More liberal foreign equity rule looms

The Securities and Exchange Commission has drafted a new set of guidelines on foreign ownership in partly nationalized industries—a more liberal framework wherein the 40-percent foreign equity limit is prescribed on both the voting shares and total outstanding shares.

The draft guidelines, which the SEC is releasing for further public feedback, make the recent capital restructuring of telecom giant Philippine Long Distance Telephone Co. involving the issuance of voting preferred shares acceptable.

“Per the Supreme Court decision, our CFD (corporate finance department) inquired into PLDT ownership structure and based on its report, PLDT is compliant,” SEC Chair Teresita Herbosa said in a text message, when asked whether the telecom firm’s issuance of voting preferred shares was suitable as compliance under the new draft of guidelines.

Based on the new guidelines, all covered corporations must, at all times, observe the constitutional or statutory ownership requirement, referring to the 60-40 percent local-foreign ownership requirement.

“For purposes of determining compliance therewith, the required percentage of Filipino ownership shall be applied to both a) the total number of outstanding shares of stock entitled to vote in the election of directors; and b) the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors,” the new draft said.

“In case the law requiring a certain percentage of ownership to belong to Filipinos specifically refers to voting stock, the requirements set forth therein shall be complied with,” the draft said.

All covered corporations were also required to adopt a system of internal controls that will enable them to monitor and observe compliance with the provisions on ownership requirements provided in the Constitution.

The new draft guidelines issued by the SEC were seen as more liberal compared to the first draft, which required that all classes of shares follow the 60-40 percent limit.

A landmark Supreme Court ruling earlier stated that PLDT had exceeded the maximum allowable 40-percent foreign equity cap prescribed by the 1987 Constitution. The ruling essentially redefined foreign capital, stating that non-voting shares did not count as equity when computing a company’s Filipino ownership level for purposes of compliance with the 40-percent foreign equity limit on key industries like property and utilities.

To cure the situation, PLDT adopted a solution wherein it issued 150 million new voting preferred shares to BTF Holdings Inc., a subsidiary of its employees’ beneficial trust fund.

This brought down the voting rights of foreign shareholders in PLDT to 34.5 percent from the previous 58.4 percent.

The SEC previously drafted a more stringent rule that would have made PLDT’s voting preferred share issuance non-eligible but the corporate regulator eased its draft after the entry of judgment issued by the Supreme Court made it clear that the 60-40 percent ownership limit favoring local shareholders would apply only to voting shares.

Meanwhile, the two-tier formula is meant to address concerns on the use of dummies in corporate structure. Aside from prescribing the 60-40 percent local-foreign ownership limit on voting shares, another tier of 60-40 percent cap was prescribed for the rest of the shares.

After the issuance of the second draft, the SEC is expected to conduct a new dialogue with stakeholders before finalizing the guidelines.