Philippines gets tough on closely held stocks

The Philippine Stock Exchange has suspended trading in seven companies that had failed to meet the minimum public ownership requirement, putting a damper on one of the best-performing markets of 2012.
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Hans Sicat, PSE chief executive
<div style="text-align: left;"> Hans Sicat, PSE chief executive </div>

In 2012, Philippine stocks climbed more than 30%, ranking second in Asia behind Thailand. However, the local stock market has kicked off 2013 on a more pessimistic note. On January 2, the Philippine Stock Exchange suspended trading of seven listed companies, including San Miguel Brewery, as they had failed to meet the deadline for complying with the minimum public ownership level of 10%. If they remain non-compliant beyond June 30, they will be delisted from the stock exchange from July 1.

The move came after non-compliant companies had been given a grace period of about two years until December 31 last year.

Increasing the levels of public ownership in publicly-listed companies is part of the Philippines’ effort to encourage more trading on the stock exchange, and make sure those who benefit from a preferential tax treatment have sufficient exposure to public investors.

Jose Florante Pamfilo, senior associate at law firm SyCip Salazar Hernandez & Gatmaitan, told FinanceAsia that shares of listed companies in the Philippines are essentially given preferential tax treatment to provide these shares greater liquidity and thereby encourage members of the public to invest.

“The end goal is to promote wide public participation in the ownership of enterprises and to promote the development of the capital market,” said Pamfilo, who is based in Manila. “If companies remain closely held despite their shares being listed, then the policy rationale behind the preferential tax treatment is defeated.”

Pamfilo explained that the Philippine Stock Exchange used to have the 10% public ownership rule until 1997, when it decided to suspend the rule. It was reinstated only in late 2010, with non-complying companies being given a grace period of until 2014, which, eventually, was moved to the end of 2012, to comply.

The benefits of being listed on the stock exchange are large. For Philippine shares not traded on the stock exchange, there are two taxes imposed on share transfers.

The first one is a capital gains tax of 5% to 10%, and documentary stamp tax of 0.375% of the par value of the shares. But if shares are traded on the stock exchange, investors are exposed only to a stock transaction tax of 0.5% of the gross selling price or the gross value in money of the shares sold.

The stock exchange had warned that it would impose a trading suspension on non-compliant companies from January 2, and the suspension will last for no more than six months, or until June 30. If a listed company remains non-compliant after June 30, its shares will be delisted on July 1.

PSE president and CEO Hans Sicat said in a statement on January 2 that “we urge companies to comply as this will also encourage good corporate governance.” The 10% public ownership rule, according to the exchange, is aimed at providing “a fair and efficient facility for price discovery and to ensure that sufficient liquidity exists in the stock market.”

The seven companies whose stocks have been suspended are: Alphaland Corporation; Southeast Asia Cement Holdings; PAL Holdings; Allied Banking Corporation (15% cumulative convertible preferred A shares); San Miguel Brewery; PNOC Exploration; and San Miguel Properties.

According to the exchange’s website, Alphaland currently has a free float level of 8.03%, Southeast Asia Cement Holdings has 2.41%, PAL Holdings, the holding company of Philippine Airlines, has 0.55%, Allied Banking has 1.51%, San Miguel Brewery has 0.61%, PNOC Exploration has 0.21%, and San Miguel Properties has 0.06%.

Given the huge tax benefit of being listed on the stock exchange, many companies would still want to take advantage of being listed on the exchange, Pamfilo said, adding that before the December 31 deadline, a list of non-compliant companies was much longer. But he also said that some companies may take, and have taken, the option of delisting because they really want to remain closely held.

Nevertheless, those companies who want to remain listed will need to issue public shares in a process that will drive primary market ECM volumes for the country. The 10% rule led to a few transactions last year, and there should definitely be more this year as companies try to meet that requirement according to one Hong Kong-based banker.

For example, if it wants to meet the 10% requirement, PAL Holdings will need to sell about $250 million worth of shares, while PNOC Exploration will have to issue about $200 million worth of shares. San Miguel Brewery will need to sell about $1 billion worth of shares, based on the stock exchange’s data. The company has been active in the equity markets already. Just a month before the deadline, San Miguel Corp raised Ps5.4 billion ($131 million) in late November from a fully marketed sale of shares in its subsidiary, San Miguel Pure Foods. The deal, for which the over-allotment option of an additional 2.5 million shares was exercised later, boosted San Miguel Pure Foods’ public float to about 15% from 0.08%. San Miguel Pure Foods was seeking to comply by the end of the year and the parent company undertook the offering to secure more liquidity in the stock, a source said at the time.

When its stock was suspended on January 2, San Miguel Brewery said in a statement that it “confirms that voluntary delisting is an option that is being considered” after it was denied of its request for extension to comply with the minimum public ownership rule. Local media had earlier reported that the company is set to delist after the securities regulator denied all requests to extend the end-2012 deadline to meet the 10% requirement.

Philippine stocks had a bullish year in 2012, helped by improved corporate earnings, strong local demand, and continued macroeconomic stability. In 2012, the Philippine Stock Exchange PSEi Index set new records a total of 38 times, and posted an annual growth of 33%, ranking second in Asia behind Thailand’s SET Index for the year.

As global markets rise on the back of improving investors’ sentiment, so the local index has built on the upward momentum, and it is now up more than 8% since the start of 2013, despite the problems caused by the suspensions.

ECM volume in the Philippines reached $3.5 billion 2012, a jump of nearly 66% from the year before, according to Dealogic.

Meanwhile, Southeast Asia ECM volume totalled $30.8 billion last year, up 64% from 2011, led by IPOs from Malaysia. Even if all the suspended stocks were to recapitalise it looks unlikely if this will be enough to push new issuance volume in 2013 past 2012’s volumes.

Therefore the issue is less one of volumes and fees and more an issue of how the market should be structured. “Generally speaking, having companies in compliance with the free float requirements will create greater liquidity, and just as a general matter, they will be more attractive to investors,” said Steven Winegar, Hong Kong-based corporate partner at Paul Hastings. “This is a step in the right direction. Having companies in compliance with the free float requirements will create greater liquidity.”


This story first appeared in the February issue of FinanceAsia magazine

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