About face on public float rule

The clock is ticking on the order issued by the Bureau of Internal Revenue in 2010 directing companies listed on the Philippine Stock Exchange to comply with the minimum public ownership requirement, or public float, by the end of the year.

Public float refers to the company’s stocks that are owned by people other than its directors, officers and controlling investors. Or people outside that circle who want to invest in the stocks for long-term or speculative purposes.

At present, listed companies are required to maintain a certain public float (computed on a percentage basis) depending on their market capitalization, with 10 percent as the minimum. The bigger the capital, the more stocks should be made available to third parties to invest in.

The public float is the cachet that gives a company the character of a publicly owned or traded corporation that entitles it to certain tax privileges.

When the stocks of that company are sold or bought through the stock exchange, the transaction is subject only to a stock transaction tax of 1 percent of the gross selling price or gross value in money of the stocks sold.

This tax is in lieu of the capital gains tax that is normally imposed on the sale of property based on the difference between its original cost and selling price.

Come Jan. 1, 2013, stock transactions that fail to meet the public float requirement will be slapped a 5 percent capital gains tax on gains that do not exceed P100,000 and 10 percent if in excess of P100,000.

Rationale

The rationale behind this tax measure is simple: If a listed company’s public float falls short of the public ownership benchmark, it forfeits its “public ownership” status. Therefore, its transactions should not be treated any different from ordinary business deals where the capital gains tax is applicable.

PSE contested the legality of the BIR’s order and threatened to bring the matter all the way up to the Supreme Court.

No dice. The feisty Revenue Commissioner, Kim Henares, stood her ground and brushed aside PSE’s doomsday scenario on the enforcement of the public float rule.

By way of concession, though, the BIR agreed to give the affected companies a one-year reprieve, or until the end of this year, to comply with its directive.

Based on this compromise, PSE advised the listed companies that failure to meet the public float benchmark would cause the suspension of trading of their shares for up to six months. If the defiance persists, their shares may be delisted from the bourse.

As PSE appeared serious in enforcing compliance with the BIR order, the affected companies immediately took the appropriate measures to avoid the adverse consequences of noncompliance, from both PSE and BIR ends.

Remedies

Some companies increased their capital stock or made adjustments in their mix to allow the issuance of more shares for the public float.

For companies that do not have that flexibility, either because their major stockholders are not willing to dilute their holdings, or increasing their public float will not translate to additional capital infusion, or the cost of maintaining their listing on the stock exchange is not worth it, the only option available is to voluntarily delist their shares from the exchange.

Thus, First Pacific and Eton Properties, for example, offered to repurchase the shares of their minority stockholders in preparation for their eventual delisting.

The buyback offer enables the minority stockholders to cash in on their investments before the company becomes a private, or nonpublic, again.

Once delisted, the market for their shares, in case they want to unload them, is practically limited to the existing stockholders and at the price the latter may offer.

Reversal

Just when the road to genuine public ownership is being cleared of obstacles ahead of the deadline, comes the report that PSE is poised to recommend to the Securities and Exchange Commission the exemption of some listed companies from the minimum public float requirement.

According to PSE president Hans Sicat, “if circumstances would warrant it, companies might be allowed to stay listed and have their shares traded on the local bourse without penalties.”

Big deal! The public float requirement is a tax measure issued by the BIR in the exercise of its revenue raising authority which the SEC cannot indirectly countermand through the exemption process being sought by PSE.

When taxes are involved—which are considered the lifeblood of the government—exemption from their payment is strictly construed against the claimant, and hiding behind the coattails of a government agency for that purpose will be fruitless.

It is doubtful if the BIR would take sitting down PSE’s attempt to run rings around its tax collection efforts, more so after foregoing one year of uncollected stock transaction taxes.

PSE’s sudden turnaround on the public float order it committed to implement more than a year ago raises certain questions about its sincerity in its earlier talks with the BIR.

Why was the issue of “justifying circumstances” not raised at that time? It is not as if the alleged differences in conditions of listed companies that prevent compliance with the public float requirement were only known today.

Justification

So what circumstances would warrant a listed company’s exemption from the public float requirement?

Economic slowdown in Europe? That problem has been festering for the past three years and economic data show that it has minimal effect on the country.

Lack of interest by investors in the public float may depress stock prices? Something is wrong with a company if investors think that buying its shares is like throwing money in a sink hole. It’s better off going private again.

Assuming selective exemption is allowed, what will happen to the companies that have already initiated efforts (and incurred huge expenses in the process) to buy back minority shares preparatory to their delisting from the exchange?

Will they be allowed to undo the repurchase and compel the selling stockholders to return their shares?

The flip-flop on the public float issue shows that the “old boys” network at PSE remains entrenched.

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