Loopholes in Corporate Bonds market

(13/04/2022) - Since 2018 the Government has issued three Decrees to regulate the Corporate Bonds market which has now grown substantially. By the end of 2021, the Corporate Bonds market accounted for 16.6% of the GDP, worth almost VND 1,150,000 bn. In 2021 alone, about 520,000 billion Corporate Bonds were issued by real estate companies, valued at VND 214,000 bn.

Legal loopholes

Despite continuously adjusting corporate bond issuance regulations, such as through amending Decree 163/2018 with Decree 81/2020, and another new Decree 153/2020 that was issued on 31 December 2020, the Corporate Bonds market is ceaselessly finding loopholes to operate. All the Decrees stand by one principle that the use of capital raised from the issuance of bonds of enterprises must ensure the right purpose according to the issuance plan, as per Article 5 of the latest Decree.

This is to say that according to the bond issuance file, the issuer always requires that the issuing company must explain the purpose of the bond. Article 5 and Article 13 of Decree 153 stipulate that enterprises are allowed to issue bonds for three purposes only. First, to implement investment programs and projects; two, to increase the size of working capital; and three, to restructure the capital source of the enterprise itself.

According to the bond issuance process specified in Article 11 and the authority to approve the issuance plan specified in Article 13 of Decree 153/2020, bond-issuing enterprises will all make their own dossiers according to regulations and approvals without going through state management agencies. This shows that the approval of the issuance plan, which partners to sell to, and how to use the raised money are entirely the prerogative of enterprises.

This is to say that the enterprise itself must complete the application according to regulations, using the money in accordance with the purpose of registration in the dossier. In all three Decrees issued, the inspection of records, supervision of capital use purposes is completely without any state management agency intervention, management or supervision, and completely dealt by the enterprise concerned.

Therefore, it is difficult to know whether the money after being successfully mobilized from the issuance of bonds will be used for the right purposes according to the provisions of the Decree. It is difficult for subsidiaries and limited liability companies to have a monitoring mechanism for this activity and completely depend on the role and impact of the parent company. The Tan Hoang Minh Group, through the role of subsidiaries issued bonds, and later reissued this money to buy land and real estate.

Issuance plans

Article 14 of Decree 163/2018 and Article 13 of Decree 153/2020 mentions that bond issuers need to develop an issuance plan and submit it to competent authorities for approval, acceptance, and as a basis for information disclosure. However, the competent authority is the enterprise, not the state management agency according to Clause 2 of Article 14 in Decree 153/2020.

This is similar to Clause 1 in Article 14 of Decree 153/2020 which stipulates a series of documents, records, and criteria that need to be included in the issuance plan to be submitted to the competent authority by an enterprise. Accordingly, if it is a business for enterprises to decide, but if it is necessary to manage, there must be a state management agency which is represented under the securities law by the State Securities Commission (SSC).

According to the provisions of Article 39, the responsibility of the State Securities Commission is only through the role of supervising information disclosure and bond trading activities to make decisions to handle violations in offering activities. Enterprises can enter wrong records and there is no one to check. Even in the disbursement of capital where the purpose is stated in the file, there is no one to check.

Article 38 stipulates the responsibilities of the Stock Exchange, but also only mentions post-issuance content such as information disclosure and bond trading. In Article 19 the content of information disclosure before the bond offering will be transferred to the Exchange with the announced content complying with Circular 122/2020 of the Ministry of Finance. Thereby, the department organizes to monitor whether the issuance plan complies with the promulgated Decree or not.

The submission of this information disclosure to the department only needs to be done one day before the offering date, and the responsibility of the department to monitor this record for a certain number of days is not mentioned. This is to say that the company actively issues and the buyer is solely responsible for own understanding of the regulations to appraise the documents.

The case of the Tan Hoang Minh Group shows that bond buyers are mostly passive. In the filing of the issuance of the bond package WTPCH2125003 worth VND 3,230 bn, issued by the Winter Palace Joint Stock Company on 16 December 2021, there is no mention of the purpose of capital use, while the previous two batches of bonds issued separately mention the purpose of capital use.

This part could be an error by the company and not reported. The more passive the buyers are, the more money they lend to businesses, whether it is used for the right purpose or not, completely by trusting the business. The Decree does not mention that any competent authority can inspect and monitor the use of money for the right purpose as the plan states.

The Decrees all stipulate the expectation that enterprises raising capital will use it with a clear and specific purpose for investment programs and projects, or supplement the scale of working capital, investment capital in works and projects, but cannot use it to acquire, annex, own shares or buy back shares of others.

However, due to lack of regulatory authority, the interpretation of these terms vary. This leaves enterprises to freely misuse capital. There is an opinion that if further checks are not made then some people who buy bonds today could become shareholders of companies or projects in the future by using this as a collateral.

Dr. Le Dat Chi Faculty of Finance, UEH

INVESTMENT & FINACE