Credit institutions M&A

Author: | Published: 1 Jul 2009
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Mergers and acquisitions have become popular recently as a result of the financial crisis, especially among credit institutions. To deal with this, State Bank of Vietnam (SBV) has drafted a circular guiding the merger and consolidation of credit institutions in Vietnam.

The draft circular requests credit institutions participating in a merger or a consolidation (transacting credit institutions) to obtain the opinion of the competition managing agency regarding their merger or consolidation if it is required by this law. In particular, in accordance with Article 20 of Law on Competition 2004, if transacting credit institutions have combined market shares of between 30% and 50%, they must notify the competition managing agency before implementing that merger or consolidation. If the combined market share is lower than 30% of the relevant market or if these transacting credit institutions after merging or consolidating are still small or medium sized, no notification is required.

The draft circular regulates two methods of merger and consolidation, voluntary and appointed. A voluntary merger or consolidation is self-explanatory and is when the credit institutions merge or consolidate on their own initiative for their own developmental purposes. An appointed merger or consolidation applies when credit institutions (i) cannot satisfy the regulation on legal capital, (ii) have "inefficient operations" or (iii) are under special control; and they cannot apply the voluntary method and these problems potentially risk the integrity of the whole credit system. In this case, SBV sets up a detailed plan to get approval of the Prime Minister before implementing the appointed merger or consolidation.

However, the draft circular still does not provide criteria to determine which credit institutions are considered to have "inefficient operations", which may lead to some arbitrary applications of the appointed mergers or consolidations.

The draft circular requires two general steps before the merger or consolidation of credit institutions: (i) the State Bank Governor's approval in principle and (ii) the State Bank Governor's official approval. However, the draft circular now requires the dossier for approval in principle to contain not only the written opinion of the competition managing agency or a written explanation of the absence of such opinion, but also the transacting institutions' next three-year anticipated business plan and financial statement of the last two years.

Lastly, in order to prevent insider transactions by management (members of the Board of Management, members of the Control Commission, the General Director and Deputy General Director of transacting credit institutions) the draft circular prohibits them from purchasing or selling their capital contribution in such credit institutions within the period of suspension of capital transfer. This period of time starts from the date that the transacting credit institutions submit dossiers to get SBV's approval in principle on their merger or consolidation and ends after 30 days from the announcement date regarding that merger or consolidation. If the capital transfer is unavoidable, transacting credit institutions must obtain the approval of the State Bank Governor before the transfer.

In general, the draft circular is an effort by SBV to set up a better legal mechanism to manage the merger or consolidation of credit institutions. However, due to the complication of this activity and the lack of experience of Vietnam here, there are some lingering issues that SBV should re-consider to make it more practical and reasonable.