Strict management needed for bank capital increases
Strict management needed for bank capital increases
Capital increases at banks may pose risks of manipulation and cross-ownership among closely related companies if management is lax.
Vietnam started establishing joint-stock banks in the late 1980s. At that time, the capital of the economy was small. For example, Maritime Commercial Joint-Stock Bank had a charter capital of $1.67 million, almost the largest at that time. At that time, banks and enterprises had to own each other’s charter capital to meet the very minimum needs of the economy. Therefore, the form of cross-ownership flourished.
Truong Thanh Duc, director, ANVI Law Firm |
Specifically, in the late 1990s it was stipulated that urban joint-stock commercial banks must have a legal capital of $2-3 million, while rural ones only require a legal capital of $200,000. A further ruling raised the legal capital very suddenly for all joint-stock banks to $41 million by 2008, and $122 million by 2010.
In just a few years, the legal capital of joint-stock banks has increased from tens to hundreds of times. To have enough capital, banks and shareholders had to work together. The control of cross-ownership and cross-investment in credit institutions had not received much attention. Regulations on ownership limits in credit institutions and cross-ownership restrictions are still loose and the roadmap is unclear.
The Law on Credit Institutions from 2010 introduced some regulations to limit cross-ownership, cross-investment, and regulations to limit charter capital ownership, which were good at limiting and handling conflicts of minority interests with the interests of credit institutions, as well as reducing risks, manipulation and domination of banks.
An improvement in managing ownership issues at banks was the State Bank of Vietnam’s (SBV) issuance of Circular No.36/2014/TT-NHNN stipulating limits and capital adequacy ratio (CAR) in credit institutions and foreign bank branches. In particular, a commercial bank was only allowed to hold shares of no more than two other institutions, and the maximum number of shares held must be less than 5 per cent of the voting capital of that institution.
Setting the figure of 5 per cent was a goal for credit institutions that were holding shares in other institutions, to divest capital or credit institutions whose charter capital was held by another institution more than 5 per cent, needed to urgently have a plan to increase capital.
After the issuance of Circular 36, cross-ownership was treated by many synchronous solutions, suitable to the situation of each bank like divesting capital and/or increasing charter capital. Since then, banks holding shares in many other credit institutions had to divest capital exceeding the rate prescribed by Circular 36.
Another measure to comply with the requirements of Circular 36 was to increase charter capital. Banks can improve charter capital through two ways: calling on investors to contribute more capital through issuing additional shares, and implementing mergers and acquisitions.
By 2017, the law amending and supplementing some articles of the Law on Credit Institutions stipulated effective measures to prevent the emergence of new specially controlled credit institutions, thoroughly handling cross-ownership and virtual capital in the operations of credit institutions; supplementing regulations to improve management and operation capacity, handling cross-ownership, preventing new bad debts and new credit institutions from arising.
For example, regulations on transferring capital contributions of shareholders; transferring shares of major shareholders, transferring shares leading to major shareholders becoming ordinary shareholders, and vice versa must be approved in documents by the SBV before implementation. It shall manage shareholders and their relative persons of credit institutions, preventing cases of buying and selling and transferring shares that increase the cross-ownership ratio.
In addition, the law stipulated that credit institutions are not allowed to provide credit to contribute capital or purchase shares of other credit institutions, including the purchase and investment in corporate bonds.
Thanks to the continuous improvement of the legal basis and the drastic implementation of solutions to prevent and handle ownership of shares exceeding the prescribed limit and cross-ownership, the SBV has achieved some positive results. Ownership of shares exceeding the limit and cross-ownership between credit institutions, credit institutions and enterprises according to the reports of credit institutions after processing has decreased significantly.
However, controlling cross-ownership between non-industry companies and banks is very difficult in cases where major shareholders and their related persons deliberately conceal or ask other individuals or organisations to stand in their names for the number of shares owned to circumvent legal regulations on cross-ownership, ownership exceeding the prescribed level.
This leads to the risk of credit institutions’ operations lacking transparency and openness, and this can only be detected and identified through verification by investigative agencies.
Detection of relationships between enterprises is still limited because information to determine the ownership relationship of enterprises, especially enterprises that are not public companies, is very difficult. The SBV is not proactive in looking up information as well as determining the accuracy and reliability of information sources; especially in the context of the rapidly developing stock market and technology today.
