Preparing the banking industry for Asean integration

A concrete reform initiative by Congress to prepare the Philippines for Asean economic integration is Republic Act No. 10641, which amended Republic Act No. 7721, whose policy objective is to build a stronger banking industry by further liberalizing the entry of foreign banks in the Philippines. The law became effective on August 7, 2014.

Under the new law, foreign banks may be allowed to operate in the Philippines through any one of the following modes of entry:

(i) by acquiring, purchasing or owning up to 100 percent of the voting stock of an existing bank;

(ii) by investing in up to 100 percent of the voting stock of a new banking subsidiary incorporated under the laws of the Philippines; or

(iii) by establishing branches with full banking authority.

Improvements

Under the old law, a foreign bank could acquire only up to 60 percent of the voting stock of an existing bank. Also, a foreign bank could invest only in up to 60 percent of the voting stock of a locally incorporated new banking subsidiary. The new law now authorizes a foreign bank to own 100 percent of a domestic bank.

On branches of foreign banks, the old law limited the number of branches to three additional branches. The new law increased the number to five. In addition, the new law removed the restriction that foreign banks must establish their branches within five years from the effectivity of the law. It also removed the restriction that during the five-year period, only six new foreign banks can be allowed to establish branches, with an additional four foreign banks allowed entry by the President of the Philippines as the national interest may require.

Locally incorporated subsidiaries of foreign banks shall have the same branching privileges as domestic banks of the same category.

Furthermore, the new law removed the restriction in the old law that “a foreign bank may avail itself of only one mode of entry.” It also removed the restriction that “a foreign bank or a Philippine corporation may own up to 60 percent of the voting stock of only one domestic bank or new banking subsidiary.”

However, the new law provides that the Monetary Board shall adopt such measures as may be necessary to ensure that the control of at least 60 percent of the resources or assets of the entire banking system is held by domestic banks, which are majority-owned by Filipinos.

The new law also provides that only “established, reputable and financially sound foreign banks” shall be allowed entry into the Philippines.

Furthermore, like the old law, the foreign bank must be “widely-owned and publicly listed in its country of origin, unless the foreign bank applicant is owned and controlled by the government of its country of origin.”

Some restrictions stay

Of course, nothwithstanding the new law, restrictions under the Constitution and other laws of the Philippines still apply. For example, if the local bank owns land, the following restrictions still apply notwithstanding the new law:

1. A foreign bank can only own up to 40 percent of the capital of the local bank;

2. The election of aliens as members of the board of directors of the domestic bank shall be limited to their allowable participation or share in the capital; in other words, foreign directors cannot exceed forty percent of the board membership of the bank.

3. No foreigner may intervene in the management, operation, administration or control of the local bank, whether as an officer, employee or laborer, except technical personnel whose employment should be specifically authorized by the Secretary of Justice.

Furthermore, the liberalization under the new law applies only to foreign banks. Hence, non-bank foreign investors must still observe the restrictions under the General Banking Law.

Section 11 provides that foreign individuals and non-bank corporations may own or control only up to 40 percent of the voting stock of a domestic bank. In this regard, the grandfather rule (not the control test) applies to determine the level of the foreign ownership of the bank.

Under this test, the percentage of foreign-owned voting stocks in a bank shall be determined by the citizenship of the individual stockholders in that bank. The citizenship of the corporation which is a stockholder in a bank shall follow the citizenship of the controlling stockholders of the corporation, irrespective of the place of incorporation.

The Bangko Sentral ng Pilipinas is expected to issue the circulars to implement the new law soon.

(The author is a senior partner of the Angara Abello Concepcion Regala & Cruz Law Offices (Accralaw) and is the president of the Shareholders’ Association of the Philippines (SharePHIL). The views in this column are exclusively his, and should not be attributed in any way to the institutions with which he is currently affiliated. He may be contacted through [email protected].)