Co-writers: Vi Tran, Ngan Nguyen, Thao Bui
To run business, not only start-ups but also all kinds of enterprise needs a certain amount of capital to make it possible. Especially, in the context of Covid-19 pandemic, it made enterprises need to mobilize more capital to maintain operation. The question is that in which ways investors can call up for capital increment?
Let our business lawyers take you a brief legal view on some forms of capital mobilization and relevant matters for your consideration.
1. What is capital and capital mobilization under Vietnam law?
Capital is money, property and property right which investors/ owners contribute into business. By this article’s context, we talk about the capital is money. Capital of an enterprise could come from 2 main sources:
- Charter capital: Such capital is total value of assets that members/ owners of enterprise contributed or committed to contribute when establishing enterprise; and
- Other sources of capital: This capital is from the capital mobilization of enterprises including loans, bonds, etc.
In addition, capital mobilization is an activity of an enterprise to raise more capital for its business. By increasing the charter capital and the capital from other sources, the enterprise has been doing the capital mobilization itself.
2. What are capital mobilization forms in Vietnam?
We would like to present some common means of capital mobilization as follows:
2.1. Charter capital mobilization
Followings are how an enterprise can increase its charter capital through capital mobilization:
a. Parent company to contribute more capital in subsidiary in Vietnam
By law, foreign parent company is foreign investor on the investment registration certificate of an enterprise. So, the parent company can increase capital of its Vietnamese subsidiary by increasing the charter capital. If the increased amount exceeds the allowed investment capital amount, the subsidiary must comply with law on investment first.
b. Issuing more shares
Only joint stock companies can issue shares for capital mobilization. The issuance of shares must strictly comply with laws on enterprises and related regulations. There are 03 forms of share offering:
- Offering shares to existing shareholders;
- Offering shares to the public; and
- Private offering of shares.
c. Increasing charter capital amount
This mean could fit for both limited liability enterprise and joint stock enterprise. There are some cases as follows:
- The enterprise increases charter capital and all existing owners will contribute for the increased part with the same shareholding ratio. Consequently, the charter capital is more, and the owning ratio of existing shareholders/ members remains the same;
- The enterprise increases its charter capital and not all existing owners will contribute for the increased part. Consequently, the charter capital is more, but the owning ratio of existing owners shall be changeable respectively; and
- The enterprise increases its charter capital but the increased part is for new owners. Consequently, the charter capital is more, and the owning ratio of existing owners shall be changeable due to the appearance of new ones.
2.2. Loan capital mobilization
The enterprise could consider for calling up a capital amount which is outside of its members/ owners. In common, there are some ways as follows:
a. Loan from parent company
An enterprise can borrow money, or even assets from its parent company. The law allows a parent company to lend an amount its subsidiary. If such parent company is a foreign party, the enterprise must register the medium- and long-term loan with the State Bank. It also need to report loan status periodically to the State Bank.
b. Loan from credit institutions
Credit institutions include banks, non-banks credit institutions, micro-finance institutions, etc. could provide a specific-term loan for operation of an enterprise. To get a loan from a credit institution, the enterprise must meet some requirements. Besides, the enterprise must guarantee the loan by its own assets or any assets from a third party.
c. Issuing bonds to the public
Corporate bond is a debt security that an enterprise issue with operation of at least one year. By issuing bonds, the enterprise commits its obligation to owe principal interest and other debt obligations (if any) to bondholders. Base on regulations on corporate bonds, issuing enterprise can mobilize capital on their use. This also means that they have to assure of the repayment capabilities for their own debts.
The enterprise shall decide the rates and issuance of corporate bonds if it satisfies the requirements of quantity, residual capital and time and procedure for bond issuance. Moreover, the enterprise must comply with regulations on stock exchange if it make this kind of capital mobilization from the Stock exchanges in Vietnam.
d. Investment from investment funds
In fact, capital from investments funds is a considerable resolution. It is based on terms and conditions of funds that enterprises must accept.
3. What legal risks should investors be aware?
Capital mobilization means may have certain potential risks as follows:
- Firstly, none-compliance with regulations could lead investors and companies bear hard penalty from competent authority. For example, a fine for non-registration of foreign loan with the medium- or long-term loan to authority is up to VND60,000,000 (~USD2,500).
- Secondly, if failing to conduct the loan for capital contribution under the procedure of investment and capital contribution, the loan might not be able to repay for the lender. The same consequence is for not transferring loans through the compulsory bank account for capital contribution.
- Lastly, the dispute related to agreement of share purchasing, capital loan, capital contribution, etc. is considerable. It could be from agreements between investors and enterprises if the parties did not prepare such agreement diligently.
In conclusion, the diversity of capital funding gives investors and enterprises more chances to approach their goals. However, investors must pay attention to the risks of each methods to make their best options. To mitigate the risks of a capital mobilization case, the party should ask for lawyers’ advice. Lawyers’ support on legal procedures and documents is also helpful for investors.
We hope to receive your comments on this article. Or should you have any questions regarding this matter, please revert to us via firstname.lastname@example.org.