Will SEC tighten up on foreign investments?

The Securities and Exchange Commission is now in the midst of public consultations on a proposed circular that will determine the allowable level of foreign ownership of companies engaged in nationalized activities.

The draft circular is occasioned by the Supreme Court’s decision in Gamboa vs. Secretary of Finance (G.R. No. 176579, 28 June 2011 and Oct. 9, 2012) in which the court ruled that “the term ‘capital’ in Section 11, Article XII, of the 1987 Constitution refers only to shares of stock entitled to vote in the election of directors…”

The decision invalidated a longstanding SEC rule that, in determining compliance with Filipino ownership requirements, the term ‘capital’ is used to refer to outstanding capital stock consisting of voting or non-voting shares.

The Gamboa ruling is widely seen as restricting our rules on foreign investments in the country.

Let me highlight two provisions of the draft circular which, I believe, will have a material impact on our country’s competitiveness.

Beneficial ownership

Section 3.a. defines “Beneficial Ownership” as referring to the “enjoyment of all the benefits and privileges of ownership of shares, including, but not limited to, the power to vote in the election of directors and/or specific corporate matters, or to direct the voting of such shares; and the power to dispose of or direct the disposition of such shares.”

If adopted, the new rule would invalidate existing corporate structures that have been in place in the corporate world since time immemorial. It will cause undue prejudice to investors who contributed capital to our economy on the strength of the longstanding SEC interpretation of the legal provisions relating to foreign ownership limits.

Ownership requirements

Of greater concern is Section 4, which provides that “all covered corporations shall … observe the constitutional or statutory ownership restrictions for each class of shares; provided that, if any class of shares is divided into series of shares and a particular series of shares has different rights, privileges, and limitations, the covered corporation must observe the same ownership restrictions for said series of shares.”

If adopted, Section 4 would restrict foreign investors, as it would require that each class of shares must comply with the foreign ownership limit.

Indeed, based on records of the Philippine Stock Exchange as of Nov. 27, the application of Section 4 of the draft circular would result in the “reduction of allowable shares to foreigners which are approximately valued at P383,265,554,441.84.”

This means not only a selldown of shares in the stock market worth P383.2 billion but, more importantly, it will force key industries to scale down their businesses due to the limited space for foreign-owned capital.

Needless to stress, this will have severe negative effects on our economy and hamper the President’s efforts to reduce poverty and improve the quality of life of our people.

The real issue

The proposed section 3.a. is apparently based on a statement of the Supreme Court in the Gamboa case that: “[f]ull beneficial ownership of the stocks, coupled with appropriate voting rights, is essential” (resolution dated 9 Oct. 2012).

Section 4 is based on another statement in the same case that “it is imperative” that the “constitutional requirement of at least 60 percent Filipino ownership… apply uniformly and across the board to all classes of shares, regardless of nomenclature and category, comprising the capital of a corporation” (resolution dated 9 Oct. 2012).

Significantly, these two statements are not included in the judgment or dispositive portion of the decision.

Lawyers of note are unanimous that these two statements can be disregarded by the SEC for being “obiter dicta” (side comments made by a judge in the body of his decision that are not necessary to decide the issue at hand).

Setting aside legalities, the more important question for the country is whether the SEC should make the two pronouncements as part of the draft circular. Before arriving at this decision, I believe the SEC should take into account the following facts:

Based on the 2011-2012 Global Competitiveness Report of the World Economic Forum, we are the least competitive among the original member countries of the Asean.

The flow of foreign direct investments to the Philippines pales in comparison with that of our Asean counterparts.

We have the lowest investment-to-GDP ratio among the five original members of the Asean.

Despite its age and recent gains, our stock market remains one of the smallest in the Asean.

We have one of the most restrictive foreign investment regimes in Asia.

There is a direct correlation between FDI and growth of a national economy. The success of our Asian neighbors is a testament to the large impact that FDI has played in their country’s economic growth.

In short, I believe that the proper balance of two interests—the openness to foreign capital and the need to maintain control of certain areas of economic activity—should be the principal policy of the draft circular.  It results in a double-win for the Philippines, as it gives us capital without giving up control.

(The author is former president and chief executive officer of the Philippine Stock Exchange. He is now a co-managing partner and head of the corporate and special projects department of Accralaw. He may be contacted at [email protected].)