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Legal provisions on converting bonds into shares

Converting bonds into shares is a financial mechanism that allows investors to exchange bonds for equity in the issuing enterprise. This process plays an important role in increasing equity capital and must strictly comply with legal regulations. Below, NPLaw invites our valued readers to explore the legal issues related to the conversion of bonds into shares.

I. Concept of converting bonds into shares

1. Definition and legal regulations on bond-to-share conversion

Converting bonds into shares is a mechanism that allows bondholders to convert the bonds they hold into shares of the issuing company, in accordance with a predetermined conversion ratio specified in the bond contract.

The legal regulations on bond-to-share conversion include:

- Pre-agreed terms: The conditions, conversion ratio, and timing for converting bonds into shares must be clearly specified in the bond issuance plan and accepted by investors from the outset.

- Dependence on maturity and conversion conditions: Conversion only takes place when all stipulated conditions are met (such as maturity date, conversion price) as committed or as required by law.

- Compliance with share offering regulations: Upon conversion, the enterprise must carry out procedures to increase charter capital, issue additional shares, and register with the competent state authority in accordance with the Law on Enterprises and the Law on Securities.

2. Distinction between bond-to-share conversion and other forms of investment

Investment Form	Converting Bonds into Shares	Purchasing Shares	Purchasing Bonds	Investing in Investment Funds
Basic feature	Bonds have the right to convert into shares of the company.	Purchase company shares to become a shareholder.	Purchase bonds issued by a company, enterprise, or government.	Invest in funds managed by companies pooling capital from many investors.
Benefits received	Fixed interest from bonds and the right to convert into shares when eligible.	Benefits from share price increases and voting rights in the company.	Fixed or flexible interest, without voting rights.	Returns from the fund’s investment portfolios (shares, bonds, etc.).
Risks	Lower risk than shares but higher than traditional bonds, possible loss of value upon conversion.	Higher risk due to share price volatility, possible substantial loss of capital.	Lower risk than shares but dependent on issuer’s solvency.	Diverse risks depending on fund strategies and asset allocation.

3. Benefits of bond-to-share conversion for investors and enterprises

Converting bonds into shares offers the following benefits to both investors and enterprises:

- When bonds are converted into shares, investors have the opportunity to benefit from the future increase in share value. If the enterprise grows and share prices rise, investors may earn significant profits by selling shares at a price higher than the original bond investment.

- Convertible bonds often carry a lower interest rate than traditional bonds because investors can convert them into shares. This helps investors mitigate credit risk if the company faces repayment difficulties, as they can become shareholders and benefit from the company’s growth.

- Issuing convertible bonds allows enterprises to raise capital without paying high interest rates like traditional bonds. The typically lower interest rate reduces financial costs. If investors choose to convert bonds into shares, the enterprise is relieved from repaying the principal, reducing financial burdens.

- Issuing convertible bonds helps attract investors interested in the long-term growth of the company. Investors will benefit from the conversion if the company performs well, thereby making the enterprise more appealing for investment.

Thus, converting bonds into shares brings many benefits to both investors and enterprises. Investors have the chance to gain from the company’s growth and participate in important decision-making.

II. Legal regulations on converting bonds into shares

1. Conditions for implementing bond-to-share conversion under current regulations

According to Article 21 of Decree No. 155/2020/ND-CP, to convert bonds into shares, a public company must meet the conditions for offering convertible bonds to the public, specifically:

- Having a capital mobilization and use plan;

- Engaging a securities company to advise on the application dossier;

- Committing to list the bonds after the offering;

- The issuing organization must open an escrow account to receive payments for the purchase of convertible bonds;

- The total value of bonds does not exceed the total value of outstanding shares (at par value), unless there is an underwriting commitment to purchase all undistributed bonds;

- If the issuance is to implement a project: At least 70% of the intended number of bonds must be sold, and there must be a plan to make up for any shortfall if this level is not met.

- Complying with other provisions under the Law on Securities 2019 (points a, e clause 1; point b clause 2; point d clause 3 of Article 15).

Thus, the condition for converting bonds into shares is that the company must fully meet the requirements for issuing convertible bonds, including procedures, financial, and legal regulations.

2. Procedures for converting bonds into shares at an enterprise

According to Article 67 of Decree No. 155/2020/ND-CP, the process for converting bonds into shares at an enterprise includes:

Step 1: Implementing the conversion of bonds into shares

- The company issues shares to convert bonds in accordance with the registered issuance plan approved by the General Meeting of Shareholders.

- The issuance must strictly comply with relevant legal regulations (the Law on Securities, the Law on Enterprise, Decree No. 153/2020/ND-CP, etc.).

Step 2: Reporting the issuance results and disclosing information

Within 10 days from the completion date of issuing shares for bond conversion:

- The enterprise must submit a report on the issuance results to the State Securities Commission.

- Attach the approval document from the State Bank of Vietnam (if the issuer is a credit institution).

- At the same time, publicly disclose information on the company’s website and the stock exchange where the shares are listed/traded.

Step 3: Confirmation by the State Securities Commission

Within 03 working days of receiving a valid dossier, the State Securities Commission will issue a confirmation document acknowledging receipt of the issuance results report. It will also notify the Stock Exchange; the Vietnam Securities Depository and Clearing Corporation; and post information on the Commission’s website.

3. Responsibilities and obligations of the issuing enterprise when converting bonds into shares

According to Article 18 of Decree No. 153/2020/ND-CP, the responsibilities and obligations of the issuing enterprise when converting bonds into shares are as follows:

- The issuer is responsible for fully, promptly, and clearly disclosing information to investors related to the conversion of bonds into shares;

- For public companies, information disclosure must comply with government and Ministry of Finance guiding decrees, and align with legal regulations on information disclosure in the securities market;

- The issuing enterprise bears full legal responsibility for the truthfulness, accuracy, and completeness of disclosed information.

Thus, when converting bonds into shares, enterprises must comply with the above regulations. Compliance not only ensures transparency and openness in capital raising but also helps protect investors’ lawful rights and maintain trust in the financial market.

III. Clarifications on certain issues concerning bond-to-share conversion

1. How does converting bonds into shares affect the company’s charter capital?

Converting bonds into shares increases the company’s charter capital. Specifically, when bondholders exercise their conversion right, they receive newly issued shares from the company. These shares are recorded into the company’s charter capital corresponding to the par value of the additional shares.

Thus, conversion is a form of issuing shares to increase charter capital instead of cash contributions.

2. Impact of bond-to-share conversion on the ownership ratio of existing shareholders

Converting bonds into shares increases the number of outstanding shares, thereby reducing the ownership ratio of existing shareholders if they do not hold convertible bonds. This phenomenon is known as share dilution. When the number of shares increases and existing shareholders are not issued additional shares to maintain their ownership ratio, their percentage of voting rights, dividend entitlements, and benefits in the company decreases.

Therefore, enterprises must transparently disclose conversion plans, and existing shareholders need to understand the dilution risks before approving the convertible bond issuance.

3. What legal risks may arise in the process of converting bonds into shares?

Some legal risks that may arise during the conversion process include:

- Inadequate or misleading information disclosure: Leading to administrative penalties or damaging the company’s reputation;

- Failure to comply with charter capital increase procedures: Resulting in violations of enterprise law;

- Infringing the preemptive rights of existing shareholders if new shares from conversion are issued without following proper procedures;

- Failing to fully register or report to regulatory authorities: Subject to penalties under securities, capital market, and enterprise laws.

4. Is it necessary to register with state authorities when converting bonds into shares?

According to Clause 1, Article 23 of Decree No. 153/2020/ND-CP, issuers of convertible bonds are responsible for disclosing information related to the conversion. Specifically, within 05 working days from completing the conversion, the issuing enterprise must submit information disclosure content to the Stock Exchange.

However, this Decree does not specifically require registration with state authorities, only that the enterprise must disclose information on the conversion to the Stock Exchange within the stipulated timeframe.

Thus, it is not necessary to formally register with state authorities when converting bonds into shares, but the enterprise must fulfill the obligation to disclose this information to the Stock Exchange.

5. Is it necessary to convene a General Meeting of Shareholders to convert bonds into shares?

It is not necessary to convene a separate General Meeting of Shareholders for the conversion if the convertible bond issuance plan was previously approved by the General Meeting of Shareholders in accordance with Article 128 of the Law on Enterprise 2020.

Therefore, if a resolution or prior approval exists for the issuance and conversion plan, the company does not need to hold a new General Meeting.

IV. Legal advisory services related to bond-to-share conversion

The above is NPLaw’s article on converting bonds into shares. With a team of experienced lawyers and legal experts, NPLaw is always ready to accompany, advise, and support our valued clients on legal matters related to bond-to-share conversion. For assistance on related legal issues, please contact NPLaw.