19-9-2024 (HANOI) Vietnam has announced the removal of a longstanding requirement for full pre-funding on equity transactions by foreign investors. The decision, set to take effect from 2 November, marks a crucial step in the nation’s ongoing efforts to secure a reclassification as an emerging market.
The Vietnamese Finance Ministry revealed the change in a circular issued late Wednesday, addressing a major obstacle that has long hindered the upgrade of the Ho Chi Minh City Stock Exchange. Currently, international investors are obliged to transfer funds in full before engaging in securities purchases, a practice that has been a point of contention for years.
Under the new regulations, brokerage firms will be empowered to vouch for foreign investors during share acquisitions. “Brokerage firms will assess the risk to determine the pre-funding ratio for foreign institutional investors when placing purchase orders,” the circular stated. It further clarified that in the event of payment default by an overseas investor, the liability would fall to the brokerage.
This regulatory shift comes at a crucial juncture, with FTSE Russell’s market classification announcement scheduled for 8 October. However, sources close to the matter suggest that an immediate upgrade for Vietnam in the October report is unlikely, despite this progressive step.
The move is part of Vietnam’s broader strategy to transition from its current frontier market status, as classified by both MSCI and FTSE indices. This classification has effectively barred many funds, family offices, and other potential investors from participating in Vietnam’s listed companies.
While the removal of the pre-funding requirement is a significant advancement, other key reforms remain necessary for Vietnam to achieve its desired market upgrade. Chief among these is addressing the strict limitations on foreign ownership of listed companies, a factor that continues to deter potential international investors.
The potential impact of an upgrade to emerging market status is substantial. The World Bank estimated last year that such a reclassification could trigger net inflows ranging from $5 billion to $25 billion into Vietnam’s $200 billion market by the decade’s end.
