According to policy orientation, from 2021, non-professional investors would not be allowed to participate in the corporate bond market separately. Meanwhile, the development of institutional investors to fill the shortage was also facing difficulties due to many factors.
The risk of weak demand
According to the Hanoi Stock Exchange (HNX), in the first five months of 2020, 100 enterprises had successfully deployed to 579 out of 832 rounds of corporate bond issuance registration. Thereby, businesses mobilised capital of more than 91.616 trillion dong, far exceeding the amount of money mobilised through government bonds, which was nearly 58.82 trillion dong.
Assessing the origin of strong demand on the individual corporate bond market today, the Ministry of Finance said that there was a significant contribution of individual retail investors. In 2019, on the primary corporate bond market, the total bond balance that individual investors bought only accounted for 8.8%, then the first four months of this year increased to 26.8%.
Talking to the Securities Investment Review, the director of an investment bank of a securities company listed on the HNX said that there were two main factors attracting individual retail investors to join the bond trading market with private placement. The first was the attractiveness of interest rates. Buying corporate bonds, investors then had the opportunity to enjoy interest rates of 10 percent to 11 percent per year, higher than the savings interest rates of three percent to four percent per year. The second was, unlike deposit when having to withdraw money before maturity investors did not receive interest, but after only one months to two months of buying corporate bonds, investors could agree with distribution units to sell bonds, then still received higher interest rates than term deposit savings.
These were the two main factors that stimulated individual retail investors to trade in corporate bonds issued individually. They did not pay too much attention to the quality of goods, as well as the financial health of businesses to make decisions to buy bonds, the expert said.
It was worth to concern about the trend of individual retail investors pouring money into corporate bonds issued individually, leading to risks for themselves and the market. In the direction of the mechanism proposed by the Ministry of Finance, from 2021, non-professional individual retail investors would be prohibited to participate in the market of individual corporate bonds.
Besides the consensus with this proposal, there were still concerned views, because the application of this new mechanism would affect the demand of the market if there were no alternative. According to a consultant of a securities company, limiting non-professional individual investors to the corporate bond market would make it more difficult for enterprises to raise capital due to the decline in purchasing power of market.
According to insiders, the development of institutional investors to compensate for the lack of demand in the market when individual retail investors were not involved was essential. The Ministry of Finance was designing policy in this orientation. Nguyen Hoang Duong, deputy director of Department of Banking and Finance, Ministry of Finance said the development of organised investors was necessary to diversify the investor structure and increase the professionalism of the market. This was the way that the regulator was aiming to complete the mechanism of corporate bonds issued separately.
However, opinions from the market raised many difficulties in developing institutional investors. deputy general manager of a fund management company shared that with the current legal system, especially tax regulations, individual investors who invested money through bond funds did not receive higher benefits than direct investment.
Specifically, in the form of direct investment, individual investors were subject to two taxes, namely personal income tax at the rate of five percent per bond interest on each receipt and transfer tax at the rate of 0.1 percent per value of each transfer. However, when investing through the fund, they were paying ‘tax stack tax’. In addition to being subject to corporate income tax, investors who received interest from the fund were also subject to one more personal income tax, when in fact the profits they received had been collected by the fund to pay the corporate income tax of the business.
Moreover, the investor through the fund could not decide on the selling time to take profits like when investing directly. That was not to mention the habit of direct investment had soaked into the subconscious mind, that was to choose the form of investment through institutional investors, investment funds.
Another important reason why individual investors had not chosen funds to send gold was the investment efficiency of bond investment funds was not impressive. For example, the net asset value of Techcom Flexible Bond Fund (TCFF) by the Fund Management Company in the June 12 trading period increased very low, only 0.6 percent after one month and 1, 22 percent after three months. The key to promoting institutional investor development for the individual corporate bond market then lied in the tax policy. If this mechanism created sufficient incentives for investors through investment funds compared to direct investment, fund management companies would had more opportunities to raise capital to establish new funds. If it were still the current situation, institutional investors would be very difficult, said the leader of the fund management company.
Limited market size and liquidity were also bottlenecks in the development of foreign institutional investors. Talking to the Securities Investment Review, a representative of Capital Partners Vietnam (CPVN) an investment organisation from Japan, said that the investment opportunities in Vietnam stock market in general and the corporate bond market Vietnamese enterprises in particular were very attractive, but the size and market liquidity were still limited, making foreign funds afraid to increase investment in Vietnam.
In order to promote the development of institutional investor groups, the Ministry of Finance representative said that besides the solutions on improving market information transparency, strengthening the credit rating market, the management agencies had to carry out solutions to improve the quality of goods. In particular, the improvement of liquidity and market size were being focused to attract foreign investment funds to disburse into Vietnam’s corporate bond market.
