According to the Circular 46/2018 of the State Bank of Vietnam (SBV), since 2021, major shareholders of credit institutions (CIs) and related persons must not own shares in excess of five percent of charter capital (chartered capital) of other credit institutions.
This regulation aims to strengthen the handling and elimination of cross-investment, cross-ownership and manipulative and dominant possession in relevant credit institutions. However, there are still many other strong solutions needed to handle cross-ownership faster and more substantially.
Article 55, Law on Credit Institutions 2010, stipulates that the ownership threshold of chartered capital in a credit institution is five percent for an individual shareholder, 15 percent for an institutional shareholder and 20 percent for a shareholder and related persons of such shareholder.
In 2015, SBV issued Circular requiring credit institutions to handle all the cases in which shareholders and related shareholders owned shares in excess of the stipulated limit before December 31, 2015, but then the deadline was extended to June 30, 2016.
At the same time, the Law on Credit Institutions amended in 2017, stipulating that a major shareholder of a credit institution and related persons of such shareholders cannot own shares of five percent or more of the charter capital of another CI. These regulations are aimed at managing cross-ownership in Vietnam’s commercial banking system.
According to SBV’s report, as of September 2016, credit institutions basically dealt with and overcame some violations of share ownership and cross-ownership. The number of pairs of direct mutual cross-ownership of credit institutions has decreased from seven in 2012 to one. Direct cross-ownership between banks and businesses decreased from 56 pairs at the time of June 2012 to four pairs at four banks.
Accordingly, there are four banks whose shareholders are State Owned Enterprises (SOEs) owning15 percent of chartered capital; three banks with shareholders are groups of people who are related to each other that own more than 20 percent of chartered capital; three banks have major shareholders and related persons owning shares of more than five percent at other credit institutions; two banks hold shares of more than two other credit institutions, one credit institution owns more than five percent of other credit institutions.
At the end of 2018, SBV continued to issue Circular 46 effective from March 1, 2016, amending and supplementing a number of articles of Circular 06/2015. Circular 46 regulates the deadlines, order and transfer procedures for the cases in which a major shareholder of a credit institution and the related persons of that shareholder own shares of five percent or more of the charter capital of another credit institution.
Leading credit institutions are responsible for coordinating with other credit institutions, and a large group of related shareholders to work out plans to handle the ownership of shares beyond the limit, to carry out and ensure the ownership ratio of major shareholders complies with the amended and supplemented Law on Credit Institutions on December 12, 2020 at the latest. For the other cases, in which ownership exceeds the limit, SBV will deal with Circular 06/2015.
It is reasonable for SBV to review the major shareholders owning excess shares to target the group’s interests. Thereby, SBV can clearly see the shareholder structure of each bank, see which shareholders are the real holders of the bank and have any related people, thereby having appropriate corrective measures.
Because the group interest problem, in the past, had harmed the banking industry, brought many banks into crisis as the main shareholders hid under the relevant people. With this regulation, management agencies need to drastically request credit institutions to carry out. In fact, some years ago, SBV asked banks to report on the ownership status of major shareholders, but no results were then published.
According to a financial expert, the ownership threshold in a credit institution for the individuals is ten percent, higher than that of the organisations (five percent), because the former has little effect on credit institutions compared to the latter. In addition, organisations are more likely to manipulate than individuals, so a low ownership ratio ceiling also prevents abuse of institutional positions.
At the same time, individuals are elected to the board of management of the commercial bank only as a member, not a legal representative of the entity. That individual must act for the benefit of all shareholders, not just for the sake of the legal entity represented by that individual. For cases in which a bank buys other banks’ shares in excess of the prescribed limit due to the historical reasons of the banking industry, as well as the lack of compliance with the regulations of the Vietnamese banking system, sanctions are not strong enough.
Or the amended and supplemented Law on Credit Institutions effective from January 15, 2016 has many terms and regulations to limit cross-ownership, but only solve the formality problem. For example, the regulation of the chair of a credit institution is not concurrently the chair of the board of other enterprises. But in fact this regulation is not effective. The purpose is to avoid abuse of the chair’s power, but they will hide in another form.
Therefore, controlling banks must be by law, such as how the power of chair of Board of directors (BoD) is allocated, how to exercise power. At the same time, it is necessary to apply banking management under Basel II. The BoD does not regulate the bank, plays only the role of management, orientation, strategy and supervision, while the executive board performs the activities of the bank, according to Circular 13. Currently there is no clear distinction between administration and management at banks.
In order to thoroughly handle the cross-ownership problem in the banking system, over the past time many proposals of having specific provisions on related people, the final owner and expand the subject to publish information about the ownership ratio. This issue results from the fact that the current regulations on shareholders’ affiliation are not all inclusive, the ambiguity in the related relationships still creates opportunities for cross-ownership to be hidden and cannot be identified. Through different legal entities and natural persons, an individual may possess beyond the above rules.
The current law only regulates shareholders and stakeholders including their own family and excluding the family of the spouse’s family. Therefore, to deal with difficulties in managing, supervising ownership, cross-investment, it is necessary to complete the current regulations on clearly identifying relevant people, supplementing regulations on the final owners, giving banking inspection and supervision authorities the right to determine the final owner based on the statutory principle.
In terms of governance, it is necessary to consider adopting the Korea’s practices. That is to force listed banks to have at least a quarter of board members who are independent members from outside. This independent member must meet strict criteria, such as not working for a bank, or a company under the bank; there is no relationship with related people owning certain shares of the bank.
Independent members play a role in making objective decisions and limit negative impacts on small shareholders, which are caused by major shareholders and shareholders having control over the bank through cross-ownership.
Previously, the basic and effective solution was expected by SBV to thoroughly handle cross-ownership, which was to require credit institutions in the alliance to conduct mergers and acquisitions (M&A). However, in the process of restructuring, there were only two cases of M&A due to cross-ownership relations. Currently, there are three banks having the same major shareholder and related people owning shares of more than five percent, but these banks still have no intention of M&A to resolve this situation.
Therefore, SBV should consider these cases, forcing banks to carry out M&A instead of letting them voluntarily, in order to achieve the goal of reducing the number of quality enhancements and handle cross-ownership issues at these banks.
