Most listed Vietnamese firms would love to boast of a foreign component to their ownership structure, seeing it as a boost to their prestige.
Pharmaceutical firms say a dose of realism needs to be injected into the argument
But, this might not be the case for pharmaceutical companies.
The current controversial definition of ‘foreign-invested companies’ has seen a string of listed pharmaceutical firms placed between a rock and a hard place. They either have to stop their lucrative pharmaceutical distribution activities to avoid breaking the law, or beg their foreign shareholders to abandon them.
Such a scenario was just underlined when authorities ruled that Mekophar Chemical Pharmaceutical (Mekophar) with its more than 4 per cent foreign ownership was “an enterprise with foreign-owned capital” and did not, therefore, have the right to distribute pharmaceuticals.
Mekophar, which floated its shares on the Ho Chi Minh Stock Exchange one year ago, had applied for the right to distribute pharmaceuticals as part of its business activities when it proceeded with re-registration.
In its ruling, however, the Ho Chi Minh City Department of Planning and Investment (DPI) quoted the Investment Law: “An enterprise with foreign-owned capital comprises any enterprise established by a foreign investor in order to carry out investment activities in Vietnam, a Vietnamese enterprise in which a foreign investor purchases shares, [with which it] mergers or which it acquires.”
Vice Minister of Planning and Investment Dang Huy Dong in late March responded to the State Securities Commission’s enquiry by also confirming that Mekophar – with 4.28 per cent foreign ownership – was “an enterprise with foreign-owned capital”.
Under the Ministry of Trade’s Circular 09/2007/TT-BTM and Decision 10/2007/QD-BTM, enterprises with foreign-owned capital cannot distribute pharmaceuticals.
Critically, though, all of the 16 pharmaceutical companies listed on the Vietnamese stock markets currently have foreign shareholders and all are carrying out pharmaceutical distribution activities. Statistics from June 1 show that Hau Giang Pharmaceuticals had the highest ratio of foreign ownership at 47.33 per cent. At the other end of the scale, the ratio for Vimedimex was 0.51 per cent.
Using the Ministry of Planning and Investment (MPI) and DPI definition all 16 pharmaceutical firms are “enterprises with foreign-owned capital”.
Under Article 3 of the Prime Minister’s Decision 238/2005/QD-TTg on the ratio of foreign ownership in listed firms and under Article 2.1 of Decision 55/2009/QD-TTg replacing Decision 238, the ratio of foreign shareholding in listed firms follows Vietnam’s international commitments and laws regulating specific sectors.
Decision 238 and Decision 55 mean listed pharmaceutical companies will have to either cut back the ratio of foreign shareholding to zero per cent or abandon distribution activities altogether.
But the Vietnamese laws are silent on whether companies which were granted licences to distribute pharmaceuticals before the enforcement of Decision 238, Vietnam’s accession into the World Trade Organisation (WTO) or Decision 55 will have to comply with those decisions upon their listing.
The laws’ silence means listed pharmaceutical companies are in danger of being accused of breaking the law at any time. It also leaves them vulnerable to judgements made by authorities at will.
Mekophar was listed in June, 2010 after Decision 55 came into force. Labelled by the MPI and DPI as “an enterprise with foreign-owned capital”, the firm obviously does not have the distribution right under Decision 55.
But while the authorities might feel relaxed about their definition of “an enterprise with foreign-owned capital”, Mekophar and other companies in the same boat are not convinced. They argue unclear laws mean different interpretations and authorities making judgements at will.
The Investment Law does not distinguish the purchase of shares by foreign investors as a means of participating in management (direct investment) and the purchase of shares for the sake of capital gains and dividends as is the case of Mekophar (indirect investment).
Article 25 of the law’s Chapter IV is named “Capital contributions, purchase of shares, merger and acquisition” while Article 26 is titled “Indirect investment”. This could hint that Article 25 refers to direct investment.
Moreover, Decree 102/2010/ ND-CP, which guides the implementation of the Law on Enterprises, allows existing foreign-invested companies with no more than 49 per cent foreign ownership to do investment and business and carry out subsidiary registration in the same way that purely domestic companies are able to.
Mekophar is now using such arguments to petition the Prime Minister, relevant ministries and the State Securities Commission in a bid to find a way through this legal labyrinth.
In Mekophar’s petition, company general director Huynh Thi Lan lamented the fact that Mekophar had been unfairly forced out of a game that all of its peers could participate in. “Our business has been seriously impacted since we are not allowed to join in on bidding and distributing pharmaceuticals to agents and retailers. If we cannot participate, we might have to abandon our stock market listing, or negotiate with foreign shareholders to bring our foreign ownership to zero per cent to obtain the distribution right.”
A new decree to replace Decree 108 guiding the implementation of the Investment Law is now being compiled by the MPI. It is expected to detail treatment for companies with no more than 49 per cent foreign ownership.
But an attorney from a high-profile law firm who declined to be named told VIR that the latest draft of the decree did not have any wording related to the definition of “enterprises with foreign-owned capital”. Thus, firms like Mekophar might still be in for a bumpy ride.