National Economics University Advanced Educational Program Finance 52A1
REPORT Group 9
FINANCIAL MARKET and INSTITUTIONS Topic: Securities Companies in Vietnam
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Question: “Study a typical Firm Commitment Underwriting case in securities issuance in Vietnam. Do you think that this issuance is successful in the side of securities firms and in the side of issuer? Extend to the current status of Firm Commitment Underwriting in Vietnam ”
Group 09: Nguyễn Hải Đăng Đỗ Thu Hằng Đào Duy Khánh Ngô Hoàng Phong Vũ Ngọc Trâm
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Introduction Over the past few years, the development of such organizations as securities firms and investment banks with various kinds of services offered helps partly ensure the steadiness and safety of the Vietnam’s stock market. Firm Commitment Underwriting, one of these services, has acted as a useful tool on which the stock or bond issuer can rely to ensure the success of their issuance. It has been fully developed in many countries. However, in Vietnam, Firm Commitment Underwriting still suffers from many difficulties and is far from being made full use of its function. This report is dedicated to help viewers gain an insight into the status of Firm Commitment Underwriting in Vietnam in the recent years through a case study on answering the question: “Study a typical Firm Commitment Underwriting case in securities issuance in Vietnam. Do you think that this issuance is successful in the side of securities firms and in the side of issuer? Extend to the current status of Firm Commitment Underwriting in Vietnam ” In this report, the group introduces briefly the definition of Firm Commitment Underwriting and the distinction between other types of underwriting. Then the group goes through the current status of this activity in Vietnam prior to examining the typical case study to answer the question. After studying the case, several recommendations given by the group with a view to building a more effective, more stable and safer operation of Firm Commitment Underwritng in Vietnam.
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Contents Definitions
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Current Status in Vietnam
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Case Study
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I. Overview of IMEXCO and VCBS
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II. Background of the Issuance
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III. Current Status of Stock Market
in 2003
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IV. Evaluation of the Issuance
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Recommendations
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Conclusion
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References
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Definitions
(1)
The initial sale of securities is divided into 2 different kinds: Public offering and Private placement. Private placement is the sale of securities to a relatively small number of select investors, usually large banks, mutual funds, insurance companies and pension funds. Private placement is the opposite of a public issue, in which securities are made available for sale on the open market. Since a private placement is offered to a few, select individuals, the placement does not have to be registered with the Securities and Exchange Commission. In many cases, detailed financial information is not disclosed and the need for a prospectus is waived. Finally, since the placements are private rather than public, the average investor is only made aware of the placement after it has occurred. Public offering contains 2 main types which are: Firm Commitment Underwriting and Best-efforts offering. Firm Commitment Underwriting is the issue of securities by an investment bank or securities firm in
Source: http://www.ssc.gov.vn/portal/ page/portal/ubck/ktck/1109118?p_page_ id=1105709&p_cateid=1105726&item_ id=1505126&article_details=1 (1)
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which the investment bank or securities firm guarantees the issuer a price for newly issued securities by buying the whole issue at the fixed price from the issuer then resells it at a higher price to suppliers of funds which is known as the Public Offering Price (POP). The difference between the selling and buying activities of investment banks is the commission for the service. Meanwhile, Best-efforts offering is the issue of securities in which the investment bank does not guarantee a price to the issue and acts more as a placing or distribution agent for a fee decided based on the success in placing the issue. Other types of Public offering include: Standby Commitment Underwriting: The underwriters agree to buy the remainder of a new issue if they are unable to place its entirety with investors. This transfers the risk of the unsold portion of the issue from the issuer to the underwriters. This guarantees that the issuer will raise the capital it intends to raise, but leaves the underwriters with the possibility that they must purchase an issue with low value. As a result, underwriters charge a standby fee for a standby agreement. All-or-None Underwriting requires the entire issue must be sold or the offering is void. Mini-Max offering is the hybrid of Best-effort Offering and All-or-None Underwriting. The issuer requires a minimum sale at certain floor rate, beyond which, the investment bank is unrestricted to sell the securities to the public up to the ceiling price. If the amount of securities sold at less than the required rate, the entire issue will be cancelled. In conclusion, in Firm Commitment Underwriting, the issuer earns a fixed amount of money with guarantee that their stocks are sold while the investment bank faces all the risk of the securities and of not earning adequate profit for the securities held. Firm Commitment Underwriting, which is the main theme of this report, will be presented in more detail right after by examining the current status in Vietnam and a case study.
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Current Status in Vietnam The Vietnam Securities market opened in 2000 with initially 7 securities firms joining in exchange activities. Up until now the number has increased to 105, which is 15 times bigger in 12 years. However, according to the circular 226 on the supervision of financial safety from Ministry of Finance, there are about 40 companies which do not satisfy certain requirements to be in operation. The government has enacted the Decree No.48/NÄ?-CP requiring securities firms to have a certain amount of legal capital to perform the services related to security business, which is described by the below table:
The legal capital required for Underwriting service is the highest with 165 billion VND – 1.65 times higher than the Securities self-investing and 6.6 times higher than the securities brokerage service. With regard to the fee for acquiring business certification, the Underwriting service also takes the highest portion – 100 million VND. This condition ensures that the firm which wants to perform the activity is compulsory to have sufficient financial 8
capability to afford the debt. (According to Circular 134/2009-TT-BTC - Ministry of Finance). Specific numbers are presented in Table 2:
Up until now, many firms have registered to provide the underwriting service. However, the largest market shares are now under possession of subsidiaries of stateowned commercial banks. The specific numbers are presented in the following chart:
As can be seen from the chart, Agriseco now takes the largest proportion with 28.42% of market share followed closely by VCBS (23.38%) and VietinbankSc (22.53%). All these companies, as stated above, are subsidiaries of state-owned banks with substantial financial sources to carry out this costly service. Moreover, they provide the service mostly for government bonds rather than corporate bonds or stocks because of less risk and the guarantee from the government. Source: http://phapluattp.vn/260116p1014c1068/le-phi-bao-lanh-phat-hanh-chung-khoan-la100-trieu-dong.htm (2)
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From the beginning, almost all companies registered to provide the service. However, after the Decree No.48 being enacted, many firms have to cancel their underwriting service. This is due to the fact that the high capital requirement exceeds the funds obtained by a great amount as well as big losses in investment force these firms to reduce some costly services. As a result, firms have no choice but to cut down the underwriting service because the revenue it brings cannot compensate for its costs. The revenue of MB Securities Company over the past few years plotted below will be a good example for the claim.
The revenues earned over years are unstable. After reaching its peak in 2009 at 5.2 billion VND, revenue continued falling dramatically the following years and in 2012, it even reached zero. It cannot guarantee MB Securities Company a stable profit while cost is too high. Another aspect that needs to be considered is the proportion of underwriting service’s revenue over the total revenues of firms. This proportion is small and tends to decrease overtime. To illustrate, another example of BIDV Securities Company is taken (Table 3). For most of the time between 2005 and 2012, the proportion decreased sharply. Only in the third quarter of 2012, the ratio significantly increased to over 16% but there is no warranty that BSC can maintain this revenue in the next quarter.
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According to a report in October 2012, only 3 firms gained revenues from underwriting service (3), which are: • BIDV Securities Company: VND 5.5 Billion • Mirae Asset Securities Company: VND 217 million • Japan Securities Company: VND 152 million For all these numbers presented earlier, it is concluded that, in Vietnam, the underwriting service is not fairly developed and not being operated efficiently now. Some other issues that deteriorate the situation of underwriting service in Vietnam include: • Potential new Security Market however not yet developed • Lasting economic crisis affect businesses’ performance • Primitive financial environment • Lack of skilful staff
(3)
Source: Baomoi.com 11
Case Study
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I. OVERVIEW OF IMEXCO AND VCBS Ho Chi Minh City General Import Export and Investment Joint Stock Company (IMEXCO)(4) was transformed from the State-Owned Company to Joint Stock Company following the Decision 3375/QD-UB in August 18th, 2003 regulated by Ho Chi Minh City People’s Committee. The Headquarter is located at 204 Vo Thi Sau – Precinct 7 – Distict 3 – Ho Chi Minh City. The company’s certificate of business registration, number 4102002078, was registered in February 2nd, 2004 at the Department of Planning and Registration. The vast majority business of the firm is import, export of agricultural or handcrafting products, and investment in real estate or infrastructure. Vietcombank Securities Limited Company (VCBS)(5) was established following the Decision 27/QD-HDQT in January 1st, 2002 passed by the VietcomBank Board of Directors. VCBS is one of the very first companies attending the security market in Vietnam and has a strong trademark as well as the prestige. Its Charter Equity is 700 billion VND in 2012. II. BACKGROUND OF THE ISSUANCE In December, 26th 2003, Ho Chi Minh City General Import Export and Investment Company (IMEXCO) went public by issuing the Initial Public Offering, or IPO. This issuance was facilitated by VietcomBank Security (VCBS) who provided Firm Commitment Underwriting Service. VCBS, from the very beginning, had been confirmed by IMEXCO that VCBS could purchase the stocks at the quoting price of 105,000 VND. An auction was held by VCBS then, and the investor agreed to purchase the stock at the highest bidding price of 118,000 VND. VCBS was able to sold 56,000 shares to the public, the remaining 3,000 shares was recorded in the Balance Sheet as Security Investment. III. CURRENT STATUS OF THE SECURITY MARKET IN 2003 1. The macro background In 2003, only 2 companies first transacted their stocks in Hanoi Stock Exchange (HNX), which were Petroleum Mechanical Joint Stock Company (PMS) trading 3,200,000 VND and VTC Telecommunications Joint Stock Company (VTC) trading 1,797,740 VND in 4 /11 and 12 /02 respectively(6). The VN-Index in 2003(7), the line represents the score of VN-Index and the bar chart represents the value of total transactions. It can be seen that in 2003, the stock market was failed to attract investments since the value of total transactions was low. The VN-Index fell to the minimum level. For more information about IMEXCO: http://www.imexco.vn/index.php?option=com_content &view=article&id=118&Itemid=390 (5) For more information about VCBS: http://www.vcbs.com.vn/About/CompanyOverview.aspx (6) Source: http://www.cophieu68.com/companylist.php?o=d&ud=d&stcid=2&currentPage=16 (7) Source: http://www.cophieu68.com/companylist.php?o=d&ud=d&stcid=2&currentPage=16 (4)
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VN-Index stood at 182.29 at the beginning of the year but dropped to 130.9 point in October 24th being the lowest over the year. Afterwards, the market experienced the leap—frog of twenty points or so promised the recovery of VN-Index. The number of listed stocks reached 22.
Some affairs during 2003 contributing to the rise at the end of the year 2003(8): • The legislation of Decree No. 144/CP At the end of November, 2003, the Decree No. 144/CP was enacted, this is the highest laws frame concerning securities and securities market. The Decree can be recognized as a big move to create a safe and sound law system appropriate to the market development. Included in the Decree is the requirement to the Initial Public Offering is the following. • Article No. 6. The Requirements for the Initial Public Offering (9) - Be a joint stock company with the Charter Capital of at least 5 billion VND at the time of the issuance. - Generate profit from Operation for the two preceding years - Have feasible plan over the capital raised from the issuance - Exclude the construction, high technology business • The applying of new technique Source: http://vnexpress.net/gl/kinh-doanh/chung-khoan/2004/01/3b9cef1e/ Source:http://thuvienphapluat.vn/archive/Nghi-dinh-144-2003-ND-CP-chung-khoan-thitruong-chung-khoan-vb51625.aspx (8) (9)
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May 20th, 2003, Security Trading Center implemented the reduction in trading shares per lot from 100 shares to 10 shares. The trading process applies ATO ordering method (10). • Foreign Investors’ transactions boosted The trading of overseas investors enjoyed the benefits from the Decision 146/2003/ QD-TTg (11). By the end of 2003, the equity proportion of foreign investors is at most 20% and at least 0.31%. • Bonds “took the throne” Bonds transaction in 2003 valued 2,300 billion VND out of 2,700 billion total market transactions value. Noticeably enough, there were merely two Corporate bonds entitled the listed license (PMS and Cobovina) valued 157.6 billion VND (1% of the total listed value), the remaining were from 99 Government bonds valuing 11,000 billion (99% total listed value). • The initial of VietFund Management (VinaFund) The joint venture between Dragon Capital Company (contributing 30% of the total capital) and Sacombank (70%) initiated the born of VinaFund. Funds would be pooled from investors to form VietFund 1 (VF1), VF 2, etc. which will be invested in the security market at most 60%.
The index during 2004 illustrates a better condition of security market in Vietnam as the noticeable improvement in not only the VN-Index but also the worth of total transactions. For more information about ATO: http://vnexpress.net/gl/kinh-doanh/chungkhoan/2008/04/3ba00e8b/ (11) For more information about the Decision: http://vbqppl.moj.gov.vn/vbpq/Lists/Vn%20bn%20 php%20lut/View_Detail.aspx?ItemID=21507 (10)
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2. Other issues affecting the business’ performance In 2003, the export turnover totalled 19.87%, rose slightly 18.9% comparing to that of 2002. However, the price of some agricultural products dropped such as rice, tea; yet the average price of export goods increased 4.8% (260 million USD). Import turnover totalled 24.95 billion USD, experienced 26.4% of increase compared to that in 2002. The reduction in import taxations according to the CEPT/AFTA implemented since July had no effect on the import. On balance, both import and export were in a good condition. Despite that fact IMEXCO experienced little rise in income, the foreseeable percentage of dividends accounting for merely around 12% led to little growth.
IV.
EVALUATION OF THE ISSUANCE
As IMEXCO sold 59,000 shares to VCBS at the price of 105,000 VND, it received 6,195 million VND. An advantage of this underwriting is that IMEXCO can simplify the issuance and be assured that 100% of stocks will be purchased. On the other hand, VCBS was able to sold 56,000 shares to the public at the price of 118,000 VND, generating 413 million of income. The remaining 3,000 shares could be recorded as Security Investment in the Balance Sheet with the value of 354 million. If VCBS was able to sell all 59,000 shares to the public, it could have generated 767 million VND in income. The poor performance in operation of IMEXCO showed little prospect of receiving returns from the securities; therefore, VCBS was vulnerable (12)
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Source: http://www.vn.emb-japan.go.jp/vn/economic/TocdotangtruongGDP.html
by either holding 3,000 securities or aiming to sell those to the public. Comparing to the Best-effort offering, with the fee for unlisted stocks contributing at most 1% of the transaction, VCBS could have generated merely 16.62 million. Meanwhile, IMEXCO could have raised its equity capital by 6,541.92 million. On balance, both sides experienced a failure. VCBS failed to maximize the earning by holding 3,000 risky securities, IMEXCO failed to minimize the expenditure and maximize the capital by choosing Firm Commitment Underwriting method over Besteffort offering.
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Recommendations Recommendations concern 3 sides mances good enough to attract more inin the operation of Firm Commitment vestors. Underwriting. First is for State Security Secondly is for Stock issuers and SeCommittee curities companies The first and foremost thing to comIn order to be trustworthy and well plete is the legal base for the stock market reputed in the eye of investors, both corespecially the operation of the Firm Comporations issuing stock and investment mitment Underwriting. In October 2012, banks are in need of being transparent several modifications to the Law of Secuin operating to draw investors’ attention. rities have been made, which have tightDetailed annual financial report, auditened up the operation of the stock market. ing report and open information about the Instructions to execute the law should be stock are some examples of documents enacted as soon as possible to protect all that investors will examine in the process players in the market including investors, of choosing stock for their portfolio. Beissuers and also banks and securities firms. sides, there should be clear agreement beFurthermore, SSC should impose stricter tween these two subjects on some aspects controls on which commercial bank or such as price, time of issuance and related securities company has the authority to issues to increase the success rate of the underwrite. The securities underwriter is issuance. One more crucial factor contribcompulsory to have substantial financial uting to the success is the human resourcand legal capability as well as a technical es. Investment banks and securities firms insight into the matter. This act will ensure should train their staff to be more skillful the safety and success for each issuance. with expertise in the stock market. They One more thing SSC needs to do is will help banks assess the potentially profrequire corporations to publicize accurate itable deal and give corporations counseldata on their performance. This data is a ling on the issuance. This is a critical step useful indicator for investors showing how that banks have to take in order to gain well both the issuer and investment banks trust and reputation. and securities firms are doing. Banks can Lastly is for the two stock exchange: also base on this data to give practical HOSE and HNX advice for the issuance of the stock and assess the potential profit earned. InvesIt is necessary to have integrated tors can rely on this information to decide coordination between these two stock whether the stock is trustworthy enough to exchange, particularly in the bidding acinvest money in. Additionally, issuers and tivity. To ensure the smoothness of the banks will have a motive to operate more activity, advanced technology should be effectively to keep their financial perfor- considered to apply more effectively 18
Conclusion In general, Firm Commitment Underwriting is of great benefit to the issuer of the stock as the stocks are safe in the hand of the underwriter. However, it is more risky to the side of the securities companies or investment banks as they have to take the risk from the stock as well as the risk of not earning adequate profit from the stock purchased. In Vietnam, the current status of Firm Commitment Underwriting is not as brilliant as expected due to the strict requirements from the government as well as the deficient capability in both legal and financial aspects of securities companies, investment banks and corporations. Therefore, the recommendations listed above are hoped to help create a more stable, safer and more effective operation of Firm Commitment Underwriting.
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References http://www.ssc.gov.vn/portal/page/portal/ubck/ktck/1109118?p_page_ id=1105709&p_cateid=1105726&item_id=1505126&article_details=1 http://phapluattp.vn/260116p1014c1068/le-phi-bao-lanh-phat-hanh-chung-khoan-la100-trieu-dong.htm Baomoi.com http://www.imexco.vn/index.php?option=com_content&view=article&id=118&Item id=390 http://www.vcbs.com.vn/About/CompanyOverview.aspx http://www.cophieu68.com/companylist.php?o=d&ud=d&stcid=2&currentPage=16 http://www.cophieu68.com/companylist.php?o=d&ud=d&stcid=2&currentPage=16 http://vnexpress.net/gl/kinh-doanh/chung-khoan/2004/01/3b9cef1e/ http://thuvienphapluat.vn/archive/Nghi-dinh-144-2003-ND-CP-chung-khoan-thitruong-chung-khoan-vb51625.aspx http://vnexpress.net/gl/kinh-doanh/chung-khoan/2008/04/3ba00e8b/ http://vbqppl.moj.gov.vn/vbpq/Lists/Vn%20bn%20php%20lut/View_Detail. aspx?ItemID=21507 http://www.vn.emb-japan.go.jp/vn/economic/TocdotangtruongGDP.html http://www.vietcombank.com.vn/News/Vcb_News.aspx?ID=2429 http://www.mof.gov.vn/portal/pls/portal/SHARED_APP.UTILS.print_preview?p_ page_url=http%3A%2F%2Fwww.mof.gov.vn%2Fportal%2Fpage%2Fportal% 2Fmof_vn%2F42561686%2F42560371&p_itemid=2660059&p_siteid=33&p_ persid=0&p_language=vi http://luanvan.net.vn/luan-van/de-tai-tim-hieu-ve-hoat-dong-bao-lanh-phat-hanhchung-khoan-cua-cty-cp-thang-long-694/ http://mbs.com.vn/vi-VN/Chung-toi/Quan-he-Co-dong/Bao-cao-tai-chinh/MBScong-bo-BCTC-quy-3-va-BC-Tai-san-No-Co-quy-3-nam-2012.html http://www.bsc.com.vn/BSCNews/2012/10/12/272222.aspx
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FINANCIAL MARKET and INSTITUTIONS 22