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State firms make windfall from sell-offs

Update: April, 28/2014 - 09:02
The Viet Nam Post and Telecommunications Group made a profit of VND26.8 billion ($1.3 million) from the sale of its stake at its non-core businesses. — Photo vietbao.vn

Compiled by Thien Ly

The Government has been worried about State-owned corporations making losses during their withdrawal from non-core areas and been taking steps to cushion the blow, but surprisingly many of the companies have been making large profits from their divestment.

In July 2012, the Government ordered State-owned enterprises (SOEs) to pull out of non-core sectors before 2015, considered an important step in their restructuring, especially of those that have invested in risky sectors like property, banking, finance, and insurance. Many of the SOEs cited one reason or another to delay the process, the most plausible being they were unable to sell their shares at book value since the Government demanded that they do not lose money.

Some of them had made unsuccessful attempts to make initial public offerings, including multiple times, amid the gloom on the stock market. Others were already listed and their prices were languishing.

Viet Nam Chemical Group (Vinachem) for instance failed last year to sell nearly 2.1 million shares, equivalent to a 6.13 per cent stake, in the Viet Nam Industry and Commercial Securities Company, whose share price at that time was just around VND2,400. The Government expected the share to be sold at a minimum of VND10,600 before taxes and fees.

Many analysts believed that SOEs would benefit by selling out non-core businesses even at below par, cutting losses overall by doing so.

Thus, in March this year the Government allowed SOEs to sell their shares in non-core businesses at below the face value of VND10,000 or below book value after provisioning for the loss. It also gave the green light for selling shares in loss-making firms to the public.

In the case of divestment from the financial and banking sector, State-owned banks have been tasked with buying the shares. The government has also assigned its sovereign fund, the State Capital Investment Corporation, to buy the remaining stakes.

This is expected to help tackle the problems SOEs encountered during the pullout process, while also preventing losses to the Government.

The analysts said selling the shares at below book value does not conflict with market principles since the investments were inefficient, adding that the important thing is to ensure transparency at all stages of the process — planning, auction, and fixing of prices.

But, with the partial recovery of the stock market, there has been a twist in the tale: Many of the divesting firms have been making fat profits.

Eleven subsidiaries of the Viet Nam Textile and Garment Group have fetched VND248.24 billion (US$11.5 million), VND45.8 billion ($2.17 million) more than their cost price.

Electricity of Viet Nam sold one million shares in the Global Insurance Company at VND26,000 each, nearly double the price at which it had bought them, according to Saigon Economics Times.

The Viet Nam Post and Telecommunications Group made a profit of VND26.8 billion ($1.3 million) from the sale of its stake at its non-core businesses.

Some SOEs deliberately delayed their pullout since they were making big profits from some of their investments.

Experts said there were after all benefits from the Government's policy of allowing SOEs to sell at below par, but expressed concern about the possibility of some abusing this licence to pocket money.

Some executives could agree to fix prices at lower than their real value in exchange for a cut, they pointed out. To preclude this, it is necessary for the authorities to have an agency responsible for valuing investments and assets before the divestment. There should be complete transparency through the entire process of planning, fixing the prices, and auctioning, they said.

Transfer-pricing fraud

Transfer pricing fraud remains rampant at foreign-owned firms.

Last year tax authorities intensified efforts to fight transfer-pricing abuse as foreign firms declared losses year after year but continued to invest in business expansion.

But according to a recent report by inspectors from the General Department of Taxation, most of the foreign firms they audited declared losses to evade tax.

Out of 870 firms they inspected, 720 were found to have committed transfer-pricing fraud by inflating input prices and lowering export prices and exaggerating the prices they paid their parents for use of trademarks and copyrights.

Tax and transfer-pricing fraud are not a new story in the country, but are becoming trickier.

They are especially rife in industries that use intangible assets, have a technological monopoly, or manufacture special products, meaning there is nothing to benchmark their products against.

The foreign firms often collude with their parent companies abroad, who act as both suppliers of their inputs and buyers of their products, making it almost impossible for the authorities to regulate prices.

An official from the Ministry of Planning and Investment told Toquoc.vn that while the number of businesses doing this had not yet reached alarming levels, it revealed the inability of government agencies to control foreign firms' operations.

The risk of widespread transfer-pricing fraud and ineffectual policing could prompt the Government to adopt new taxation policies.

But the country should also apply tariffs that are competitive in comparison with other markets so that transfer-pricing abuse is not the first impulse foreign firms have.

Bond interest

Last week the board of a medium-sized commercial bank based in HCM City decided to invest VND500 billion ($23,697) in five-year bonds issued by a firm at a coupon rate of 11 per cent for the first year.

Though the rate was lower than the bank's lending interest rate, the board thought it was the right decision since it had not been easy to lend to corporate borrowers at 12-12.5 per cent.

Many other lenders too have invested or are investing in corporate bonds at rather low rates. Hoang Anh Gia Lai Group last month issued bonds at a coupon rate of 12 per cent. Though this was 2 percentage points down from late last year, the company successfully sold all 1,000 shares.

Earlier another major property company also successfully issued bonds worth VND6.8 trillion ($323.81 million) at only 11 per cent interest.

Many other firms, including medium-sized ones, also plan to issue bonds.

Significantly, most of the buyers are banks.

Corporate bonds are proving to be more and more attractive because of their rather high coupon rates.

The head of a commercial bank's branch in Tan Binh District, who declined to be named, said the number of firms that qualify for bank loans is very modest. So, when a firm gets approval to issue bonds, banks snap them up to enjoy the high interest rates. — VNS

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