Some Theoretical Issues on Corporate Bond Market Law

issued” 28 . This concept is not accurate because according to this concept, readers will misunderstand the secondary market, expressed in the idea of “buying and selling newly issued securities” without clearly showing the buying and selling taking place between which subjects, while distinguishing the concept of the primary market mainly depends on the subject of the bond buying and selling relationship in this market. Specifically, the bond buying and selling relationship in this market takes place between two subjects with different interests, which are the bond issuing organization and the investor, in which the issuing organization is the party that has bonds to sell to raise capital, the investor is the person with money to buy bonds to seek profit from his idle money. The author Nguyen Nien's view on the primary market is similar, specifically: “The primary market is the market for buying and selling securities issued for the first time. The most basic function of the primary market is to mobilize investment capital. Through the primary market, capital from investors will be transferred to the issuer to invest in expanding production and business" 29 .

From the researcher's point of view, the issuance market is a market formed mainly by the relationship of borrowing/lending assets between bond-issuing enterprises and investors. The operation of the issuance market creates a channel to attract and mobilize idle money from the public to convert into investment capital for the economy. Through the issuance market, enterprises can borrow a certain amount of money from investors to increase their business investment capital. Therefore, in the legal content of the corporate bond issuance market, the researcher will mention the contents related to this market, including: market participants (focusing on the issuers and investors); market objects (corporate bonds - goods of the market); forms of bond issuance (research on forms of bond issuance from the perspective of clarifying the nature of each form of issuance and conditions for bond issuance in each form); procedures for corporate bond issuance; state management of the market.

*Trading market

After investors have purchased bonds from businesses on the issuing market, they can hold the bonds until maturity to receive interest from the issuing business or can resell them to other investors before the bond matures to receive interest based on the difference between the purchase price and the selling price of the bond. To satisfy the second need, the trading market was born. The trading market is also known as

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28 Bach Duc Hien (2009), Stock Market Textbook, Academy of Finance, Financial Publishing House 2009, p.15.

29 Nguyen Nien (1998), Basic legal issues on securities and the securities market, Legal Journal No. 8, 1998, p.6.

is the secondary market where corporate bonds issued on the issuance market are traded. The operation of the trading market creates the ability to convert bonds into cash easily and conveniently. In this market, bonds are bought and sold between investors, the money earned from selling bonds does not belong to the issuer but to the investor selling the bonds. The development of the trading market is especially important because in this market the liquidity of bonds is clearly demonstrated. This market allows investors to convert bonds into cash when they need it. In most countries in the world today as well as in Vietnam, based on the form of market organization, the trading market is divided into the trading market at the Stock Exchange (also known as the centralized trading market) and the trading market outside the Stock Exchange (also known as the decentralized market). In the Law Dictionary of the Institute of Legal Science, the Ministry of Justice defines a centralized trading market as a place where securities are bought and sold or a place of reference for buying and selling securities, equipped with necessary technical means for securities transactions to be conducted conveniently and easily according to mandatory rules set in advance for participants 30 . The decentralized trading market mentioned in the book Securities Law of Hanoi Law University is a market that is not organized according to the provisions of the law on the securities market; transactions on this market take place spontaneously between investors; the buying and selling of securities on this market is not subject to supervision and does not have to comply with the law on securities, but must still comply with civil law 31 . Therefore, in the legal content on the bond trading market, the researcher will present 05 groups of content similar to the presentation in the legal section on the issuance market, including: subjects participating in the trading market; objects of the trading market (corporate bonds - goods traded on the market); forms of transactions and procedures for corporate bond transactions on the trading market; state management of the market. These five groups of content, the researcher will implement in the direction of closely following each organizational form of the corporate bond trading market (including transactions at the Stock Exchange and transactions outside the Stock Exchange).

There is an intrinsic relationship between the issuance market and the trading market, in which the issuance market is the basis and premise; the trading market is the driving force. Without the issuance market, there are no bonds to circulate on the market.

30 Institute of Legal Science, Ministry of Justice (2006), Dictionary of Law, Justice Publishing House, 2006, p.711.

31 Pham Thi Giang Thu (2013), Securities Law Textbook, Hanoi Law University, People's Police Publishing House, 2013, p.114.

trading market and vice versa, if there is no trading market, the issuance market will be difficult to operate smoothly, all types of bonds will be very difficult to issue, no one dares to buy bonds because their capital is immobile, bonds cannot be converted into money when investors have demand. The classification of corporate bond issuance market into issuance market and trading market is extremely important, helping the state see the characteristics of each market to issue appropriate regulations to promote the positive aspects, limit the negative aspects, and ensure the stable operation of corporate bond issuance market. Therefore, in the thesis, the author relies on the classification based on the circulation of capital sources - the most common classification to approach corporate bond issuance market. Therefore, the legal content on corporate bond issuance presented by the author in the thesis is also based on this common classification, including the law on corporate bond issuance market and the law on corporate bond trading market.

1.2. Some theoretical issues on corporate bond market law

1.2.1. Concept and structure of the law on corporate bond market

The development of the Vietnamese economy in general and of the private sector in particular cannot be without the regulatory and intervention role of the State. The State, as an organization representing special public power (class power), manages the private sector with many different tools, first and foremost of which is the law.

With the approach of the positive law school, the concept or conception of the law on TTTPDN is mentioned by many authors in different scientific research works. Author Pham Thi Giang Thu introduces the concept of stock market law: "Stock market law is the totality of legal documents issued by the State regulating the fields of securities and the stock market" 32 . This concept is given by the author quite simply, is a formal concept, and does not describe the internal content of the stock market. This concept is consistent with the historical time of the market, which is the time when the market was newly formed. Or the concept "The legal framework on securities and the stock market is understood as the totality of elements expressing the legal structure regulating the relationships arising in the field of securities and the stock market in a country" 33 .

In general, the legal concepts of the corporate bond market in the early period of market formation were almost non-existent and were unified in the legal concept of the stock market. The legal concepts of the stock market in this period were also very general and formal, without reflecting the economic content of the market.

32 Pham Thi Giang Thu (2003), Building and perfecting the legal framework for the stock market in Vietnam , Doctoral thesis in Law, Hanoi Law University, p.43.

33 Ministry of Justice, Institute of Legal Science Research (2000), Theoretical and practical basis contributing to the development of laws on securities and securities markets in Vietnam , Ministry-level scientific topic, p.10.

market. Until later, the concept of the law on the stock market was more transparent, reflecting the internal activities of the market. For example, the concept of "Securities Law is a synthesis of basic principles and orientations of the institutionalized securities and securities market operating mechanism, a synthesis of legal norms regulating social relations arising in the process of offering, listing and trading securities in the territory of Vietnam and securities-related activities of Vietnamese organizations and individuals" 34 . With this approach, the researcher proposed the concept of the law on the securities market as follows:

The law on corporate bond market is the totality of legal norms issued by the State, expressed in specific forms to regulate social relations arising in the process of formation, existence and operation of the corporate bond market, including the issuance market and the transaction market.

With the above concept of the law on TTTPDN and consistent with the research in the classification of TTTPDN, according to the researcher, the structure of the law on TTTPDN includes the following parts:

*Law on corporate bond issuance market

To form any type of market, the first condition is that there must be goods that are allowed to be bought and sold on the market. The issuance market has the "mission" to carry out this task. For the Vietnamese corporate bond market in particular and the international market in general, the issuance market is always an important component, determining the scale and liquidity of the bond market, especially the trading market. This is a measure of the market's ability to supply capital to businesses. The purpose of the law related to the issuance market is to control the supply of goods for the corporate bond market, initially ensuring the interests of investors in particular and stabilizing the economy in general, minimizing the risk of risks occurring in the field of capital mobilization by issuing corporate bonds. The content of the law on the corporate bond issuance market includes:

First, the regulations on the type of bonds issued - the market commodity.

From the perspective that TTTPDN is a market like other markets, a place where buying, selling, and exchanging of goods and services take place. For the TTTPDN market to operate, there must be goods for this market. Corporate bonds are the goods of that market. Moreover, the more diverse the products and goods in the market, the more vibrant and developed the market will be, and investors will have more opportunities to invest.

34 Pham Thi Giang Thu (2013), Securities Law Textbook, Hanoi Law University, People's Police Publishing House, p.21.

Many advantages of choosing the type of bond that suits your investment goals, the issuer chooses the type of bond that suits your capital mobilization goals and business strategy. In the information disclosure on bond issuance, one of the important information that enterprises must disclose is the type of bond that the enterprise will issue. Therefore, studying the law on types of corporate bonds is one of the important contents of the law on corporate bond issuance.

Author Libena Tetrevova mentioned quite a variety of corporate bonds and presented the concept of each type of bond in the article "Mezzanine finance and corporate bonds" . The article clearly stated: "There are many types of bonds, classified based on different bases. Based on the interest rate, there are fixed-rate bonds, floating-rate bonds, profit bonds, and zero-profit bonds. Based on the repurchase method, there are one-time payment bonds, installment bonds, and convertible bonds. Based on the guarantee, there are secured bonds and unsecured bonds. Based on the national criteria and the currency of issuance, there are domestic bonds, foreign bonds, and European bonds (Eurobonds). Based on the form of existence, there are bonds that exist in physical form (such as bond papers), bonds that exist in electronic form (such as electronic registration). There are also natural bonds, option bonds, preferred bonds, publicly tradable bonds, and privately traded bonds” 35 .

In general, although it is an underdeveloped market, in terms of products/goods, Vietnam has most of the popular corporate bonds in the world, including: non-convertible bonds, convertible bonds, bonds with warrants; secured bonds, unsecured bonds; bonds that can be redeemed before maturity, bonds that can be resold before maturity; bonds with fixed interest rates, bonds with floating interest rates, etc.

Second, regulations on market participants.

The subjects participating in the securities market are very diverse and rich with different interests and benefits. According to the Law Dictionary, the subjects participating in the securities market include buyers, sellers, brokers and state management subjects for the market 36 .

As a market where buying and selling takes place, there must first be a seller, that is, the entity issuing the bond. This is the entity that raises capital through selling activities.

35 Libena Tetrevova (2009), Mezzanine finance and corporate bonds, University of Pardubice, Czech Republic, pp.148 – p.149.

36 Institute of Legal Science, Ministry of Justice (2006), Dictionary of Law, Justice Publishing House, 2006, p.710.

bonds for investors. The issuers of corporate bonds are enterprises, including joint stock companies and limited liability companies that need to raise capital for production and business activities through bond instruments. Depending on each country, the right to issue corporate bonds may vary. For example, in Malaysia, to facilitate the issuance of cross-border Islamic bonds, the Malaysian government allows multinational corporations to issue Islamic bonds in Malaysia in Myr (Ringgit - Malaysian currency) 37 . Or there are countries that have had a period of regulations that non-financial corporations are the main issuers of corporate bonds (Austria before the year 2000). In Vietnam, only joint stock companies and limited liability companies established and operating under Vietnamese law have the right to issue bonds.

In addition to sellers, the corporate bond market also needs buyers, which are investors. Investors are those who buy corporate bonds provided by the issuer. Normally, based on the investor's ability, level of market analysis, and investment scale, investors are divided into individual investors (including individuals, households) and institutional investors (including securities companies, insurance companies, pension funds, investment banks, commercial banks, investment funds, etc.). Depending on each country, each market, and each stage of market development, the development and role of each type of investor is different. In China, organizations are the main investors in the interbank bond market (OTC market), while small and medium-sized investors and individuals are the main investors in the bond trading market . 38 In India, there are 4 types of investors: banks and financial institutions; insurance companies, savings and pension funds; mutual funds; retail investors 39 . In Korea in the 1990s and early 2000s, in the trading market, financial institutions held 60% of the total outstanding corporate bonds, while life insurance companies and pension funds held a relatively low share 40 . In the United States, at the end of 2013, corporate bonds were distributed among different types of investors, with households holding 19% of the total corporate bonds and the remaining 81% held by institutional investors.

37 Muhamad bin Ibraham and Adrian Wong (2005), The corporate bond market in Malaysia, BIS papers No- 26 (2005) Developing corporate bond markets in Asia, Proceeding of a BIS/PBC seminar held in Kunning, China on November 17 – 18 2005, p.126.

38 Mu Huaipeng (2005), The development of China's bond market, BIS papers No-26 (2005) Developing corporate bond markets in Asia, Proceeding of a BIS/PBC seminar held in Kunning, China on 17 – 18 November 2005, p. 56.

39 VK Shama and Chandan Sinha (2005), The corporate debt market in India, BIS papers No-26 (2005) Developing corporate bond markets in Asia, Proceeding of a BIS/PBC seminar held in Kunning, China on 17

– November 18, 2005 , p.83.

40 Sungmin Kim and Jae Hwan Park (2002), Structural change in the corporate bond market in Korea after the currency crisis, BIS Paper No.11 (2002), The development of bond markets in emerging economics, Bank for international Settlements, Monetary and Economic Department 2002, p.142.

institutions, banks and other legal entities; institutional investors are defined as pension funds, insurance companies and investment funds 41 .

In the book, author Moorad Choudhry also stated quite fully the concept of investors: “There are many investors in the bond market. The first is short-term institutional investors, including banks, money market funds, central banks, funds of some enterprises. The second is long-term institutional investors, including pension funds and life insurance companies. The third is mixed institutional investors, which are investors who account for a larger number than other investors, including insurance companies in general and most enterprises” 42 . In the book Stock Market, the group of authors mentioned investors including individual investors (who participate in the bond market to seek profits, including risk-taking investors and risk-averse investors); Institutional investors (investors who regularly buy and sell bonds in large quantities, including investment companies, insurance companies, pension funds and other social insurance funds, and financial companies) 43 .

In addition to the two main entities, the issuer (seller) and the investor (buyer), there are other related entities in the securities market. One of them is the credit rating organization. The credit rating organization is an extremely important entity for the corporate bond market, especially in the issuance market. According to IOSCO, “Credit rating is an assessment displayed by an established and determined credit rating system on the ability to pay debts of an entity, a debt, a debt security or the issuer of these obligations” 44 . A credit rating organization is an organization that specializes in providing services to assess the ability to pay principal and interest according to the term and terms committed by the issuing company for a specific issuance in the form of a credit rating. Investors can rely on the credit ratings provided by credit rating organizations to consider making their investment decisions. Among the types of securities that a business can issue, the issuance of corporate bonds is the case where the role of a credit rating organization is most needed. Credit rating can be considered an essential requirement in the issuance of corporate bonds because the issuance of corporate bonds is a business borrowing, so the investing public (i.e. lenders) need to know the details.

41 Serdar Celik, Gul Demirtas, Mats Isaksson (2015), Corporate bonds, bondholders and corporate governance, OCED Corporate Governance Working Papers No.16, 2015, p.24.

42 Moorad Choudhry (2004), Corporate bonds and structured financial products , 2004, p.7.

43 Bach Duc Hien (2009), Stock Market Textbook, Academy of Finance, Finance Publishing House 2009, pp.22 – p.25.

44 IOSCO (2008), Code of Conduct Fundamentals for Credit Rating Agencies, The Technical Committee of IOSCO, 2008, p.3.

information related to its debtor (i.e. the issuing enterprise) before deciding to lend. Normally, a corporate bond issuance involves 3 parties: the issuing enterprise, the consulting/distributing/guarantor unit, and the investor. In this issuance, both the issuing enterprise and the consulting/distributing/guarantor unit benefit when the bond is successfully issued. Therefore, if there is no credit rating organization (independent of the above 2 entities), investors will completely depend on the information published by the enterprise and may face many risks.

Author Hakansson believes that one of the important conditions for the healthy development of the corporate bond market is the role of financial analysts, who have a role in providing investors with independent advice; groups of analysts have long begun to form rating agencies, the best known of which are Moody's, Standard and Poor's and Fitch Investor; they support bond investors. Therefore, credit rating agencies are one of the main components of a developed bond market . 45 . Assessing the role of credit rating agencies in the development of the corporate bond market, Mr. Thomas Keller of Moody's Asia Pacific affirmed: "The role of credit rating agencies is to help increase transparency and efficiency in the debt capital market by reducing information asymmetry between borrowers and lenders. This is beneficial to the market because it increases investor confidence. Rating opinions are public, free and widespread. Credit ratings are opinions about the future probability of full and timely repayment of debt obligations such as bonds. Credit ratings are communicated to the market through a notation system that originated nearly 100 years ago, ranking risks on a scale of 9 levels from Aaa to C” 46 . The bond credit rating system of 02 famous credit rating companies in the world can be referred to in the following table:

45 Hakansson Nils H (1999), The role of a Corporate Bond Market in an Economy and in Avoiding Crises,

UC Berkeley, 1999, p.9.

46 Thomas Keller, (2005), The role and function of rating agencies, BIS papers No-26 (2005) Developing corporate bond markets in Asia, Proceeding of a BIS/PBC seminar held in Kunning, China on 17 – 18 November 2005, p.39.

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