Business 'can live with' new draft foreign ownership rule

by Coco Alcuaz, ANC

Posted at Mar 26 2013 09:22 AM | Updated as of Mar 27 2013 12:34 AM

MANILA, Philippines - An investment banker and two lawyers said the latest draft rule on foreign ownership rules is acceptable, allaying fears foreign investors would be turned off on the Philippines, or forced to sell off, triggering a drop in stock prices.

The Securities and Exchange Commission on Monday released a draft memorandum circular on the issue, asking interested parties for their comments by April 25.

The SEC's new draft says the 30 to 40 percent limit on foreign ownership in utilities, media, advertising and natural resources applies only to voting shares and total shares. In November last year, the SEC's draft implementing rules and regulations said the limits apply to all classes of a company's stock.

"The SEC is crafting a memo that tightens rules but it appears like something companies can live with," BDO Capital President Ed Francisco said in an e-mail. "It should remove uncertainty specially from foreign investors and allow our companies to compete globally and tap the capital markets."

The controversy stems from Supreme Court rulings in June 2011 and October 2012 on the foreign ownership of Philippine Long Distance Telephone Co., known as the Gamboa case, and the SEC's draft implementing rules in November.

These prompted industry players to warn that foreigners may be forced to sell up to P200 billion of shares, triggering a drop in prices. They also prompted not just PLDT but Ayala Land and ABS-CBN, all companies in industries protected by the constitution, to take steps that will allow foreign investors to keep or increase their holdings.

"The (new) draft squarely addresses the issue on voting rights," said Francis Lim, a senior partner at the ACCRA law firm and former PSE president. "But it should further clarify the issue on beneficial ownership in light of accepted corporate structures like high/low par shares and depositary shares that give beneficial interest to foreign investors."

Beneficial ownership refers to having benefits or rights of ownership, such as dividends, even if ownership is in someone else's name. An example would be foreigners' beneficial ownership in ABS-CBN and GMA Network via so-called depositary receipts linked to shares in the name of a special-purpose Philippine-registered company.

"The SEC has recovered from its initial shell-shocked over-reaction to Gamboa (the name of the Supreme Court case) and has done a good job of being sensitive to both what Gamboa called for and the country's foreign investment needs," according to a lawyer who did not want to be identified.

The new proposed wording of the rule may allow PLDT's foreign owners -- mainly Hong Kong's First Pacific and Japan's NTT Docomo -- to continue to hold 60 percent of common shares, which were until recently the company's only voting shares.

That's because the draft rule is limited to voting shares and total shares, excluding common, preferred and other classifications. In October last year, PLDT created a new class of voting shares, voting preferreds, and sold them to its Filipino-registered pension fund. These reduced foreign ownership of all voting shares to about 30 percent.

Following are the wordings in last year's Supreme Court ruling and SEC draft, and the SEC draft released yesterday:

Supreme Court, Oct. 2012:
"The 60-40 ownership requirement in favor of filipino citizens must apply separately to each class of shares, whether common, preferred non-voting, preferred voting or any other class of shares."

SEC, Nov. 2012:
"If any class of shares is divided into series of shares and a particular series of shares has different rights, privileges, and limitations, the covered corporation must observe the same ownership restrictions for said series of shares."

SEC, March 2013:
"The required percentage of Filipino ownership shall be applied to both the total number of outstanding shares of stock entitled to vote in the election of directors; and the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors."