Vietnam business law should be more open to debt for equity swap

Lawyer Ha Huy Phong, CEO of Inteco law firm.

Do current regulations in Vietnam allow the debt for equity swap?

A debt capital market does not only issue credit or transfer debts between qualified financial institutions, but also has other functions, including the debt for equity swap. Therefore, such practice is considered as part of corporate finance and subject to specialized regulations and laws in this field.

As stipulated in economic or services contracts, enterprises are obliged to repay debts for their lenders or providers. However, in case the contract stipulates that the parties can swap the debt amount into investment capital, such move is not forbidden by the law. In other words, there is no regulation that ban debt-for-equity swap practice.

What conditions required for this practice?

Two parties can come to an agreement for the swap and are, thus, responsible for this practice. However, they should be aware that the swap would turn one party into a shareholder of their debtor. Therefore, they should finalize the following procedures, including:

Firstly, there should be a contract stipulating a conversion of debt into equity. This contract should clearly state the timing and amount of debt subject for conversion, measures to deal with principal and interest, or specific stake that the shareholder would own following the swap.

Secondly, two parties must complete internal procedures of the company in subject, including the approval of new shareholders or change in the ratio of stake between shareholders.

Thirdly, these processes must be certified by competent government agencies to formally acknowledge new shareholder.

Fourthly, for enterprises that set to receive contributed capital from foreign investors, they should take into consideration investment conditions under the Investment Law to ensure lawful rights and obligations of foreign investors.

Can you give a more detail view on this practice?

The debt for equity swap is not a new practice among the business community in Vietnam. For many years, there have been a conversion from bonds into shares, or resolving bad debt by converting it into equity.

Paragraph 2 in article 34 of circular No.03/2016/TT-NHNN, which providing instructions on foreign exchange administration in respect of enterprise’s foreign borrowing and foreign debt repayment of enterprises, states that companies can pay debts by means of shares or contributed capital of the borrower in compliance with laws and regulations.

This is a legal base for such practice, and when companies convert debt into equity, the borrower should inform the State Bank of Vietnam (SBV) on the change in the nature of the debt.

However, this is only applicable to foreign borrowing, while there is currently no specific regulation for domestic ones, and both parties often come to terms with each other.

During this swapping process, enterprises should consult legal advisers having expertise in corporate finance to ensure their rights.

What impacts this practice can exert on the economy?

There are both benefits and risks from debt for equity swap to the economy. Enterprises can deliberately convert bad debts into equity for different purpose. In other case, foreign investors might do the swap to make illegal investment or reduce their risks in investment by giving out loans. Regarding this situation, they could easily leave without being held accountable if things turn sour.

On the contrary, the practice would be an efficient channel for capital mobilization and contribute to the diversification of the capital market. With this practice, enterprises can go through financial restructuring in a flexible manner to keep a balance between rapid and sustainable development amid a volatile business environment.

Vietnam’s legal framework should be more open regarding this practice to create more favorable conditions for enterprises to operate. 

Thank you!