11 June 2015
The State Bank of Vietnam (SBV) continues to show that it is serious about restructuring Vietnam's beleaguered banking sector. The most recent piece in the puzzle was the issuance of Circular No. 06/2015/TT-NHNN (Circular 06) on 1 June 2015 which is designed to tackle the problem of shareholding by individual and institutional investors in excess of the legal limits. Along with cross-ownership in credit institutions, this excess shareholding in credit institutions by certain individuals and institutions has been highlighted as a critical weakness of the banking sector. Despite restrictions on shareholding limits under the 2010 Law on Credit Institutions that became effective from 1 January 2011, prior to Circular 06, little was done to address this.
Circular 06 provides a timeline and procedures to bring ownership thresholds in line with those stipulated in Article 55 of the Law on Credit Institutions. It also imposes harsh penalties on non-compliant shareholders, including suspending dividend rights and rights to serve on the board of directors. Circular 06 will become effective on 15 July 2015.
Legal Restrictions on Shareholding Levels in Credit Institutions
Under Article 55 of the Law on Credit Institutions, ownership in credit institutions is restricted as follows:
Individuals may not own more than 5 percent of the charter capital of a credit institution.
- An institutional shareholder may not own more than 15 percent of the charter capital of a credit institution, other than limited exceptions being: (i) ownership in a credit institution in distress, (ii) ownership in an equitised credit institution, or (iii) ownership by a strategic foreign investor (which may reach 20 percent of the charter capital of a credit institution).
- A shareholder and affiliated persons may not own more than 20 percent of the charter capital of a credit institution.
Despite these legal restrictions introduced in 2011 when the current Law on Credit Institutions became effective, it was not clear how shareholders and the credit institutions would reduce shareholdings to comply with the law.
Remedial Plan of Circular 06
Circular 06 requires shareholders, in cooperation with the target credit institution, to build a remedial plan to reduce their shareholdings to the permitted limits by 31 December 2015 (Deadline). We note that Circular 06 does not cover the ownership limits exceeding the ratios set forth above that have been approved by the Prime Minister or credit institutions whose restructuring plan has been approved by the SBV.
As of the effective date of Circular 06, the target credit institution will not be permitted to give or extend loans to the shareholder or related persons whose ownership in the target credit institution exceeds the permitted limit.
Penalties for Non-Compliance
After the Deadline, the SBV may take the following measures against shareholders who remain in breach of the permitted ownership limits and the target credit institutions:
- The SBV will not approve for the relevant shareholder or related persons (or nominees in case of a institutional shareholder) to be elected or appointed as a member of the board of directors, board of control, or as the general director of the target credit institution.
- The shareholders may not increase ownership in the target credit institution in any manner (except receipt of dividend in-specie).
- Cash dividends payable on shares exceeding the legal limits will be retained by the target credit institution until the relevant shareholder's ownership has been reduced to the permitted limits.
- Other applicable regulatory measures, including compulsory restructuring by the SBV.