Following consultations, the State Securities Commission (SSC) has confirmed it will not adopt a proposal by the HCM City Stock Exchange to allow companies to issue non-voting depository receipts (NVDR).
The plan, first proposed by the HCM City Stock Exchange two years ago, was based upon its study of the Thai Stock Exchange, in which a similar plan was enacted in a bid to lure foreign investment to their domestic stock market.
The plan was prompted by concerns that foreign investors could not invest in many companies because foreign ownership in these firms had reached the limit of 49 per cent, as stipulated in the current law. Thus, NVDRs would have offered an alternative option for foreign investors who are interested in arbitrage and financial benefits, such as dividends, rights issues or warrants.
The possibility of allowing for NVDRs remained open until last week when SSC's vice chairman Nguyen Thanh Long said that the commission would not adopt this solution.
According to Long, allowing foreign investors to hold NVDRs could lead to risks that a company could not hold annual shareholders' meetings due to low participation rates or create imbalanced voting rights between domestic and foreign shareholders.
Further, he presented an example in which a group of foreign investors were holding 49 per cent of the company's charter capital, while another group of foreigners held 30 per cent of stakes in the form of NVDR's.
"Who will represent the voting rights of these 30 NVDR shares? If this problem is not solved, it can affect the organisation of its shareholders' meeting," Long said.
The current regulation stipulates a general shareholders' meeting shall only be conducted if the number of shareholders reaches at least 65 per cent of total voting shares.
In addition, the existing legal system had yet to allow the establishment of a body responsible for issuing and selling NVDRs to investors, Long added.
"Since NVDR does not help attain all the targets set out, we shall not implement this solution," Long told reporters at last Thursday's meeting to provide detailed information on Decree 60, which details new rules for foreign ownership in public companies.
In Thailand, the Stock Exchange of Thailand set up Thai NVDR Co Ltd, which is responsible for issuing and selling NVDRs to investors and performing the purchase or sale of those listed company shares whose investors wish to trade through NVDRs. Thai NVDR reserves the right to attend shareholders' meetings, but cannot vote.
The value of foreign trading, including both buying and selling, accounts for 20 to 30 per cent of the total market value on the HCM City exchange, averaging some VND580 billion ($27 million) per session in the last 12 months.
This figure was much more modest on the Ha Noi Stock Exchange, making up 10 to 15 per cent of the market's value, with an average of just VND31 billion ($1.4 million) per day since early this year.
By July 6, there were some 40 listed companies in which foreign ownership had reached, or nearly approached, the limit of 49 per cent, accounting for just 6 per cent of total stocks listed on the two exchanges.
However, most of these are hot stocks, such as dairy giant Vinamilk (VNM), software giant FPT Corp (FPT), Mobile World Investment Co (MWG), DHG Pharmaceutical (DHG), Refrigeration Electrical Engineering (REE) and HCMC Securities Co (HCM).