How to understand the corporate bond issuance purpose regulations?

This article was published on The Saigon Times on March 2nd, 2023,

and The Saigon Times Online on March 6th, 2023.

HM&P 's Managing Partner Van Phuc Nguyen and Associate Nhat Duong Nguyen shares their analysis on the corporate bond issuance purpose regulations.

In 2022, Vietnam's stock market and corporate bond issuance have witnessed an unexpected period of difficulties, far beyond the challenge of the Covid-19 pandemic’s peak in 2021. A number of businesses have to cancel their bond issuance plans and buy back bonds before maturity came from regulations related to the purpose of corporate bond issuance and the authorities are stepping up inspection activities on the issuance of corporate bonds recently.

A number of large real estate corporations were investigated and punished in 2022 related to bond issuance activities. Although there is no final conclusion from the authorities, the bond issuer has signs of falsifying records and documents related to using mobilized capital or fraudulently issuing bonds are the common points in these cases, according to the press agency. Not only corporations are being scrutinized, but the consequences of the recent bond scandals are also having a tremendous influence on businesses that see bonds as the main capital mobilization channel of enterprises. How to utilize bond issuance capital for the right purpose when businesses have a real need but the ability to mobilize from other channels is not practical or limited is the big concern. In order to address this issue, businesses firstly need to properly understand the purpose of bond issuance which is regulated and managed by the relevant authorities for current bond issuance activities.

On September 16, 2022, the Government issued Decree No. 65/2022/ND-CP^[1] effective on the same day to amend and supplement several articles of Decree No.153/2020/ND-CP^[2], which requires businesses to consider the purpose of issuing bonds. Accordingly, enterprises are only allowed to issue bonds to (i) implement investment programs and projects; (ii) restructure the enterprise's debt or (iii) the purpose of issuing bonds by specialized laws.  As can be observed, in addition to eliminating the purpose of "increasing the size of operating capital," Decree 65/2022/ND-CP also amends the purpose of "restructuring capital" into "restructuring debt" of the enterprise itself.

Additionally, according to Decree No. 65/2022/ND-CP, in the bond issuance plan, in case of issuing bonds to carry out programs, investment projects, enterprises need to specify the legal status and investment risks of the program or project; in case of debt restructuring, enterprises need to select the value and term of the restructured debt. Besides the above regulations, there are currently no more specific regulations and guidelines on the purpose of bond issuance.

Understanding the regulation "Implementation of programs and investment projects" correctly.

According to the Law on Investment 2020, business investment is defined as an investor's use of capital to carry out business activities in the following ways: (i) investing in the establishment of an economic organization; (ii) investing capital contribution, share purchase, capital contribution purchase; (iii) implementing investment projects; (iv) investing under a BCC contract; and (v) new forms of investment and economic organization as determined by the government. Only the scenario of carrying out the issuing firm's investment project is truly obvious, assuming the enterprise applies this understanding to the objective of bond issue in Decree No. 65/2022/ND-CP.

Moreover, there is no specific regulation on the investment program, so it is not certain whether an investment program may include the establishment of a new economic organization or the capital contribution, purchase of shares, purchase of capital contribution in other enterprises or cooperation through BCC contract or not. In fact, many businesses issue bonds not only to carry out their investment projects but also can implement investment projects through the establishment of project companies, capital contributions to subsidiaries (project company) or contribute capital with one or more parties in the BCC contract. The scope of investment activities under the investment law is  vast; for example, in the case of an enterprise establishing an economic organization, after its establishment, the business activities of the based financial organization are also enterprise investment. Therefore, leaving the purpose of implementing programs and investment projects open can make it difficult for businesses to determine the meaning of issuing bonds.

According to HM&P, practically all of the relevant authorities currently recognize that businesses can only use funds acquired through the bond route for investment and management operations that cannot be carried out through an intermediary. We believe that this concept needs to be changed in order to keep the Law on Investment 2020's legal recognition of the right to invest and do business from being restricted.

"Restructuring corporate debt."

Similar to the purpose of debt restructuring of enterprises, this decree also does not clarify the debts that enterprises can restructure. In business operations, enterprises may incur many debts, which can come from obligations to employees, suppliers, debts from cooperation contracts or loans, and even bond debt. Therefore, enterprises can understand that the "debt" mentioned by Decree No. 65/2022/ND-CP includes all payable debts applied under the corporate accounting regime is still a big question.

At the same time, with the uninterrupted conflicting information about the current bond issuance activities, the situation of individual investors puzzled, leading to the request of issuing enterprises to buy back bonds before maturity is not uncommon. Therefore it is more difficult for businesses to manage their financial resources to buy back bonds from investors. Whether an enterprise that issues a later batch of bonds to pay interest or buy back bonds from previous lots is approved by Decree No. 65/2022/ND-CP, when this shows signs of a form of refinancing. Although it is not prohibited as in credit extension activities^[3], if refinancing is carried out in bond issuance activities, the consequences and impact on later buyers are huge; the risk of falling domino break is like multi-level transformation when businesses will tend to issue bonds in the next round with higher interest rates than the previous one to relieve the "thirst" for capital.

It can be seen that although the Government has made timely amendments and adjustments to bond issuance activities in the direction of tightening in many aspects, however, with the opening and no specific instructions regarding the purpose of issuing bonds, many businesses still feel confused and have many different interpretations for this purpose. Until the intent of bond issuance is not adequately understood, companies still have many potential risks from being sanctioned for administrative violations and criminal liability in certain cases for individuals, business related.

From these concerns, more than ever, the Ministry of Finance should soon issue a guiding circular so that businesses can properly understand the purpose of bond issuance, ensure the distribution and use of capital in compliance with the law. After that, enterprises can bring into play the total efficiency and inherent potential of the capital channel coming from bonds and contribute to helping businesses in particular and the economy, in general, overcome the headwinds period of post-Covid-19.

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