Capital Flow to Stock Market to Be Tightened

The draft circular which would replace the Decision No. 27/2007 says that securities companies’ borrowed money must be no more than three times of the stockholder equity, while the current regulation allows the borrowed money to be six times higher than the stockholder equity.

The sharp cut has worried investors, because this may lead to the weakened cash flow to the stock market. They have estimated that if the draft regulation is approved, the capital to be pumped into the market may drop by 50 percent, if noting that most of the loans of investors have been disbursed via securities companies.

However, analysts have reassured the investors that the regulation would not a big problem. The reports of the 10 leading securities companies show that their ratios of borrowed money on stockholder equity are very low. Especially Vietcombank Securities Company VCBS and VNDirect did not have borrowed money at the time of making finance report.

The 10 securities companies are the influential ones on the market. Therefore, though they cannot represent the financial situation of the other 90 securities companies, experts still believe that the new regulation would not cause any serious problem.

Tightening the control over securities companies is the principle in compiling new legal documents.

Securities investors once witnessed the VP Bank’s Securities Company receiving warning from the State Securities Commission (SSC) because its borrowed money which once reached 7.54 times of the stockholder equity instead of six times as stipulated.

The key lies in the few subjects that can lend to securities companies

The draft circular not only sets up the limit on the ratio of borrowed money on the stockholder equity, but also attempts to cut down the subjects from which securities companies can borrow. The lenders could be commercial banks only, or securities companies could borrow bonds.

Meanwhile, the reports show that the money borrowed by securities companies from commercial banks just accounts for a small proportion of the total borrowed money of the companies.

The finance report of Thang Long Securities Company, for example, shows that by December 31, 2011, it had borrowed 1811 billion dong, including 991.8 billion dong from institutions and 219.6 billion dong from individuals, while there had been no borrowing from credit institutions.

Rong Viet Securities Company reportedly had 339 billion dong in short term debts, of which 136.8 billion dong came from banks, while the remaining came from individual lenders and other subjects.

Most of the securities companies which are not the members of the top 10 companies have been mobilizing idle capital from individual securities investors or from enterprises. Securities companies competed with each other to attract capital from commercial banks, while the companies offered very high interest rates for the capital of up to 17-18 percent per annum.

At present, parent banks must not provide credit to their subsidiaries – securities companies. However, the draft circular would lift the ban.

However, a new problem would arise if the drafted legal document sets limitation on the subjects to be allowed to lend to securities companies. Will securities companies be able to find the capital sources to support investors? It’s very likely that once securities companies have fewer sources of capital to borrow, the securities credit would become gloomy.

In the past, in order to dodge the laws relating to the capital safety indexes, some commercial banks still pumped capital to securities companies through third parties.