SEC rules on foreign ownership out

By Miguel R. Camus, BusinessMirror

Posted at Nov 06 2012 07:39 AM | Updated as of Nov 06 2012 03:39 PM

MANILA, Philippines - The Securities and Exchange Commission (SEC) is giving companies that may be in violation of the 40-percent foreign-ownership limit up to five years to comply, based on the new draft rules for covered Philippine corporations released on Monday.

The SEC posted on its web site the circular for the much-awaited proposed guidelines for the registration, monitoring, investigation and compliance of companies under a broad range of sectors including telecommunications, mining, property development and public utilities.

The proposed rules effectively implement the October 9 Supreme Court ruling on the foreign ownership of Philippine Long Distance Telephone Co. (PLDT)—a decision which also had wider implications for Philippine businesses as the High Court laid out specific definitions on how the 60-40 percent ownership rule in favor of Filipinos should be calculated.

The SEC’s guidelines also pointed out reportorial requirements for covered companies as well as prohibited acts and their respective penalties, which run from millions of pesos, to the cancellation of the firm’s certificate of registration. The SEC is holding a public hearing at its headquarters in Mandaluyong City on November 9.

Analysts said the release of the rules provides some measure of relief for investors for now.

“The SEC IRR [implementing rules and regulations] will allow companies to know how to comply,” Jose Lacson, head of research at stock-brokerage firm Campos Lanuza and Co., said in a phone interview on Monday. Lacson was referring to recent moves by PLDT and Ayala Land Inc. to comply with the foreign ownership requirement by issuing voting preferred shares.

As mentioned, the SEC is giving companies in breach of the foreign ownership cap “not more than five years” from and after the effectivity of the SEC’s rules, which take effect 15 days following its publication.

Lacson said the five-year transition period “is more than enough time.”

A second source with knowledge of the discussions said the SEC was mulling over a transition period of between one year and five years, before settling on the present number.

Moreover, the SEC said non-complaint firms “shall no longer allow any transfer of shares that would result in increasing its present foreign ownership.”

A second source, citing data from a confidential research report, said there are four companies that would breach the maximum foreign-ownership limit, assuming voting preferred shares are not included in the computation.

These are PLDT (58.3-percent foreign ownership) and three Ayala-led firms, namely, Globe Telecom (65.2 percent), Manila Water Co. (53.3 percent) and Ayala Land (40.3 percent).

Based on its guidelines, the SEC said “all covered corporations shall observe the constitutional and statutory ownership restriction for each class of shares.”

In case any class is divided into a series of shares, which may have different rights, privileges and limitations, “the covered corporation must observe the same ownership restriction for said series of shares.”

The SEC also detailed prohibited acts and their respective penalties.

Non-compliance with the 60-40 foreign-ownership rule or issuing depositary receipts without prior approval from the SEC, for instance, will merit a fine of up to P2.5 million (as well as up to P100,000 each for the president, chief executive officer and other top executives) on the first violation. The SEC said revocation of the certificate of registration is the penalty for the third offense.

The High Court’s October 9 decision stemmed from an earlier case filed by the late human-rights lawyer Wilson Gamboa, who sought to annul the sale of the government’s stake in PLDT to Hong Kong-based First Pacific Co. Ltd. in 2007.

PLDT is currently a major unit of First Pacific, which is led by its managing director and chief executive officer, Manuel V. Pangilinan, and controlled by the Salim family of Indonesia.

At the heart of the issue was how the term “capital” was defined for the first time by the High Court in a way that is very different from the definition used by the SEC over the past decades.

Based on its ruling, the Supreme Court said capital should only refer to “shares of stock entitled to vote in the election of directors,” instead of the previous standard of defining capital as being the total outstanding capital stock (which combines common and preferred shares whether voting or non-voting).

The October 9 decision also extended the interpretation to include not only voting control but beneficial ownership as well.

“Mere legal title is insufficient to meet the 60-percent Filipino-owned capital required in the Constitution. Full beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of the voting rights, is required,” the decision said.

In its decision, the Supreme Court also added that “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.”