Capital Raising In Enterprise With 100% Charter Capital Held By The State

In Vietnam, “State-owned enterprises constitutes a part of the State-run economy and always determined as playing a leading role in the public economy”1. So, how are State-owned enterprises understood? 

Under Article 3.11 and Article 88 of the 2022 Law on Enterprises, State-owned enterprises include enterprises in which the State holds more than 50% of charter capital or total voting shares and they can be organized and managed in the form of limited liability companies or joint stock companies. 

Since the capital to establish the enterprise is funded by the State, the regulations on capital raising of such enterprise are different from those applicable to enterprises by individuals/organizations. However, State-owned enterprises must be established under and governed by the law on enterprises as well as have the same rights as other enterprises, including the right to mobilize, allocate and use capital. 

In this article, we will analyze the regulations on capital raising by State-owned enterprises, specifically those whose charter capital is wholly (100%) held by the State. 

1. The right to mobilize capital of enterprise with 100% charter capital held by the State

In accordance with Article 3.9 of the 2014 Law on Management and Use of State Capital Invested in Production and Business at Enterprises (“Law on Management and Use of State Capital”), capital of an enterprise with 100% charter capital held by the State includes its equity capital and raised capital. 

In particular, the equity of an enterprise as the State capital invested in such enterprise includes (i) capital from the state budget and capital of state budget origin; (ii) capital from development investment funds at enterprises and the enterprise reorganization support fund; (iii) government-guaranteed credit capital, state development investment credit capital and (v) other capital invested by the State in enterprises. 

For this type of enterprise, the State is the sole owner of the enterprise. Therefore, when the enterprise needs capital, it will not be able to increase capital contributions/shares from external organizations and individuals. It may only request the owner which is the State (via the ownership representative) to add its charter capital from sources which are used to create the state capital at such enterprise (under Article 22.3 of the Law Management and Use of State capital) or raise capital through credit activities. 

  • Under Article 23.1 of the Law on Management and Use of State Capital, enterprise with 100% charter capital held by the State are entitled to borrow capital from credit institutions, financial institutions, external organizations and individuals, and their employees; issue corporate bonds and otherwise raise capital in accordance with law. 

In accordance with the law regulations, it can be understood that enterprise with 100% charter capital held by the State can raise capital from domestic and foreign loans if they ensure compliance with the law regulations on loans. 

For foreign loans, enterprise can directly borrow on their own and shall be responsible for repaying the loans to foreign lenders in accordance with the conditions committed in the loan agreements, where attention should be paid to: 

  1. Conditions, sequence and procedures for considering and approving foreign loans of enterprises, which shall comply with the law regulations on management of foreign loans and repayment thereof by enterprises that are not guaranteed by the Government; and
  2. Enterprises’ foreign loans must be within the annual national foreign loan limit as decided by the Prime Minister and must be registered and confirmed by the State Bank of Vietnam in accordance with current regulations. 

2. Principles for capital raising by enterprise with 100% charter capital held by the State

Capital raising by enterprises must follow the principles specified in Article 23.2 of the Law on Management and Use of State Capital, specifically: 

(i) Being based on five-year and annual development investment strategies and plans of the enterprises;  

(ii) Capital raising plans must ensure debt repayment capacity; 

(iii) Persons approving capital raising plans shall supervise and examine to ensure that raised capital is used properly and effectively;  

(iv) The raising of capital from domestic organizations and individuals shall be conducted under loan agreements with these organizations and individuals in accordance with law; the borrowing of capital from state development investment credit sources must comply with the law on development investment credit and other relevant laws;  

(v) The raising of capital from foreign organizations and individuals, borrowing of loans or issuance of government-guaranteed bonds must comply with the law on management of public debts and other relevant laws;  

(vi) The raising of capital in the form of issuance of corporate bonds must comply with the laws. 

 


Disclaimers:

This article is for general information purposes only and is not intended to provide any legal advice for any particular case. The legal provisions referenced in the content are in effect at the time of publication but may have expired at the time you read the content. We therefore advise that you always consult a professional consultant before applying any content.

For issues related to the content or intellectual property rights of the article, please email cs@apolatlegal.vn.

Apolat Legal is a law firm in Vietnam with experience and capacity to provide consulting services related to Business and Investment and contact our team of lawyers in Vietnam via email info@apolatlegal.com.

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