Philippines free float rules welcomed

Author: Ashley Lee | Published: 11 Oct 2012
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The Philippine Stock Exchange’s free float rules should deliver crucial liquidity to the market. But local counsel are unsure the reforms are enough to attract foreign investors to the country’s capital markets.

The Philippine Stock Exchange will enforce a 10% minimum public float rule for all listed companies beginning 1 January 2013.

Although approximately 20 companies’ free floats remain below the 10% mark, lawyers believe that the requirement will increase market integrity and force companies listed for tax reasons to either delist or increase their public holdings,

Agustin R. Montilla IV, partner at Romulo Mabanta Buenaventura Sayoc & De Los Angeles told IFLR that the public float requirement is a credibility and market integrity issue.

“If a listed company calls itself public, but only a 1% stake is owned by persons outside the controlling shareholder group, it’s not really a public company with liquidity reflecting that fact,” he said.

Several companies are under scrutiny for especially low public floats. For example San Miguel Corporation subsidiaries San Miguel Pure Foods has a public float of 0.08 percent% San Miguel Brewery has a 0.61% public float. Other companies striving to meet the January 1 deadline include PNOC Exploration Corporation, with a 0.21% public float.

But there are compelling success stories following compliance with the free float rules: Petron Corporation joined the benchmark PSE Index (PSEi) this August after a successful share issue in January, raising its public float to 15%.

Foreign investor reactions

Nonetheless, the free float rules may not attract foreign investors to the Philippines’ capital markets. Sources said concerns with the country’s judiciary as well as corruption issues may deter investors.

Steven Winegar, a partner at Paul Hastings Hong Kong instead focused on PSE liquidity issues, commenting that investors in this environment are focused on liquidity in addition to value.

“Even if they’re getting a great deal in terms of price, buying shares in a placement is less attractive without meaningful liquidity because it could be difficult to trade out of the position,” he said. “These companies’ shares already have a limited free float, and that alone may mean that they are less compelling.”

Consequences for non-compliance

If companies do not comply by January 1, trading of their shares will be suspended for six months. If they are not in compliance in six months, they will be delisted and prohibited from relisting for five years.

A PSE announcement issued on 28 September further tightened the rules, stipulating that if the public float of a listed company falls between 12%, the company must submit a Public Ownership Report to the PSE at the end of each month.

Winegar said this intensified the spotlight on companies that are non-compliant.

But counsel warn that the PSE will not count preferred shares towards the minimum public ownership requirements, which has proved problematic for some listed companies.

Montilla noted that there are many companies with preferred shares held by controlling shareholders, and some of those would not be compliant if the free float rules included preferred shares. “The PSE’s stance on preferred shares is not a cure-all, but we in the legal world always appreciate clarity in the implementation of regulations,” he said.

The free float rules were encouraged by the Bureau of Internal Revenue because companies were taking advantage of tax breaks for listed companies: all PSE-listed firms enjoy a preferential 0.5% tax rate on any stock trade transaction. Listed companies that do not comply with the free float rules will instead be subject to the 5 to 10% capital gains tax on stock trades.

While the PSE’s consequences for non-compliance are harsh, it was widely agreed that the application of the capital gains tax is much worse for a company’s bottom line.

Thus corporates are rushing to issue shares before the deadline. Simeon Ken Ferrer, a partner at SyCip Salazar Hernandez & Gatmaitan, said that there are a number of private placements lined up, and that he’s expecting some activity between now and the end of the year.

The real issue may be enforcement. Winegar said the free float rules were also a test of regulatory resolve. He predicted it would become greater clarity would be given in January as to whether the PSE actually suspends trading in shares of companies that don’t meet the free float requirement. Even so, he said the PSE appeared to be serious about enforcing the year-end deadline.

See also

‘A bright future for foreign investment in the Philippines’

‘Clarification on minimum Philippine ownership’

‘Philippines: A bright future on the islands’