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Point of Law

A case of administrative legislation?

/ 01:36 AM December 20, 2012

Sometime in 2010, the Philippine Stock Exchange (PSE) issued a new Rule on minimum public ownership (MPO), effective Nov. 30, 2010 (2010 Rule), requiring that publicly listed companies maintain a minimum public ownership of at least 10 percent of their issued and outstanding shares, exclusive of any treasury shares, or as such percentage that may be prescribed by the Exchange (Section 3(a), Article XVIII, Continuing Listing Requirement).

Listed companies were given a 12-month period to comply with the MPO requirement. In recognition of market uncertainties, the 2010 Rule gave noncompliant companies a 36-month grace period to cure their noncompliance, during which time they would be subjected to additional annual listing maintenance fees. If, after the grace period, the companies remain noncompliant, they will be subjected to trading suspension and delisting procedures.

Under this rule, listed companies had until 2014 to comply with the MPO requirement.


However, after this new Administration assumed office, the Commissioner of Internal Revenue (CIR) threatened to impose capital gains tax on noncompliant companies even during the grace period.

The PSE took issue with this position of the CIR, pointing out that all that the National Internal Revenue Code (Tax Code) requires is that the shares are listed and traded through a local stock exchange.

However, the Securities and Exchange Commission (SEC) eventually directed the PSE to amend the 2010 Rule by shortening the deadline for compliance to December 31, 2012 (the Amended Rule). Companies that are not compliant after this date would automatically be subjected to a six-month trading suspension, and if the companies remain noncompliant, to automatic delisting after the six-month period.

Apparently, the PSE accepted the amendment without protest, despite its earlier legal position on the matter.

Fortunately, under the Amended Rule, the SEC may grant extensions in justifiable cases where the noncompliant company has a concrete program to restore its public float to the required percentage.

Recently, however, the Secretary of Finance and Commissioner of Internal Revenue issued Revenue Regulation No. 16-2012 (RR 16-12). This time, the BIR made matters worse for the listed companies and investors. It will impose not only capital gains tax but also documentary stamp tax on the trading shares of stock of noncompliant companies, regardless of any extension given by the SEC beyond Dec. 31, 2012.

The law

The Tax Code provides that shares listed and traded through the local stock exchange shall be subject to the stock transaction tax of ½ of 1% of the gross selling price or gross value in money of the shares sold, and shall be exempt from the tax imposed under the 5%/10% net capital gains tax and from regular individual or corporate income tax.


The Tax Code also exempts shares of stock listed and traded through the local stock exchange from documentary stamp taxes (DST). As president of the PSE, I worked hard for the enactment in 2009 of Republic Act No. 9648, which removed the five-year limit on the DST exemption for shares of stock listed and traded through the local stock exchange. By enacting RA 9648, Congress reaffirmed its policy to lower the transaction costs for shares of stock listed and traded in the local stock exchange.

Administrative legislation?

The Supreme Court has consistently held that “rules and regulations issued by administrative officials to implement a law cannot go beyond the terms and provisions of the latter,” and that “courts will not countenance administrative issuances that override, instead of remaining consistent and in harmony with the law they seek to apply and implement”(Philippine Bank of Communications v. CIR, et al., G.R. No. 112024, 28 January 1999; see also CIR v. Central Luzon Drug Corp., G.R. No. 159647, 15 April 2005 and Chamber of Real Estate and Builders Associations, Inc. v. Romulo, G.R. No. 160756, 9 March 2010).

Likewise, “[i]t is well-settled that an administrative agency cannot amend an act of Congress” (Chamber of Real Estate and Builders Associations, Inc. v. Romulo, G.R. No. 160756, 9 March 2012.). Rules or regulations that conflict or extend beyond the statute “become void not only for being ultra vires but also for being unreasonable” (In Re: Entitlement to Hazard Pay of SC Medical and Dental Clinic Personnel, A.M. No. 03-9-02-SC, 27 November 2008).

Clearly, all the law requires is that the stock be (1) listed and (2) traded in the local stock exchange to be (a) subject to the stock transaction tax of ½ of 1% in lieu of net capital gains tax and regular individual or corporate income tax and (b) exempt from DST. Nowhere in the Tax Code is it required that companies maintain a minimum public ownership as well.

Indeed, if it were the intent of Congress to require listed companies to maintain a minimum public ownership as a condition to the applicability of the stock transaction tax and exemption from DST, it would have legislated it, as it did under the Real Estate Investment Trust Act of 2009 where Congress expressly required compliance with the MPO requirement as a condition to the enjoyment of the tax incentives provided by the law.

Notably, the persons directly affected by RR 16-12 are investors, including the common Juan, who will have to bear the brunt of additional income and documentary stamp taxes. This reminds me of Senator Panfilo Lacson, principal sponsor of Senate Bill No. 3203 (now RA 9648), who lamented that the high cost of investing discouraged investors from placing their money in our local exchange. Interestingly, Senator Lacson explained that “investor confidence is key to a vibrant stock exchange,” and that investors are “highly dependent on the stability of government laws and policies affecting their investments.”

People have asked me whether the PSE, as the vanguard of the investors and the equities market, will question the constitutionality of RR 16-12 in court.

Well, I have strong feelings about the issue, but I’m not the proper person to answer the question.

(The author is the former president and CEO of the Philippine Stock Exchange. He may be contacted at

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TAGS: listed companies, Markets and Exchanges, minimum public ownership, Philippine Stock Exchange, Philippines, shares
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