New draft decree on bond issuances could suffocate market: experts
The Ministry of Finance has made numerous amendments to Decree 153 on corporate bond offerings but experts say the latest draft is so stringent that it would suffocate the market.
Notably, Article 5 of the amended draft stipulates that firms are not allowed to issue bonds to raise capital which will be used to purchase shares, bonds and contributed capital of other firms, to make capital contributions to those firms, or to lend them money.
Experts said the article would work against big corporations as it prevents them from issuing bonds to finance their projects and subsidiaries.
“As small-sized subsidiaries have difficulties in raising capital and issuing bonds, it is normal for their parent companies to do so in their stead and refinance them with the proceeds,” said the experts.
Some financial authorities, including the National Financial Supervisory Commission, propose that Article 5 be inapplicable to parent companies issuing bonds to finance their subsidiaries, thereby maintaining a common practice in corporate finance.
Experts also mention Article 8 as a legal setback for the market.
Article 8 stipulates that professional securities investors are allowed to purchase privately-placed bonds issued by only public companies with collateral or payment guarantee.
Experts say the article sets the bar too high for bond issuers as only public companies with collateral or payment guarantee are eligible to offer privately-placed bonds.
“The article is too strict. With such strict regulation, the market is no different from a closed market,” said economic expert Đinh Trọng Thịnh.
According to the State Securities Commission of Vietnam, Việt Nam had around 2,809 public companies by late March 2022. Meanwhile, the number of firms in the country is about 683,590. That means less than 0.5 per cent of firms are eligible for public placement of bonds under Article 8.
“Most firms in the economy will not be able to raise capital through publicly-placed bonds if Article 8 is put in place. Without capital, production would come to a halt,” Thịnh warned.
The economic expert attributes the chaos in the bond market to inexperienced F0 investors who have little understanding of financial systems.
He said the investors have insufficient information about bond issuers and do not know how to evaluate issuer-related risks. As a result, those investors normally come up with bad investment decisions.
He suggests the establishment of credit-rating agencies that would help reduce the risk of asymmetric information, thereby better safeguarding investors.
The Asian Development Bank (ADB) shares the view, saying that credit-rating has become the norm in other Asian markets, notably Thailand, India and China. Việt Nam should follow their model to incorporate credit-rating into the draft.
"The State does not have sufficient resources to keep a close watch on the market across the board. The responsibilities to oversee bond issuers should be passed to such agencies", said the experts.
Thịnh proposes that the agencies are in charge of supervising bond issuers and publishing the credit-ratings assigned to them with or without their consent.
"The agencies are required to supervise bond issuers continuously, not every 6 months or one year. Bad issuers get downgraded and good ones get upgraded immediately," Thịnh suggested.
Some experts, however, disagree with Thịnh's proposal as they are concerned about the quality of the ratings.