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THE CURRENT LEGAL FRAMEWORK ON FOREIGN INDIRECT INVESTMENT IN VIETNAM AND SOME PROPOSED SOLUTIONS FOR IMPROVEMENT

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06 tháng 11 năm 2025

THE CURRENT LEGAL FRAMEWORK ON FOREIGN INDIRECT INVESTMENT IN VIETNAM AND SOME PROPOSED SOLUTIONS FOR IMPROVEMENT

 

Doctor, Lawyer Nguyen Minh Duc Head of Division Law, Faculty of Finance and Accounting, Van Hien UniversityAbstract

 

In reality, compared to other countries in the region, Vietnam remains a country with a relatively low level of foreign portfolio investment (FPI) attraction. Moreover, the scale of FPI is still not commensurate with the development and potential of Vietnam's stock market (TTCK). This article discusses the current legal framework on FPI, identifies its limitations, and proposes several solutions to improve and enhance the effectiveness of FPI-related legal implementation in Vietnam.

Keywords: Investment capital, Indirect investment, Stock market

1. Introduction

 

FPI is understood as a form where foreign investors (FI) invest by purchasing shares, stocks, bonds, other valuable papers... of issuing organizations, or through securities investment funds and other intermediary financial institutions, where the FI is not interested in or unable to manage, and does not directly participate in investment management.

Vietnamese law has regulations on foreign indirect investment in the Law on Investment, the Ordinance on Foreign Exchange, and guiding documents. However, there are still some limitations in both legal provisions and practical implementation. The article analyzes these limitations and proposes solutions for improvement to meet the needs of the Vietnamese economy in the current period regarding FPI capital sources.

2. Overview of the Legal Framework on Foreign Indirect Investment Activities

 

According to the International Monetary Fund (IMF), foreign indirect investment is the activity of purchasing securities (stocks or bonds) issued by a company or government agency of another country on the domestic or foreign financial market. The IMF uses an ownership ratio of 10% of the voting shares or capital contribution of the enterprise as the criterion to determine and distinguish between Foreign Direct Investment (FDI) and FPI[^i].

According to the World Bank (WB) definition, FPI is a form of investment through the purchase of foreign stocks, foreign bonds, and bank loans to foreigners[^ii].

In Vietnam, only the Law on Investment (LoI) 2005 provided a definition for the term "indirect investment." Specifically, Clause 3, Article 3 of LoI 2005 stated: "Indirect investment is a form of investment through the purchase of shares, stocks, bonds, other valuable papers, securities investment funds, and through other intermediary financial institutions where the investor does not directly participate in investment management."

Similar to the above definition, Clause 13, Article 4 of the Ordinance on Foreign Exchange 2005 (amended and supplemented in 2013) provided a more specific regulation on FPI with the subject performing this indirect investment activity being FIs: "Foreign indirect investment into Vietnam is the investment by foreign investors in Vietnam through the purchase and sale of securities, other valuable papers, capital contribution, share purchase, and through securities investment funds, and other intermediary financial institutions as prescribed by law without directly participating in investment management activities."

Based on the spirit of the above definitions, Article 5 of Circular No. 05/2014/TT-NHNN guiding the opening and use of indirect investment capital accounts, as amended and supplemented by Circular 06/2019/TT-NHNN guiding the foreign exchange management for foreign direct investment activities in Vietnam (which amends Clauses 1, 2, 6, Article 5 of Circular 05/2014/TT-NHNN), specifically lists the forms of FPI activities in Vietnam to carry out FPI.

Although there are many definitions of FPI, in essence, FPI can be understood as a form of cross-border indirect investment; it refers to the activities of purchasing foreign financial assets for profit, without accompanying participation in the management and operation of the enterprise. The FI also has no commitment to transfer technology, assets, management experience, or labor training. Unlike FDI, FPI is a purely financial investment primarily carried out on the financial market.

Based on this, the law on foreign indirect investment activities can be understood as the system of legal norms set forth or recognized and guaranteed by the state to regulate social relations arising during the process of foreign investors carrying out indirect investment activities in the host country.

3. Practical Implementation of the Law on Foreign Indirect Investment Activities in Vietnam in Recent Times and Some Solutions

 

 

3.1. Practical Implementation of the Law on Foreign Indirect Investment Activities in Vietnam

 

Following the Covid pandemic, while the FDI capital flow tends to increase positively, the FPI capital flow shows signs of decline. According to the Foreign Investment Agency - Ministry of Planning and Investment, the registered capital for capital contribution and share purchases by FIs up to June 20, 2024, reached 1,420 turns with a total contributed capital value of 1.7 billion USD[^iii]. This figure, compared to the same period last year, decreased by 58% in total contributed capital value and 11% in the number of projects for capital contribution and share purchase. It is noteworthy that this downward trend has started from the beginning of 2024 until now. Additionally, the stock market recently recorded net selling waves by FIs, with a value reaching 44.6 trillion VND in the first 6 months of 2024, more than double the 19.5 trillion VND for the entire year of 2023.

Notably, on June 22, 2024, the Korean press reported that SK Group (the country's third-largest chaebol) is planning to reduce its investment in Vietnam. Previously, Blackrock - the world's largest asset management group - also announced the closure of the iShares Frontier and Select EM ETF, a fund that had the highest proportion of Vietnamese stocks (28%) out of a total asset size of 425 million USD, equivalent to over 10,800 billion VND[^iv]. The withdrawal of capital by these major investment funds could lead to the withdrawal of indirect investment capital by many other FIs from the Vietnamese market in the near future.

The decline in foreign capital flowing into the stock market along with the increase in net selling value on this market indicates that FIs do not yet have strong confidence in the upcoming economic outlook. Furthermore, this investment flow is at risk of completely withdrawing from the territory to shift to markets with higher profit potential. The risk of FPI flow reversal is clearer than ever[^v].

The practical situation of declining FPI attraction in recent times is due to several reasons related to legal aspects and practical implementation:

  • First, conflicts still exist in the legal regulations on FPI in Vietnam. Despite amendments, supplements, and adjustments in legal documents related to FPI, many regulations related to the development of the stock market and the management of FI activities on the stock market... are still not completely compatible, lacking synchronicity and consistency, affecting transparency and clarity.

    • A specific example is the Law on Securities (LoS) 2019 which stipulates that, except for cases with separate regulations, the ownership limit for FIs in listed enterprises is 100%, except for specific regulated sectors. Meanwhile, the Ministry of Finance and the State Securities Commission (SSC) propose not to continue empowering enterprises to determine the FI ownership ratio as currently regulated, while maintaining the list of conditional business investment sectors, becoming a challenge related to legal regulations for FIs, especially compared to the LoI.

    • The relaxation of room (foreign ownership limit) according to LoS 2019 mainly focuses on investing in buying corporate shares, while the FPI capital source in Vietnam currently is divided into two segments: buying corporate equity and trading on the stock market. In which FPI on the stock market is becoming the dominant trend, causing FIs to only focus on seeking corporate shares, rather than contributing capital for production and business activities. Thus, this room relaxation only causes enterprises to seek short-term profits from buying and selling businesses, instead of becoming a driving force to become a "strategic partner" of the enterprise and helping the enterprise grow stronger.

    • Furthermore, Clause 22, Article 3 of the LoI 2020 stipulates: "An economic organization with foreign investment capital is an economic organization where a foreign investor is a member or shareholder." According to this regulation, FIs are only relatively consistent with the type of operation of limited liability companies or regular joint-stock companies that have not completed procedures for listing shares on the stock exchange, making it difficult to apply to public companies. In reality, most public companies operating in the market are enterprises with foreign investment capital. Besides, many provisions in the Land Law, Real Estate Business Law, and LoI are still inconsistent, causing deadlocks that are difficult to resolve, hindering the development of M&A deals, especially in large-scale projects in the real estate sector.

  • Second, lack of transparency in information disclosure and stock market supervision. For a long time, the lack of transparency in information disclosure and stock market supervision has been causing many risks for domestic and foreign investors, especially the prevalence of bad news, rumors, stock manipulation, false analysis, information asymmetry, and lack of market transparency. The Vietnamese stock market is significantly affected by poor information transparency (incomplete, untimely, difficult-to-access information, insider information...) creating erratic fluctuations in the market. In recent years, the number of violations regarding reporting and information disclosure has always accounted for a high percentage of the total number of violations subject to penalties. Common violations in information transparency include untimely or delayed disclosure and reporting; inaccurate or incomplete information disclosure; failure to disclose, or report important information to the Stock Exchange (SGDCK) and the SSC. Failure to disclose information is also a common violation by organizations and individuals in the market, accounting for 41%, and violations related to inaccurate or incomplete disclosure/reporting of information content accounted for the lowest percentage, 7.9%[^vi]. The FLC manipulation incident on the stock market raises requirements for clarifying transparency in the system of order congestion, inability to cancel or amend orders, causing heavy losses to investors when the market reverses and drops sharply.

  • Third, the Vietnamese economy during the period 2017 – June 2024 still had many instabilities, affecting FPI activities in Vietnam. Economic growth still shows many signs of unsustainability, affecting the FPI flow into Vietnam. Vietnam has experienced periods of high inflation due to continuous high credit growth. High inflation is also impacted by rising prices, crises, and recessions in the international economy, making the Vietnamese economy very vulnerable to external fluctuations. The restructuring of the banking system, credit institutions, and solutions for handling bad debts in Vietnam are not yet sustainable, the scale of the state-owned economy has not decreased significantly, the system of domestic private enterprises has developed unsustainably, and the number of bankrupt or suspended private enterprises has increased... making the Vietnamese economy not yet stable enough to reassure FPI investors.

 

3.2. Solutions for Improvement and Enhancing the Effectiveness of FPI Legal Implementation in Vietnam

 

  • First, issue a unified, highly legally valuable normative document on FPI.

    • The position and role of FPI and FDI should not be compared or prioritize one form of investment over the other. Therefore, it is necessary to research and introduce a legal framework consistent with market principles and international experience, meaning the provisions of the LoI need to be amended to clearly regulate the two fields of FDI and FPI. Currently, the LoI 2020 is developed in a way that only refers to the direct investment form, without any provisions regulating indirect investment. New Circulars of the State Bank of Vietnam (NHNN) are also managing FI capital accounts in a manner that clearly distinguishes between direct investment capital accounts and indirect investment capital accounts. FIs must separate their FPI and FDI activities into these two types of capital accounts and convert the capital account type appropriately when there is a change in the investment form.

    • It is necessary to soon issue a highly legally valuable document to generally and uniformly regulate issues related to indirect investment activities, thereby ensuring the integrity of the investment law, serving as a basis for synchronization, consistency, reducing the dispersion of FPI regulations in sub-law documents, making it easier for state managers, researchers, investors in general, and FIs in particular to research and understand, and have a more complete view of FPI.

  • Second, supplement regulations on investment incentives and support for FPI activities, for foreign investment fund management companies, as well as other intermediary financial institutions.

    • Similar to the FDI form, it is necessary to consider introducing incentive solutions for the FPI form to encourage FIs to invest long-term and strategically in the Vietnamese financial market, such as tax incentives, and incentives for transferring profits abroad...

    • Besides perfecting legal regulations on the establishment, organization, and operation of investment funds and other intermediary financial institutions, the Government also needs to have incentive policies for the operation of these funds, possibly allowing foreign fund management companies to establish investment funds under domestic law but capable of raising capital in the international market and treating these funds as domestic investors, to facilitate investment activities with larger capital scales, or have reasonable preferential tax policies, following the experience of countries in the region. The development of investment funds thanks to specific incentive and investment promotion policies will have a significant impact on attracting FPI flow into Vietnam.

  • Third, continue to research, complete, and specify the regulation on the reasonable foreign investor ownership ratio (room).

    • Currently, according to Decree 60/2015/ND-CP, the limit has been relaxed, stipulating that FIs who do not fall into special cases can own 100% of the shares if the company charter does not limit it. However, for public companies in conditional business investment sectors, the foreign ownership ratio remains at a maximum of 49%.

    • In the process of developing and perfecting regulations on the FI ownership ratio, lawmakers can consult the research community on widening the ratio to introduce the most appropriate policies in the current context to unblock the FPI flow from the foreign bloc. This solution will help the market rapidly increase trading volume, liquidity, and improve the position of the Vietnamese financial market in terms of scale in the region and the world. Some specific recommendations include:

      • The general foreign investor ownership limit for all sectors could be increased from 49% to 60%.

      • For the banking sector, the current 30% ownership limit needs further consideration from the perspective that the capital scale of Vietnamese commercial banks is still too small, so it may be regulated to increase more.

    • In addition, it is necessary to specifically issue a List of investment fields that require tight management along with specific regulations on the FI ownership ratio. With this List, FIs will easily cross-reference and grasp which investment sectors are more open, which sectors are more restricted, and the extent of the openness or restriction. Once there are amendments, supplements, or changes to the ownership ratio in specialized laws, the List will also be amended accordingly, still making it easier for FIs to monitor and grasp the situation compared to having to search for each specialized legal regulation scattered across many legal documents as currently.

  • Fourth, complete regulations on information disclosure on the stock market to enhance transparency and facilitate FPI attraction.

    • It is necessary to continue perfecting regulations on information disclosure (CBTT) on the stock market in the following directions:

      • Clarify ambiguous issues in CBTT obligations, such as the transaction value/loan amount of one or more transactions/loans, and what constitutes a "major affecting event."

      • Research and supplement regulations on the CBTT obligation of other related organizations such as the General Statistics Office and the scope of information required to be disclosed that affects the stock market, investment decisions, and the fair rights of investors.

      • Research and supplement the CBTT obligation related to the enterprise's sustainable development, aiming to ensure that enterprises not only operate for profit goals and economic benefits but also have more responsibility toward the environment and the community, and at the same time provide investors with more information to compare enterprises for investment decisions.

 

Conclusion

 

Perfecting the law and enhancing the effectiveness of legal implementation is always a common requirement in all areas of life. However, for FPI, macroeconomic stability, inflation control, maintaining a stable exchange rate policy, and maintaining good national foreign exchange reserves capacity are crucial conditions for FPI investors to increase capital investment in Vietnam. These are the requirements, demands, and solutions to attract FPI in the coming time.

Citation Documents

 

References

 

  1. Phạm Thị Bích (2018), The Impact of Law on Foreign Indirect Investment Activities in Vietnam, Master's thesis in Law, Hanoi Law University.

  2. Nguyễn Thanh Cai (2021), Solutions for Managing Foreign Indirect Investment Capital in Vietnam, Journal of Financial and Monetary Markets, Issue 8/2021.

  3. Nguyễn Thanh Huyền (2018), Management of Foreign Indirect Investment Capital in the Vietnamese Stock Market, PhD dissertation in Economics, National Economics University.

  4. Hoàng Văn Quỳnh, Nguyễn Lê Cường, Cao Minh Tiến (2018), Enhancing the Capacity to Attract and Manage Foreign Indirect Investment in Vietnam, Vietnam Finance and Economics Journal, Issue 4/2018.

DOCTOR, LAWYER NGUYEN MINH DUC HEAD OF DIVISION LAW, FACULTY OF FINANCE AND ACCOUNTING, VAN HIEN UNIVERSITY