will be able to purchase uncapped stakes in any domestic enterprise unless it operates in a sector in which foreign involvement is specifically restricted by further Government regulation. The new law also does not impose any restriction on the right of foreigners to participate in management. These changes represent a significant liberalisation of foreign investment law in Viet Nam.

However, inconsistencies exist in current regulations. Government Decision No 238/2005/QD-TTg of September 29, 2005, specifies a cap on foreign investment in listed companies of 49 per cent.

However, the Investment Law applies to all forms of direct investment which includes capital contribution or share purchases in enterprises "in order to participate in management." The new Investment Law provides that only indirect investment – share purchase without participation in management – is governed by the Law on Securities and other relevant laws (such as Decision 238). It is clear that an investor seeking to purchase a large stake in a company intends to participate in management. Hence, the Investment Law applies to these purchases, and this law does not cap foreign ownership in domestic enterprises. In these cases, the 49 per cent cap in Decision 238 is inconsistent with the new Investment Law.

If Decision 238 were applied to listed companies, various problems would arise:

(i) Foreign investors are allowed to purchase more than 49 per cent of unlisted companies. The 49 per cent cap would force foreign investors to divest their shareholding if they wished to list the company on the stock exchange. This would be a major disincentive to listing.

(ii) Foreign-invested shareholding companies established under the new Enterprise Law do not have any restriction on foreign ownership. It would be impractical to subject these companies to the 49 per cent cap upon listing. If the 49 per cent cap applies to some joint stock companies and not others, then the unifying purpose behind the new Enterprise Law would be thwarted.

The Government should consider revising or repealing Decision 238 to ensure consistency with the liberalised foreign investment climate under the new Investment Law.

Vietnamnews (Vilaf- Hong Duc)