The Vietnamese government bond market is gradually stabilizing and becoming a useful tool for the restructuring of public debts. As a result, the government has now moved towards promoting the development of the private bond market, including the corporate bond market, as an important step to promote the mobilization of medium and long-term capital for the economy.
Although the corporate bond market has grown in recent years, it is relatively small compared to the scale of the bank credit channel. Due to significant impediments for the issuance of bonds under Decree No. 90/2011/ND-CP of the Vietnamese government dated October 14, 2011 (“Decree 90”), the value of Vietnam’s corporate bond market is much lower than the average level of other countries in the region.
In order to promote further development of the corporate bond market in Vietnam, the Vietnamese government issued Decree No. 163/2018/ND-CP dated December 4, 2018, governing the private issuance of enterprise bonds (“Decree 163”) to replace Decree 90.
Decree 163 is aimed at creating more favorable conditions for enterprises to raise capital through issuing bonds, developing the corporate bond market to be more accessible to the public, while continuing to provide protection to investors. The Ministry of Finance has stated in its publication dated January 9, 2019 that Decree 163 is also intended to help reduce the reliance of Vietnamese companies on raising funds through bank credit.
While Decree 163 replaces regulations governing the issuance of privately issued corporate bonds, it applies to both publicly and privately issued corporate bonds, noting that the issuance of corporate bonds to the public under Decree 163 will remain subject to the provisions of the Law on Securities.
Under the new Decree 163, the requirement for the issuer to have one year of profitability (for domestic bonds) and three years of profitability (for international bonds) prior to the issuance has been removed. Instead, issuers need only have financial statements approved by an auditor for the year immediately preceding the year of the issuance. This is in contrast to the requirements under Decree 90 which required the issuing enterprise have been profitable in the year preceding the issuance.
This requirement prevented enterprises from issuing a bond to restructure their debts or to raise capital prior to achieving profitability, thus limiting substantially the options of enterprises in an early stage of development for instance.
However, in order to issue domestic bonds, an issuer must not have defaulted on payment of any principal or payment of interest due on any previously issued bond in the three-year period prior to a proposed new issuance. This new condition has been added for purposes of consumer protection and is consistent with a similar condition specified in the Law on Enterprises.
Restriction on Secondary Sale of Bonds
Privately issued bonds are limited to 100 investors (other than professional investors as defined under Article 6.11 of the Law on Securities) during the first year following issuance. This restriction also applies to secondary transfers during the restricted period (i.e. no more than 100 non-professional investors are permitted to acquire the bonds during this period).
Following the one-year restricted period, the bonds may be freely traded and available for purchase by the public without restriction. The new limitation appears to be drafted as a consumer protection measure designed to limit the number of inexperienced investors from immediately accepting the risk associated with a new bond issuance.
Requirement for Deposit of Bonds
Within 10 business days of completion of a bond issuance, the issuer must register and deposit the issued bonds with a bond registrar (i.e., the Vietnam Securities Depository or one of its members). The bond registrar will need to ensure that the issuer is in compliance with the transfer limitations. As such, issuers may incur additional fees, though detailed guidance on the requirement to deposit bonds and the relevant fees have not yet been issued. This is expected to be clarified by the government in guidance circulars.
No Minimum Paid-up Capital
Under the old Decree 90, to issue a bond the issuer needed to meet a minimum debt to equity ratio of 20 per cent of its total investment capital. This requirement has been removed under Decree 163. However, certain debt to equity ratios may apply based upon other laws applicable to particular industries or enterprises receiving State financing.
“Green Bond” Introduced
Green corporate bonds are enterprise bonds that are issued to invest in an environmental protection project in accordance with the Law on Protection of the Environment.
The capital raised by an issuer from the issuance of a green corporate bond must be accounted for and managed separately from other capital raised by the issuer and disbursed for the environmental protection project set out in the issue plan approved by the Authorized Level specified in Decree 163. For clarity, the Authorized Level is the relevant governing body of an enterprise that is required to approve of the bond issuance plan as specified in Article 14.2 of Decree 163.
Early Redemption of Bonds and Conducting Bond Swaps
One important change under Decree 163 is that an issuer is permitted to redeem bonds prior to maturity or to conduct bond swaps in order to reduce or restructure its debts.
The redemption or swap features of a bond must be properly disclosed to investors prior to the issuance. At least 15 business days prior to arranging an early redemption of bonds or a swap trading, the issuer must make a public announcement specifying:
- the method of the early redemption or swap;
- the terms and conditions of such redemption or swap; and
- the volume of bonds to be redeemed or swapped for bondholders pursuant to the plan on the early redemption or swap as approved by the Authorized Level specified in Decree 163.
Decree 163 in this respect too is more flexible than Decree 90 which only permitted an issuing enterprise to redeem its bonds prior to maturity or swap bonds if there is an agreement between the enterprise and the bondholder covering the early redemption or swap prior to maturity of the bond, and such plan has been approved by the competent authorities and the relevant approval body of the enterprise.
Issuing Bonds in Tranches
Decree 163 allows a bond to be issued in multiple tranches provided that all tranches must be issued within 12 months from the date of the first tranche and each tranche must be fully issued within 90 days. In order to issue bonds in multiple tranches, the issuer must pass an issue plan specifying:
- the number of tranches;
- the proposed volume of bonds;
- times of issuance; and
- capital utilization plans for each issue tranche.
In addition, the issuer must disclose information to investors and the relevant stock exchange about each issue tranche.
Offshore Issuance of Bonds
Decree 163 is less restrictive than Decree 90 in relation to the issuance of offshore bonds. Under Decree 163 the Vietnamese issuer of an offshore bonds does not need a credit rating report or to have a legal opinion regarding the bond issuance.
Unlike Decree 90, Decree 163 has been drafted to simplify the issuance of offshore bonds by Vietnamese enterprises. In particular, Decree 163 no longer requires three years of operations, three years of profitability or an adequate international market credit rating.
Direct Issuance of Bonds
In accordance with Decree 163, an issuer of private bonds is permitted to directly issue such private bonds to investors subject to the limitations outlined above.
The previous requirements specified under Decree 90 allowed bond issuers to sell the bonds if the issuer was a credit institution and was required to appoint a private placement agent if the issuer was not a credit institution. This meant that any enterprise that was not a credit institution had additional cost associated with a bond sale due to payment of service fees to the private placement agent, even where only one entity or a limited number of entities subscribed to the bonds.
Decree 163 introduces a comprehensive disclosure regime for bond issuers including:
- disclosure before issuance;
- disclosure about issuance results;
- regular disclosures (e.g. six-month financial statements and use of proceeds report); and
- irregular disclosures (e.g. suspension to the business, change to the use of proceeds, or inability to repay a loan).
Generally, the key changes in Decree 163 are stricter (and, potentially, more public) disclosure requirements in respect of bond transactions by the issuer.
However, a fair degree of uncertainty remains regarding the level of detail required in such disclosures and how to make disclosures (particularly for unlisted issuers). This is expected to be clarified by the government in implementing regulations for Decree 163. We note that at the time of publication it is not yet clear when the regulations clarifying the scope of the disclosures will be issued.
Taxation of Bonds
Decree 163 does not provide guidance on the tax implications for issuers of, and investors into, corporate bonds in Vietnam. At the time of drafting of the tax laws, the drafters were not contemplating having a bond market in Vietnam. Therefore, the current tax regulations do not contain specific tax rules for bonds.
However, the existing tax laws and regulations can provide general guidance as to how Vietnam will tax bonds.
Interest Deductibility of Bonds
Although the current tax regulations in Vietnam do not specifically contain any provisions dealing with bonds, there are general rules that can apply, including:
- The corporate income tax regulations do not allow a full deduction of interest paid to enterprises that are deemed to be non-credit institution or non-economic organizations and the interest rate is higher than 150 percent of the interest rate announced by the State Bank of Vietnam as at the effective date of the loan agreement. It is unclear how this provision may apply to interest on bonds in Vietnam and how it may be administered where bonds are listed on an exchange.
- In line with Action 4 of the Base Erosion and Profit Shifting Action Plan on Interest Deductions, the Transfer Pricing regulations in Vietnam provide that the tax deductibility of interest on loans is capped at 20 percent of EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization) and applies to both related and third-party loans.
- Interest on loans that are used for investment into the capital of an enterprise that has not fully paid up its capital as required in the enterprise’s charter will be disallowed for tax purposes.
Tax Implications for Investors
Corporate bonds are defined as securities in Decree 163 and the Law on Securities. The current tax laws and regulations do not contain any specific provisions dealing with the tax implications for investors into bonds in Vietnam. The current tax law provides some general guidance on the potential tax issues for investors:
- Resident corporate investors: the receipt of interest from bonds or a gain from the sale or transfer of a bond may be treated as taxable income and therefore subject to corporate income tax at 20 percent;
- Nonresident corporate investors and individual investors: the receipt of interest income from a bond may be subject to 5 percent tax, while the transfer of a bond may be subject to a 0.1 percent tax on the gross proceeds of the transfer in accordance with the rules for securities.
The Vietnamese government will need to issue new guidelines as to the taxation of bonds in Vietnam for both the bond issuers and investors.
Decree 163 came into effect on February 1, 2019 and replaces Decree 90.
Corporate bonds issued prior to the effective date of Decree 163 continue to be subject to the terms and conditions set out in the approved bonds issue plan and as disclosed or announced to investors.
As from February 1, 2019, enterprises having issued bonds pursuant to Decree 90 will be required to comply with the disclosure requirements under Decree 163, and to send such disclosures to the relevant stock exchange if the bonds are listed and to deposit the bonds with a bond registrar in accordance with Decree 163.
Jérôme Buzenet is Managing Director, Phonganh Hoang is Country Partner and Paul D. Volodarsky is a Senior Associate at DFDL Vietnam