Loopholes and risks holding back bond market

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Lawyer Nguyễn Thanh Hà

The State Securities Commission of Vietnam has recently cancelled nine private bond offerings of three companies under Tân Hoàng Minh Group, laying open loopholes and risks that have been holding back Việt Nam’s bond market. Lawyer Nguyễn Thanh Hà, chairman of the law firm SBLAW, spoke to Vietnam News Agency about the loopholes, the risks and his suggestion to reduce investors’ risk exposure.

In 2021, unsecured bonds amounted to VNĐ83 trillion (US$3.6 billion), accounting for 18 per cent of total issued bonds. Amid a volatile bond market, such a high amount of unsecured bonds poses serious risks to investors. Is there any legal framework regulating the issuance of unsecured bonds to date? What are your suggestions to reduce the risks?

So far, there is no legal framework specifically regulating the issuance of unsecured bonds.

Under Decree 153/2020/ND-CP, authorities do not grant permits for the issuance of privately placed bonds. It is the issuers who decide the forms of their issued bonds and take responsibility for their own issuances.

It can be seen from this regulation that there still exists loopholes related to privately placed unsecured bonds and privately placed bonds secured by low-quality collateral in the Law on Securities 2019 and Decree 153.

Accordingly, it is necessary to make amendments to these documents to plug the loopholes.

Notably, regulations on issuance purposes can be modified to ensure issuers use the proceeds for the right purposes.

Regulations on bond ratings can also be added to raise the bar on issued bonds. Investors can refer to the ratings to assess bond risks, effectively reducing their risk exposure.

Lawmakers can also introduce regulations on bondholder representatives to better monitor the use of proceeds and the extent to which issuers comply with their commitments.

Additionally, the establishment of an exchange for privately placed bonds should be stepped up to enhance bond liquidity and bring bonds traded on the secondary market under control.

Regulations on information disclosure should be modified as well to boost issuers’ transparency.

Lastly, a document guiding the implementation of the Decree 153 should be put in place to fill the legal gaps left by Circular 16/2021/TT-NHNN, which only regulates the sale and purchase of corporate bonds by credit institutions and foreign bank branches.

What risks will bondholders have to face in the case that issuers make a loss and fail to repay their debts?

As most corporate bonds in Việt Nam have no credit ratings, no collateral and no payment guarantees, bondholders usually run a high risk of principal and deposit losses in the case that issuers operate unprofitably and default on their debts.

Some firms, despite raising capital at high interest rates, cannot come up with viable business plans for debt repayment, fuelling the situation.

Amid such uncertainty, issuers normally engage banks or securities firms to issue bonds on their behalf to boost investors’ confidence in their bonds.

This may work because investors are likely to buy bonds on grounds of the banks’ and the securities firms’ reputations.

However, it is worth noting that those organisations are just service providers. They are not legally required to assess the financial situation and the ability to repay of the issuers.

The responsibility to service and repay the debts falls to the latter.

In the case of issuers’ bankruptcy, payments to bondholders always come low down the list of payments to stakeholders.

Notably, under the Law on Bankruptcy 2014, the priority of payments are as follows: costs of bankruptcy, unpaid salaries, severance pay, social insurance and medical insurance, other benefits according to the labour contracts; debts incurred after the initiation of bankruptcy which are used for resuming operation; financial obligations to the Government; unsecured debts payable to the creditors; secured debts which are not paid because the value of collateral is not enough to cover such debts.

What penalties are applicable to those issuers that disclose false information and conceal information in bond issuance?

The penalties are defined in Decree 156/2020/ND-CP and Decree 128/2021/ND-CP on penalising administrative violations in securities and the securities market.

To be more specific, the violating issuers would face a fine of VNĐ400-500 million (US$17,500-21,800) and, depending on the nature and severity of the violations, would also be subject to remedial measures, notably forced withdrawal of issued bonds and return of the proceeds plus interests to bondholders in the Tân Hoàng Minh case.

Additionally, Article 132 of the Law on Securities 2019 stipulates that, depending on the nature and severity of the violations, violating issuers would face administrative penalties or face criminal prosecution, and pay compensation for any damage caused.

In the case that issuers’ false disclosure and concealment of information constitute the violations of Article 209 of the Criminal Code 2015, the violating issuers would definitely face criminal prosecution.

The maximum penalty for the violations is five years in prison. For legal entities, a fine of up to VNĐ5 billion can be imposed. — VNS

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