MANILA, Philippines - Private-sector stakeholders led by the Philippine Stock Exchange (PSE) that trooped to the Securities and Exchange Commission (SEC) headquarters in an apparent show of force on Friday morning did not come out disappointed.
At the very least, the effort earned them reasonable hopes of a compromise over “game-changing” foreign- ownership restrictions, which would hurt the capital markets and the broader Philippine economy, participants said at the sidelines of a “public dialogue” hosted by the SEC.
The SEC held the rare dialogue at its Mandaluyong City building to open for comment its recently issued draft implementing rules on the 60-40 percent ownership rule in favor of Filipinos covering so-called nationalized and partly nationalized sectors.
Its proposed rules are meant to implement the October 9, 2012, Supreme Court decision, affirming the court’s June 28, 2011 ruling, on the foreign ownership of Philippine Long Distance Telephone Co. (PLDT).
But the SEC also drew criticism for fully adopting in its draft the most contentious portion of the High Court’s decision, which said the calculation for the 60-40 rule should apply to each class of shares instead of just voting shares as indicated in the “dispositive” portion of the June 28 ruling. The draft rules indicated a five-year period for firms to
Because the tribunal’s interpretation is very different from what the SEC has been following for decades, fund managers expressed worries that this could trigger a wave of foreign selling of a number of PSE index heavyweights, which will suddenly be in violation of the 60-40 rule.
Concerns were also raised over curtailing of foreign money needed for a wide range of businesses from large-cap firms to smaller companies involved in the capital-intensive public-utility and mining sectors.
SEC open to changing rules
PSE President Hans Sicat, leading industry groups and ranking officials and lawyers from large corporations affected by the rules such as PLDT, Ayala Corp. subsidiaries and the Lopez Group echoed those concerns in the packed multipurpose hall of the SEC on Friday morning.
The exercise started out with dire warnings on effects of the SEC’s draft rules. Sicat said about 13 percent of over 250 listed firms would be affected, while unprecedented economic gains under the current administration could be undone, noted PLDT Regulatory and Policy Affairs head Ray Espinosa.
But the meeting ended in a positive note. “It sounded like they [the SEC] are open to listening,” Sicat said.
BDO Capital and Investment Corp. President Eduardo Francisco, who said strict implementation of the High Court’s 60-40 interpretation could trigger an estimated P200 billion in foreign equity selling while discouraging certain types of investment instruments, was also optimistic.
“It’s good that the SEC is willing to entertain changes. From my understanding, they recognize the fact that their rules [at present] might be a deterrent to capital-market growth,” Francisco added.
SEC Chairman Teresita Herbosa said in a press conference held immediately after the dialogue that the corporate regulator is indeed open to revising its draft rules, namely, the “meat of the matter” or Section 4, which outlines the parameters for computing the 60-40 rule.
One of the suggestions during the dialogue that caught the commission’s attention is a “twofold” approach, which Herbosa said could meet the requirements under the Constitution and the recent ruling by the Supreme Court.
Under this approach, the SEC applies the 60-40 rule both on voting shares, as well as on total outstanding capital.
To recall, the use of the 60-40 test on outstanding capital was the definition that the SEC has been using for decades before the High Tribunal came out with its own definition of capital.
“We heard this morning that a lot of people are quite happy with the existing 60-40 based on outstanding capital. So the twofold suggestion is worth considering,” Herbosa said.
She added that the decision to strictly comply with the Supreme Court’s application of the 60-40 rule per class of share in its draft was a “maximum position” taken by the SEC.
“We have to make sure that whatever rules we are going to come up with are proactive and will not set back our capital markets many years behind,” Herbosa said.
During the dialogue, Espinosa reiterated that that 60-40 rule applying to each class of share, whether common or non-voting preferred, is an “obiter dictum” or a remark said “by the way” and thus, is not legally binding.
The Supreme Court’s ruling on PLDT stemmed from an earlier case filed by the 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. Gamboa has since passed away.
Final rules still due next year
Herbosa said the next step is to gather comments that are expected to be submitted in the coming weeks. The SEC is eyeing a November 30 deadline for comments and hopes to release a final set of rules after six months.
The private-sector participants said they will work with the SEC in crafting suggestions and solutions to help promote the Philippines as a viable investment destination while complying with the court’s ruling.
“We will work with the commission in trying to come up with a rule that allows us to deal with the legal realities of Gamboa but, at the same time, promote, as I said, vibrant and robust capital market formation,” Espinosa said.
Ayala Land Chief Finance Officer Jaime Ysmael said the company will collaborate with other private-sector groups in filing its comments even as it moves to appease jittery fund managers.
“We assured them [fund managers] that we will be in dialogue with the government,” he added. Ayala Land and PLDT have announced issuance of voting preferred shares to comply with the 60-40 rule under the June 28 decision.
But with the recent October 9 decision, both companies would be in breach of the foreign-ownership cap, with Ayala Land at 40.5-percent foreign ownership and PLDT at 58.3 percent.
“I don’t know what will happen. Foreigners will probably have to unload some of their [shares]. It will happen as a natural course but hopefully it does not happen at all,” Ysmael said.
Two other Ayala companies are said to be in breach of the 60-40 rule when using the per class of shares interpretation of the Supreme Court. These are Globe Telecom at 65.2 percent and Manila Water Co. Inc. at 53.3 percent.
In a statement last week, Ayala Corp. Corporate Secretary Solomon Hermosura clarified that Manila Water is “not required by law to have 60-percent Filipino ownership. But it is at present, based on ownership of both voting stock and economic interest, compliant with 60-percent Filipino ownership.”
“Our group abides with law, and will always comply with applicable laws and rules. We trust SEC to enforce the laws in the best interest of our country according to its discretion,” Hermosura said.
PLDT and Ayala Land shares have declined 1.13 percent and 2.76 percent, respectively, week-on-week while Globe Telecom is up 0.26 percent. The benchmark PSE index added 0.86 percent during the period.