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Foreign investors are only allowed to hold 30-49 per cent of certain companies. As such, warrants will offer them another avenue to gain exposure to those stocks without breaching limits.
Covered warrants, also known as options, give investors the right to buy or sell stock or an underlying asset at a particular price within a set time period.
“It will be an alternative for foreign investors who are not able to hold shares of the companies if they have reached the ceiling of foreign ownership,” Ms. Nguyen Thi Viet Ha, a Board Director at HoSE, said.
Developers at HoSE said they studied covered warrants markets in the US and Europe and that Vietnam will follow the European model and focus on call options first. Each of these options will be valid for 3-24 months and payment must be made in cash.
A covered warrant is expected to become a new investment tool for investors to reduce the chance of risks and to provide more options at a lower cost compared to common stocks and fund certificates. It allows the holder to buy or sell a specific amount of equity, currency, or other financial instrument from the issuer, usually a bank or a similar financial institution, at a specific price and time.
Covered warrants can have a wide variety of underlying financial products, such as company stocks, market indices, and fund certificates that meet the requirements of the State Securities Commission (SSC).
According to the SSC, the first covered warrant products will be large-cap stocks that are listed in the VN30 and the HNX30 indices, as they meet requirements on market capitalization, trading liquidity, and the percentage of free-float shares.
The trading of covered warrants is similar to that of stocks, as investors are allowed to use their stock trading accounts to buy and sell covered warrants.
So far, only ten candidates among more than 70 securities companies in Vietnam meet the requirements to sell warrants, including charter capital and equity capital of at least VND1 trillion ($44 million). These securities companies must also not have incurred cumulative losses and must have fully licensed securities operations. Of those, only four securities companies have shareholder approval to issue warrants this year.
Currently, some 15 stocks in the VN30-Index make the cut as underlying stocks for the first warrants. Such stocks meet requirements in terms of market capitalization of over VND5 trillion ($219 million), sufficient liquidity and free-float and decent business performance.
The VN30 is re-evaluated every six months and consists of 30 blue-chip companies, Vinamilk, FPT, Vingroup, Saigon Securities, and REE. They account for 80 per cent of total market capitalization.
Warrants will be the sixth product to be traded on the bourse, along with stocks, bonds, fund certificates, VNX All Share and VNX 50 in the stock market’s 18-year history. Vietnam also expects to launch a sustainable development index and another exchange-traded fund before year-end.
Vietnam’s stock market recorded its steepest fall in nearly two and a half years on February 6, with investors concerned that the US Federal Reserve will raise interest rates.
The Fed, which raised rates three times last year and in December forecast three more for this year, said it expected that “further gradual” rate increases will be warranted. The target range for the federal funds rate is currently 1.25 to 1.50 per cent.
