The impressive economic growth of Vietnam over 90s decade has been due in part to significant foreign investment activities.

It therefore comes as no surprise that Vietnam has sought to stimulate it and to harness the considerable inputs brought by foreign investment. By promulgating two important laws in 2005, Law on Enterprises and Law on Investment, both effectively 1 July 2006, Vietnam wishes to flow new foreign investment capital waves into its capital hungry economy. New legal developments in foreign direct and indirect investment are well noted.

However, there is a noticeable fact that indirect foreign investment capital inflow is not as much as expected. The amount of indirect foreign investment is considerable modest compared against direct investment. The hesitation of foreign investors in pumping further capital into local companies would be partially caused by the existing limitation of permissible industries and sectors as well as the cap of 30% total shares in an unlisted company. This would be in line with some reasons for stabling the economy development, but has led to losses in accessing to foreign capital flows, technologies and modern corporate governance. It is ambitious that the Law on Investment would remove pending barriers and obstacles and provide more rooms for this. Foreign investors and financiers are still awaiting further legal improvements as to how and to what extent the removals will be in effect.

Pending the guidelines, there are some general concerns with hope to contribute to the drafting process. Firstly, the Law on Investment is supposed to open more forms to foreign acquisition of shares in domestic companies and branches (Article 25.1) and gives a green light for the Government to think and decide limitations and a cap in certain business sectors in a strategic itinerary. Literally, it can be construed that the capital contribution and shares is neither restricted to particular sectors nor 30% like previously stipulated, and that foreign investors and financiers entitle to buy out entirely a company’s shares, provided that functional business sectors of the company are not limited or controlled by the Government. This, if can be promulgated, would make this area be more attractive to foreign investors and financiers.

Secondly, the capital contribution and acquiring shares in domestic companies are now not only categorized as a form of indirect investment but to some extend can be converted and understood as direct investment where foreign investors come into take charge of management and operation of such companies. This, on one hand, will help local shareholders access to the new management modes and learn their knowledge and experiences in corporation governance. On the other hand, there are still some concerns remained under the new provision. According to Article 8 of the Law on Enterprises, enterprises are entitled to actively use their capital and to select the lawful business activities including those limited to buy shares to foreign investors. In case a foreign investor buys out up to 100% of charter capital for unrestricted business sectors and maximum a cap for restricted sectors, the question is whether foreign capital contribution can be used for restricted business sectors. If the answer is “not, then it is either against Article 8 of the Law on Enterprises or hard to differentiate the foreign contributed capital in use in reality. If the answer is “yes, then the limitation of cap in certain sectors does not make sense.

There is also an unclear point concerning foreign investor’s voting ratio in the companies they acquired shares or contribute capital. Article 79 of the Law on Enterprises stipulates that shareholders are entitled to vote according to the proportion of shares they hold in the company. If the Government later provides limitation by cap in certain business sectors, it may cause a paradox that foreign investors, although only own shares in certain business sectors, may be entitled to vote in all matters of the companies, including those they would not the right to vote.

One important issue is rights of foreign shareholders to dividends. The question is whether foreign investors would be entitled to company’s total dividends in case they acquired shares in certain business activities but not entire business activities of a company, and what would be happened if their acquired business in a company that is profitable but some others would suffer losses.

Business community is withholding their judgments until further implementing regulations are issued.