Bonds are becoming an attractive investment channel because of their alluring interest rate and that bond issuance is generally underwritten by credit institutions. As other investment channels, risks and profits are the main concern of every investor. Their decisions depend on one, and only one, factor: information.
MORE AND MORE INFORMATION IS REQUIRED TO BE MADE PUBLIC
It is undeniable that investors bear a greater amount of risks since they are the ones directly “pouring” money to contribute capital into the issuing company. To both help, investors mitigate risks as well as help companies quickly raise capital when issuing valuable papers, companies, whether public or not, should comply with and follow the rigid procedures of information publication and issuance, which include several steps(1).
Generally, the information that issuing companies are required to publicize often aims to make transparent and public the corporate status upon issuance, and to avoid any “fabrication of fantasy” for the investors. In a matrix of information released by businesses to solicit investment, legislators should focus on helping investors steer clear of any complications in verifying information or prevent them from “blindly following” advises of brokers and issuing organizations.
First of all, one of many information that concerns the investors is affiliate companies, which is required to be specifically published before issuance of bonds(2). This regulation originates from the reality that parent companies often delegate bond issuance to raise capital upon their subsidiaries or backyard companies. This stems from the fact that such parent companies are public companies or listed companies, which are obliged to publish their information. Real estate companies, for example, often establish subsidiaries (known as project companies) to implement projects and obviously, these companies are entitled to issue bonds to raise capital for the respective projects. In such case, investors pay more attention to the reliability of the parent companies, since the contribution and participation of investors play a major role in each successful real estate project.
In the information publication form prior to bond issuance(3), under part 2 section II, issuing company must publish the list of its parent companies and subsidiaries if they operate in the parent-subsidiary company model or companies of which the issuing company are holding control or dominant shares, and companies which are holding control or dominant shares of the issuing company.
Currently, Decree 163 is yet to provide clear definition of controlling/dominant, therefore, issuing companies may face certain complications, but they are also able to “ignore” publication of unfavorable information related to the controlling company. In the near future, upon promulgation of circulations to provide guidance on Decree 163, lawmakers should consider shedding some light upon this publication procedure.
Second of all, publication of information related to the financial status of the issuing company is put under discussion(4). To be specific, they are several basic indexes in the most recent three years such as equity, debt/equity ratio, after-tax profit, return on equity (ROE) and the status of debts. Obviously, these are the information which would help investors gain a wider perspective of the financial status prior to issuance, reflecting growth rate and corporate governing ability, allowing for better evaluation of expected profits.
Third of all(5), information regarding plans of bond issuance, including the types of bond expected to be issued, allocation of gained capital as well as plans to liquidate the bonds and settle any rights and obligations of the parties involved in the issuance. With aims to raise capital, it is understandable why issuing companies must particularly and precisely publish these information, as they will help investors choose the type of bonds, issuing plan and discount suitable to the amount of available capital which they intend to invest in bonds. Moreover, publication of the investors’ rights and benefits would also become an important basis in carrying out plans of bonds subscription.
ITS IS, HOWEVER, INSUFFICIENT TO MITIGATE INVESTORS’ RISKS
Decree 163/2018/ND-CP introduced a rigid procedure as well as sanctions which governing agencies may apply upon failure in compliance by issuing companies. However, in case all requirements and conditions on compliance are satisfied, would there still be any risks for bond-holders?
In fact, it is almost impossible to achieve the goals set forth by both the issuing company and the investors, should the same basic method is maintained for publication at stock exchange, including publication of information prior to issuance, announcements of issuing result, publication of periodical information, publication of extraordinary information and other information. Hence, stock exchange is merely an agency to receive information required to be published and upload onto specialized information pages on corporate bonds at stock exchange(6).
At present, while it is possible to check and compare information on financial status with the attached financial statement (audited by independent audit agency), and that other information such as issuing plans is virtually based on the company’s undertakings and the guaranty of issuance-underwriting institution (if any), information on affiliated companies has never eased the investors’ minds. It is due to the fact that, on one hand, issuing companies are not required to provide their shareholder books at the time of issuance, they, on the other hand, may choose to declare information on companies of which they are controlling or holding dominant shares, or information of companies currently controlling or holding dominant shares of the issuing companies.
In addition, Decree 163 is yet to provide clear definition of controlling/dominant, therefore, issuing companies may face certain complications, but they are also able to “ignore” publication of unfavorable information related to the controlling company. In the near future, upon promulgation of circulations to provide guidance on Decree 163, lawmakers should consider shedding some light upon this publication procedure.
Furthermore, an option that stock exchange could put under consideration is to connect with security depositories, consultants in bond issuance, bidding, issuing, underwriting institutions to jointly publish information for the issuance, which would allow investors to have more “channels” to verify the information published by the companies. As a matter of fact, there are many investors who simply make decisions under advices of credit institutions without seeing the whole picture, and lack the ability to evaluate the importance published information. Moreover, the exchange of information between these organizations would synchronize and speed up the obligations of reporting the status of corporate bond(7), contributing to improve the efficiency of state governance.
In a context where there is no mechanic of information verification or evaluation of creditability regarding publication of information required by laws, strict lawmaking and effective methods are fundamental to protect all parties involved, with raising a considerable amount of resources for the national economy being the very first goal. Any capital markets, aiming at stable development and becoming an effective capital-siphoning channel, must be established one the most solid foundation of all – the trust of market participants.
Lawyer Le Thi Tuyet Dung – Managing Director of VICTORY LLC
(1) Article 12 of Decree No. 163/2018/ND-CP on bond issuance, issued by the Government on 14 December 2018, effective from 01 Febuary, 2019 (“Decree No. 163)
(2) Article 22 of Decree No. 163
(3,4,5) Schedual 22 of Decree No. 163
(6) Article 29 of Decree No. 163
(7) Article 38 of Decree No. 163