SEC drafts new rule on foreign ownership to conform with SC ruling

The Supreme Court building in Manila. INQUIRER FILE PHOTO

MANILA, Philippines—The securities and Exchange Commission has drafted a new set of guidelines on foreign ownership of certain industries in line with a Supreme Court ruling that only voting shares be considered in determining compliance with the 40 percent constitutional cap on foreign ownership of local companies.

The draft guidelines, on which the SEC is seeking further public feedback, make telecommunications giant Philippine Long Distance Telephone Co.’s recent capital restructuring 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 in compliance with the new draft guidelines.

Based on the new guidelines, all covered corporations must, at all times, observe the constitutional or statutory requirement that at least 60 percent of a company must be owned by Filipinos and foreign ownership limited to no more than 40 percent.

A landmark Supreme Court ruling earlier stated that PLDT had exceeded the maximum allowable 40 percent in foreign equity prescribed by the Constitution. The ruling essentially defined a company’s capital, stating that non-voting shares should not be counted as equity when computing Filipino ownership in relation to the 60-40 percent constitutional requirement for key industries.

In the past foreign ownership in PLDT was reckoned as a percentage of both voting common shares and non-voting preferred shares, including preferred shares that all applicants for PLDT landlines were required by a martial law edict to purchase. The last Supreme Court ruling on the issue stated that only voting shares must be reckoned when determining foreign ownership of a local company.

To cure this situation, PLDT recently issued 150 million new voting preferred shares to BTF Holdings Inc., a subsidiary of its employee beneficial trust fund. This brought down the foreign holdings in PLDT to 34.5 percent from 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.

The two-tiered formula was meant to address concerns on use of dummies in corporate structure.  Aside from prescribing the 60-40 percent local-foreign ownership limit on voting shares, a similar 60-40 cap has been prescribed for the rest of a compny’s shares.

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