Current Status of Legal Regulations on Forms of Corporate Bond Issuance

highest interest rates on the market. The dominance of commercial banks and real estate enterprises in issuing corporate bonds has overwhelmed the playing field of enterprises in the manufacturing sector. In particular, infrastructure development enterprises in Vietnam have almost no access to the bond market. In Malaysia, 30% of corporate bonds are issued to finance infrastructure projects 103 . The dominance of commercial banks can lead to the consequence that many issuing organizations raise capital in the corporate bond market to reinvest in corporate bonds (for example, commercial banks are both large issuers and large investors in the corporate bond market) instead of expanding production and business, contributing to creating a market bubble and the risk of losing capital when the market declines. Real estate enterprises issue corporate bonds to increase capital for real estate business, while the real estate market in Vietnam has been developing a bubble for many years, so the risk for investors is very high.

Second, regarding investors, the current law does not have regulations showing the granting of certain preferential rights to professional investors commensurate with the conditions (often more stringent than those of other investors) that they must satisfy according to the law. In addition, the current law provides a concept of types of investors that is not clear in some places. The structure of investors in the corporate bond market is not diverse , the current investment demand structure does not ensure sustainable growth of the market. In fact, commercial banks are still the largest investors in the market, while other professional investors and individual investors play a rather modest role. Vietnam Social Security is one of the large financial institutions with stable, long-term and very large financial resources, but current regulations do not allow investment in corporate bonds. Other financial institutions such as insurance companies are not interested in this investment channel. Voluntary pension insurance is newly formed and has no financial potential. Thus, it can be seen that the system of institutional investors has not yet developed, limiting the development of the stock market in general and the corporate bond market in particular. Recently, the market has recorded the active participation of individual investors. The increase of individual investors in the market when they have not had full access to information about the purpose of issuance, financial situation, debt repayment capacity of the enterprise, and at the same time limited ability to analyze and evaluate the enterprise, ... will be a risk for these investors. In fact, when deciding to invest in corporate bonds, especially individual investors, often do not care too much about the quality of goods as well as the "financial health" of the enterprise but only care about interest rates. Taking advantage of this mentality, many enterprises are

Maybe you are interested!

103https://tinnhanhchungkhoan.vn/trai-phieu/thi-truong-trai-phieu-doanh-nghiep-cho-cu-huych-co-che-

216518.html, accessed 15:12 on August 13, 2020.

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tend to increase access to individual investors. Even the Ministry of Finance had to warn of risks when securities companies and banks showed signs of inviting individual investors to buy bonds at all costs.

Third, credit rating agencies are not yet developed in Vietnam and their operations are rather obscure. In addition, bond-issuing enterprises in Vietnam do not have the habit or culture of letting another organization participate in assessing their capacity, and they do not have the habit of paying for this service.

2.1.3. Current status of legal regulations on forms of corporate bond issuance

2.1.3.1. Concept of forms of corporate bond issuance

Issuance of individual bonds in Vietnam is currently regulated in general in the Securities Law 2019 (Clause 20, Article 4), the Enterprise Law 2020 (Clause 128, Article 2), and at the same time complies with specific and detailed regulations in Decree 153/2020/ND-CP of the Government dated December 31, 2020 regulating the offering and trading of individual corporate bonds in the domestic market and the offering of corporate bonds to the international market. Issuance of corporate bonds to the public in Vietnam is currently regulated mainly by the regulations on public offering of securities in the Securities Law and a number of related legal documents.

The Enterprise Law only regulates the issuance of individual bonds by joint stock companies that are not public companies, while the issuance of individual bonds by joint stock companies that are public companies (and securities companies, securities investment fund management companies) is regulated in the Securities Law. Specifically, Article 31, Clause 1 of the Securities Law 2019 stipulates that public companies offering individual convertible bonds/bonds with individual warrants can only be sold to strategic investors and professional securities investors. Article 31, Clause 2 of the Securities Law 2019 stipulates that the offering of individual bonds by public companies that are not convertible bonds/bonds with warrants can only be offered to professional securities investors.

Although Decree 153/2020/ND-CP does not directly introduce the concept of private bond issuance, Article 8, Clause 1 of Decree 153/2020/ND-CP stipulates the subjects of private bond purchase, which partly reflects the viewpoint of this Decree when it comes to the concept of private issuance and public issuance: “(a) For non-convertible/non-warrant bonds, the subjects of bond purchase are professional securities investors; (b) For convertible bonds/bonds with warrants, the subjects of bond purchase are securities investors.

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professional securities, strategic investors, of which the number of strategic investors must be guaranteed to be less than 100 investors".

While the concept of private bond offering is mentioned in many different legal documents, the concept of public bond offering is only mentioned in a single legal document, the Securities Law. Specifically, Article 4, Clause 19 of the 2019 Securities Law defines public bond offering as the offering of bonds in one of the following ways: (i) offering through mass media; (ii) offering to 100 or more investors, excluding professional securities investors; (iii) offering to unidentified investors.

Legal regulations show that the signs to identify private securities offerings or public offerings are stipulated in many legal documents and different regulations for each type of issuing organization (a non-public joint stock company is different from a public joint stock company). This is not only unnecessary but also makes the concepts of public offerings and private offerings more cumbersome, complicated, and difficult to understand. In addition, there are differences between regulations in the same document or between different documents. This is contrary to the consistency of the legal system. Even in one document, the Securities Law, both concepts of private bond offerings and public bond offerings are simultaneously introduced, and the criteria for determining these two forms in the same document are also incompatible with each other. The criteria for determining private bond issuance are based only on the number of individual investors or the participation of professional investors, while determining the form of public issuance requires the participation of the mass media. In addition, the Securities Law provides criteria with the word "or", meaning that only one of the criteria prescribed by the Securities Law needs to be satisfied. The wording of the Enterprise Law shows that private bond issuance is a form of issuance that must satisfy three criteria: (i) not through the mass media and; (ii) less than 100 investors and; (iii) meeting the conditions on the subjects purchasing private bonds. The overlapping, overlapping but contradictory provisions of the law on the signs of private bond issuance and public bond issuance are a barrier to understanding and applying the law in practice.

In addition, the fact that Vietnamese law provides a sign of the participation of the mass media to identify private issuance or public issuance is unreasonable. Because this provision is only meaningful if considered from the perspective of the issuer's initiative. From the perspective of the issuer, according to the law

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According to the law, the issuer is not allowed to proactively and intentionally use the mass media to widely publicize information about the issuance (because only public issuance is allowed to do this). However, if we consider the objective external impact, it is clear that the issuing enterprise and even the law cannot prohibit or control the participation of the mass media. Therefore, the participation of the mass media in this case is beyond the control of the issuing enterprise. Moreover, in today's information society, just a very simple action can cause all information about a person or an organization to spread on the Internet, making it difficult to investigate the source of the information to assign responsibility. Therefore, relying on the criterion of mass media participation to distinguish between private placement and public offering does not make much sense because private placement of bonds can still involve mass media participation beyond the control of the issuing enterprise.

Distinguishing between public issuance and private issuance based on the 100 investor mark is also not very meaningful, because a public bond issuance may have more than 100 investors but only hold 5 billion VND worth of bonds, on the contrary, there are private bond issuances with less than 100 investors participating but the amount of bonds they hold can be up to thousands of billions of VND. Therefore, if we only rely on the number of participating investors to determine the level of impact on the public, thereby determining the boundary between public issuance and private issuance is unreasonable. In addition, the criterion "Offering to 100 or more investors, excluding professional securities investors" in the concept of public securities offering of the Securities Law 2019 also causes many different interpretations. This provision can be understood in the sense that the issuing enterprise has announced its securities issuance to 100 or more investors and 100 or more investors have obtained information about the enterprise's securities issuance. Or it can also be understood in the sense that 100 or more investors have registered/confirmed to buy securities of the issuing organization. Therefore, the law needs to have standard regulations to create a common, unified understanding for all organizations and individuals so that the law can be applied more accurately in practice.

In the United States, the Securities and Exchange Commission's Securities and Exchange Market Regulations have defined a public offering as an offering in which the offering entity must register.

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Register this activity with the securities regulatory agency 104. The US Securities Act of 1933 also stipulates that issuers must register securities with the SEC (Securities and Exchange Commission, abbreviated as SEC) if they use advertising media to issue federally 105. Although there is no direct concept of public offering of bonds in the Securities Act, through the above provisions, it can be understood that US law considers public offering of bonds as an offering activity that must be registered with the state regulatory agency (under state supervision) and is an offering activity that uses advertising media to introduce and invite the public to invest (transparency).

In China, public offering of securities is understood as an offering activity that must be approved, verified and ratified by the securities regulatory agency under the State Council. 106 . Chinese law also stipulates: “Securities are issued to the public in the following cases: (i) Issuance of securities to unspecified subjects; (ii) Issuance to more than 200 investors for a specific type of securities; (iii) Other issuances according to laws and administrative regulations. Private issuance of securities must not be advertised, publicized or disclosed in any form” 107 . Thus, Chinese law has a fairly clear concept of public issuance of bonds and private issuance, based on the criteria of the number of investors and the participation of the mass media.

Thus, the above presentation shows that the laws of each country distinguish private bond issuance from public bond issuance based on criteria such as: professionalism of investors; number of investors; participation of media to advertise, solicit investors or state management through issuance registration procedures. However, not all of these criteria are

104 United States, Securities and exchange commission (SEC), Securities and exchange commission rules and regulations, Part A-A1, Rule 223, http://www.sec.gov.ng/files/Rules%20and%20Regulations%20of% 20the%20Securities%20and%20Exchange

%20 Commission.pdf (accessed 22:30, July 23, 2020).

105 United States Congress (1933), Securities Act of 1933 , Sec 6[77f](a), https://www.sec.gov/answers/about- lawsshtml.html?fbclid=IwAR3WItOy9xbP605G7TNk0wLtG1w2kyp81JoEYbW9l9kQZVB6Q2gdfr4isCw#seca ct1933 , (accessed 11:30 p.m., May 20, 2020).

106China Congress (2005), SecuritiesLaw of The People's Republic of China, passed 2005-10-27, effective January 1, 2006, Art 10, http://english.mofcom.gov.cn/article/policyrelease/internationalpolicy/200703/ 20070304466356.shtml(accessed 9:30 a.m. May 18, 2020).

107 China Congress (2005), SecuritiesLaw of The People's Republic of China, passed 2005-10-27, effective

January 1, 2006,Art 10, http://english.mofcom.gov.cn/article/policyrelease/internationalpolicy/200703/20070304466356.shtml(accessed 9:30 a.m. May 18, 2020).

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used by countries, each country only uses one or some of those criteria. In addition, we see that the laws of most countries in the world often introduce the concept of public bond issuance without introducing the concept of private issuance, so the concept of private issuance is obviously understood as the remaining cases outside the scope of public issuance cases. Regulations in this way will help to unify the understanding and clearly define the boundary between private bond issuance and public bond issuance, not leading to a situation where a certain bond issuance case can be overlooked that cannot be classified into the group of private issuance or public issuance.

In fact, in Vietnam's corporate bond market, the form of issuing individual corporate bonds accounts for an overwhelming proportion compared to the form of issuing corporate bonds to the public. According to statistics from the Ministry of Finance, in 2018, the volume of bonds issued individually increased sharply. Specifically, VND 146,049 billion of corporate bonds were issued individually this year. According to SSI Research and Advisory Center, in 2019, most enterprises issued in the form of individual bonds, only about 6% were issued to the public by commercial banks 108 . Also according to this study, in 2019, except for BIDV and Vietinbank, which had domestic public offerings and VPB, which offered international bonds, most commercial banks issued in the form of individual bonds. According to VCBS's 2018 Bond Market Report, the balance of corporate bonds in 2018 increased, reaching more than VND 436,773 billion 109 . According to this report, the total number of bonds issued in the market decreased by 19.8% compared to 2017, but the number of corporate bonds issued privately increased sharply, going against the trend of decreasing the total number of bonds issued in the market. This shows that private issuance always accounts for a large proportion of the total issuance market, overwhelming the form of public issuance.

In the first 6 months of 2020, the corporate bond market started to become active in the quarter.

II. The value of bonds issued in the first half of 2020 through the private bond channel reached VND 156,327 billion. Notably, in June 2020, 46 enterprises issued VND 42,474 billion in private bonds, an increase of 56.8% compared to May 2020 and no public bond issuance occurred 110. There was a significant increase in the form of private corporate bond issuance because the Government issued Decree No. 81/2020/ND-CP dated July 9, 2020 amending and supplementing a number of articles of Decree No. 163/2018/ND-CP dated December 4, 2018 on private corporate bond issuance, which will tighten

108https://ndh.vn/bao-cao/ssi-research-bao-cao-thi-truong-trai-phieu-doanh-nghiep-viet-nam-2019-so-khoi-

va-ngon-ngang-1261784.html, accessed 9:47 a.m. on August 23, 2020.

109https://www.vcbs.com.vn/vn/Communication/GetReport?reportId=6155 accessed 18:15 on August 12, 2020.

110https://www.vndirect.com.vn/bao-cao-thi-truong-trai-phieu-doanh-nghiep-6t2020/ , accessed 22:22 on August 17, 2020.

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more conditions for issuing individual corporate bonds in the coming time. Therefore, enterprises are promoting the issuance of individual bonds before Decree No. 81/2020/ND-CP takes effect.

Studying the legal regulations on identifying signs of private corporate bond issuance and public corporate bond issuance, the researcher found that Vietnamese law has provided identifying signs between private corporate bond issuance and public corporate bond issuance that are basically relatively diverse and clear in legal documents. These signs, in addition to being consistent with international practices (such as signs of a certain number of investors, signs of investor professionalism), still have some issues that need further discussion. Specifically as follows:

Firstly, Vietnamese law when introducing the concept of private bond issuance and public bond issuance still has differences, even going against the general trend (such as signs of participation of mass media).

Second, there are overlaps, differences, and even invalidation between regulations in the same legal document, between legal documents on the concepts of public bond issuance and private bond issuance.

Third, some of the distinguishing signs between private corporate bond issuance and public corporate bond issuance that Vietnamese law provides are not entirely consistent with the reality of the Vietnamese stock market. In fact, in the Vietnamese market, corporate bond issuance is almost impossible to achieve the number of offerings to more than 100 investors. Therefore, the distinction between private issuance and public issuance is mainly based on the remaining sign, which is "offering through the mass media". And according to this regulation, the issuance of private corporate bonds is not allowed to be announced in the mass media to invite investors, while this sign is considered to have little meaning and also goes against the general trend of the world in building a public and transparent market.

Fourth, in reality, when issuing corporate bonds, there is a large difference between private issuance and public issuance.

In the Vietnamese corporate bond market, the form of issuing individual corporate bonds is the majority, overwhelming the form of issuing to the public. According to the provisions of Vietnamese law, when a business issues individual bonds, it will not have to comply with the strict conditions as when issuing bonds to the public. Therefore, businesses, to avoid those conditions, especially the conditions on information disclosure as well as saving costs, have chosen to issue individually.

2.1.3.2. Conditions for issuing corporate bonds

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*Conditions for issuing bonds to the public

Current Vietnamese law stipulates that the issuance of corporate bonds to the public must comply with the conditions specified in Article 15, Clause 3, Securities Law 2019. For the public offering of convertible bonds, in addition to satisfying the conditions specified in Article 15, Clause 3, Securities Law 2019 (except for the condition on credit rating results), it is also necessary to satisfy additional conditions specific to this type of bond (specified in Article 15, Clause 4, Securities Law 2019). The reason why the issuance of convertible bonds to the public must satisfy a number of additional specific conditions is because convertible bonds are bonds that can be converted into common shares in the future, and the owners of convertible bonds will become shareholders - owners of the company and no longer creditors of the company. However, the issuance of convertible bonds does not have to meet the conditions on credit rating results like the issuance of other types of bonds, this is also determined by the characteristics of convertible bonds.

Chinese law stipulates that the conditions for issuing corporate bonds to the public must satisfy the following conditions: (i) The net assets of a joint stock company must not be less than 30 million yuan and that of a limited liability company must not be less than 60 million yuan; (ii) The total outstanding balance of the company's bonds must not exceed 40% of the company's net asset value;

(iii) The average distributed profit in the last 3 years is enough to pay 1 year's interest for corporate bonds; (iv) Investment in raising funds must comply with the state's industrial policy;

(v) The interest rate of the bonds shall not exceed the interest rate prescribed by the State Council; (vi) Meet other requirements prescribed by the State Council. Funds raised through the public issuance of corporate bonds shall be used for the right purposes. The issuance of convertible corporate bonds by a listed company shall comply with Clause 1 of this Article and the provisions of the current Law on Offering of Shares and shall be reported to the securities regulatory authority under the State Council for inspection and approval111 .

Taiwanese law stipulates that the total amount of bonds offered and issued (except in cases where the competent authority has jurisdiction over the business of the company by the central authority) must comply with the following provisions and is not subject to the restrictions of Article 247 of the Company Law: (i) The total amount of issued secured bonds, convertible bonds or bonds with warrants must not exceed 200% of the total assets minus total liabilities of the company; (ii) The total amount of issued

111 China Congress (2005), SecuritiesLaw of The People's Republic of China, passed 2005-10-27, effective January 1, 2006, Art 16, http://english.mofcom.gov.cn/article/policyrelease/internationalpolicy/200703 /20070304466356.shtml(accessed 9:30 a.m. May 18, 2020).

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