SEC may relax draft foreign ownership rules

Judith Balea
The 40% foreign ownership limit may apply on common or voting shares only, not all classes of shares in final SEC rules

MANILA, Philippines – The Securities and Exchange Commission (SEC) may shelve a plan to cap foreign ownership of each class of company shares when it comes up with final rules governing the issue by June this year.

What is clear at the moment is that the securities regulator will have to comply with a final Supreme Court ruling that the 40% foreign ownership limit must apply to common or voting shares, SEC chair Teresita Herbosa told reporters on Thursday, January 10.

The SC, in its October 18, 2012 Entry of Judgment on the Philippine Long Distance Telephone Co. (PLDT) foreign ownership case, stated that the term “capital” in Section 11, Article XII of the 1987 Constitution refers only to shares entitled to vote in the election of company directors, not the total outstanding stock (common and non-voting preferred shares).

In other words, only common shares must be counted when computing the percentage of foreign ownership in a local company.

“This will now be our basis in crafting new rules,” Herbosa said.

The SEC last year issued draft rules on foreign ownership to comply with the SC decision on the PLDT case.

But instead of applying the 40% foreign equity limit on common shares only, the rules call for uniform application on every class of share, whether common, preferred, preferred voting or any other class.

The rules also provide for a 5-year grace period for non-compliant companies to correct their ownership structure.

‘Acceptable’ rules

The stricter ownership rules have raised concerns foreign investors might be discouraged to put capital in Filipino companies.

To address this, Herbosa said the SEC will take into consideration the interests of all stakeholders in the issue when it drafts the final rules.

“We will come up with rules that will lessen conflict and controversy. Those that will be acceptable to all. Our primordial interest is to protect Filipino interest in the country, but we also see the need for foreign capital to come in. We have to weigh all these considerations and one consideration is that the new rules must not give rise to another case,” she said.

Herbosa said they want rules that are easy to implement and understand. For instance, she said the 60-40 ownership, in favor of Filipinos, for each class of shares is “easy to apply. You will just look at each type of shares.”

However, she acknowledged the implications it may have on foreign investments. “That might pre-empt companies from coming out with classes of shares that are attractive to foreign investors,” she noted.

Herbosa however also pointed out that the 40% limit is not the biggest concern for investors. It’s the changing of the rules in the middle of the game.

“Thailand and some other countries do restrict ownerships in companies. But you’d be surprised that according to studies, that’s not the deterrent against foreigners coming in. But here in the Philippines, it could be because the rules are changing.”

The SEC is now awaiting the comments of other government agencies, including the National Economic and Development Authority, the central bank, the Department of Trade and Industry and the Board of Investments, on the initial draft of rules it released last year.

Once the comments come in, the SEC will study them.

Herbosa said the final draft of the new foreign ownership rules may come out by March or April, and will be published in major broadsheets thereafter.

“The rules may be released in June for implementation,” she added. –

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