The underwriting of securities issuance plays a vital role in the financial market, facilitating capital mobilization for organizations. This article explores the concept of securities underwriting, the conditions required to perform this function, and the relevant regulations governing the process.
1. What is Securities Underwriting?
According to Clause 31, Article 4 of the 2019 Securities Law, securities underwriting is an essential operation within the financial market. In this context, the underwriting organization commits to the issuing organization to purchase part or all of the securities that have been issued, with the aim of reselling them to the public or investors. This ensures that the issuing organization can raise the desired capital, even if the securities are not fully distributed to investors during the issuance period.
There are two main forms of securities underwriting: First, the underwriting organization may commit to purchasing all undisbursed securities after the issuance is completed. This provides security for the issuing organization, ensuring they will receive the raised capital regardless of whether investors buy all the securities available in the market. Second, the underwriting organization may only commit to making maximum efforts to distribute the remaining securities to investors without guaranteeing the purchase of all unsold securities. This requires the underwriting organization to employ professional methods, a wide distribution network, and a good reputation in the market to achieve optimal results in securities distribution.
The underwriting operation acts as a crucial bridge between the issuing organization and investors, helping to create stability and confidence in the capital mobilization process. In a developed securities market, the presence of strong underwriting organizations enhances liquidity, ensures the success of securities issuances, and minimizes risks for both issuing organizations and investors. In summary, securities underwriting not only enables businesses to raise capital effectively but also contributes to the sustainable development of Vietnam’s financial market.
2. Conditions for Performing Securities Underwriting
According to Article 17 of the 2019 Securities Law, the implementation of public securities underwriting is strictly regulated to ensure transparency, financial security, and the protection of the interests of all participants. Organizations intending to perform underwriting must meet the following stringent legal conditions:
- Conditions for the Underwriting Organization:
Organizations eligible to perform public securities underwriting must be securities companies or financial institutions with sufficient capacity as stipulated by law. Specifically:
- They must be licensed by the State Securities Commission to engage in securities underwriting. This ensures that the underwriting organization has been evaluated by the regulatory authority for its capability, reputation, and compliance with all relevant legal requirements.
- They must meet financial safety criteria as required by law. This includes maintaining necessary financial safety ratios, such as minimum charter capital, liquidity, and short-term debt repayment capacity. This is crucial to ensure that the underwriting organization has the financial capacity to fulfill its commitments related to the issuance of securities.
- They must not have any related party connections with the issuing organization. This is to prevent conflicts of interest and ensure transparency and fairness in the underwriting process. Any related relationships between the underwriting organization and the issuing organization could influence the objectivity and integrity of the underwriting and distribution of securities.
- Conditions Regarding Underwriting Limits:
The underwriting organization has the right to commit to purchasing part or all of the securities issued by the issuing organization. However, the total value of the securities that the underwriting organization can underwrite must comply with strict limits to ensure financial stability and avoid excessive risks in the market:
- The total value of underwritten securities must not exceed the equity capital of the underwriting organization. This regulation aims to prevent the underwriting organization from committing beyond its financial capacity, which could lead to financial risks for both the market and investors.
- The value of the underwritten securities must not exceed 15 times the difference between current assets and current liabilities. This regulation is based on the latest quarterly financial statements of the underwriting organization, ensuring that the organization can meet short-term financial obligations and maintain liquidity during the underwriting process.
These conditions are established to ensure that only organizations with sufficient financial capacity and experience can participate in securities underwriting. This helps maintain the stability of the financial market and protects the interests of investors while mitigating risks for both issuing organizations and underwriting firms.
3. Regulations on Securities Underwriting by Securities Companies
According to Article 23 of Circular 121/2020/TT-BTC, the underwriting activities of securities companies are regulated in detail to ensure transparency, fairness, and financial safety during public securities issuance. These regulations include:
- Underwriting Limits:
Securities companies engaging in underwriting may choose to purchase part or all of the securities issued by the issuing organization. However, the total value of the securities underwritten by the securities company must not exceed:
- The equity capital of the securities company itself. This ensures that the securities company does not commit beyond its financial capacity, avoiding the risk of financial imbalance and protecting the interests of investors and the market.
- Fifteen times the difference between current assets and current liabilities, calculated based on the latest quarterly financial statements. This regulation helps ensure that the securities company has good liquidity and can meet financial obligations arising during the underwriting process.
- Cases Not Allowed for Firm Commitment Underwriting:
Securities companies are prohibited from engaging in firm commitment underwriting or acting as lead underwriters in certain special cases to prevent conflicts of interest and ensure fairness during the securities issuance process. Specifically:
- When the securities company, its subsidiaries, or related parties own 10% or more of the charter capital of the issuing organization, or have control over the issuing organization, or have the right to appoint the General Director of the issuing organization.
- When at least 30% of the charter capital of the securities company and at least 30% of the charter capital of the issuing organization are owned by the same individual or organization, to avoid dual control and ensure objectivity in the underwriting process.
- When the issuing organization, its subsidiaries, or related parties own 20% or more of the charter capital of the securities company, or have control over the securities company, or have the right to appoint the General Director of the securities company.
- When members of the Board of Directors, the General Director, and related parties of the securities company are also members of the Board of Directors, General Directors of the issuing organization, to avoid personal conflicts of interest.
- When members of the Board of Directors, the General Director, and related parties of the issuing organization hold similar positions at the securities company, leading to unfair influence between the two parties.
- When the securities company and the issuing organization share the same legal representative, which increases the likelihood of conflicts of interest and reduces objectivity during the underwriting process.
- Requirements for Accounts Receiving Securities Purchase Funds:
When performing underwriting, the securities company must open a separate account at a commercial bank to receive funds from investors for the purchase of securities. This ensures that the funds raised from investors are managed and monitored separately, avoiding commingling with other financial sources of the securities company, thereby ensuring transparency and safety during the securities issuance process.
In conclusion, the conditions for underwriting securities issuance, as stipulated by the 2019 Securities Law, are designed to create a robust framework that ensures transparency, protects investor interests, and maintains financial stability. By adhering to these conditions, underwriting organizations can effectively contribute to the development of the securities market in Vietnam, facilitating capital mobilization for issuers while minimizing risks for investors. As the financial landscape evolves, these regulations will continue to play a vital role in fostering a stable and trustworthy investment environment.
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1. Lawyer Vu Thi Phuong Thanh, Manager of TLA Law LLC, Ha Noi Bar Association
Email: vtpthanh@tlalaw.vn
2. Lawyer Tran My Le, Chairman of the Members’ Council, Ha Noi Bar Association
Email: tmle@tlalaw.vn.
Dinh Phuong Thao