Senior Associate Minh Doan shared his thoughts on the implementation of the 2005 Ordinance on Foreign Exchange and risks of using foreign currencies in shares transactions if the parties are not knowledgeable of foreign exchange restrictions in Vietnam. Below is an excerpt of his article in the Vietnam Investment Review.

Foreign exchange restriction is one of the measures used to stabilise the foreign currency market, helping enhance the convertibility of VND, especially in the context of international integration.

On the issuance of the 2005 Ordinance on Foreign Exchange, the Standing Committee of the National Assembly has stipulated that: “Within the territory of Vietnam, any transaction, payment, listing, or advertisement by the residents, non-residents shall not be performed in foreign exchange, except for transactions with credit institutions, payments made through an intermediary including collection under the authorisation, entrustment, agency and other necessary cases which are permitted by the prime minister.”

After a period of time, the ordinance gradually showed its loopholes when the acts of the transaction, payment, listing, and advertisement failed to cover cases where the use of foreign exchange should have been restricted.

In its written explanation of amendments and supplements to the ordinance, the State Bank of Vietnam (SBV) pointed out several cases where quotation, valuation, and denomination of goods and service prices denominated in foreign currencies had complicated the foreign exchange activities, affecting the management of monetary policy, exchange rate and the government goal of anti-dollarisation.

As a result, when the ordinance was amended, foreign exchange restrictions intensified. Accordingly, in addition to transaction, payment, listing, and advertisement, it is now stipulated that quotation, valuation, pricing in contracts and agreements, as well as other similar forms such as conversion or adjustment of price by residents or non-residents shall not be denominated in foreign exchange, except for the cases permitted under the SBV regulations.

Additionally, for foreign investors in Vietnam, the SBV issued separate regulations on the use of foreign currencies in the sale and purchase of shares and capital contributions in the form of direct and indirect investment activities.

Specifically, all indirect investment activities of foreign investors in Vietnam must be performed in VND; as for direct investment activities, the valuation and payment of the transfer price of investment capital may only be performed in foreign currencies in cases where the relevant parties are non-residents, and the same must be performed in VND among the residents or between the residents and the non-residents.

Read the full article here.