5% of what?


Emeterio Sd. Perez

ROMMEL Ablin, a reader of The Manila Times, is asking why the sales by insiders of shares they owned in Now Corp. have not been disclosed. He raised what could be a valid issue, which only the Securities and Exchange Commission (SEC) could possibly answer. He may not be alone in a predicament over the undue advantage insiders, directors in particular, enjoy over the public including him.

Without Ablin knowing it, his email poser can be divided into two. Why are the sales or acquisitions by insiders who own significant blocks of listed and non-listed shares in a company not covered by the full disclosure rule?

Why limit the coverage of the rule to the sales or acquisitions of 5 percent or more of outstanding shares?

Any sale by insiders of listed shares, even if too little to affect market prices, should be disclosed and posted on the website of the Philippine Stock Exchange. In particular, the majority stockholders who control the entire board should be required to inform the public about either the addition to or reduction in their holdings.

The problem lies with the rule, which is not as encompassing as it should be and covers only certain blocks that would amount to at least 5 percent or more of outstanding shares. As a matter of fact, the rule is too vague for the public to appreciate. What is five percent of outstanding shares when this percentage would be too small to be based on outstanding shares? When computed on “outstanding capital stock,” 5 percent would even be too little to compute.

As far as Due Diligencer is concerned, 5 percent of outstanding shares may be significant enough to affect prices of listed shares. This disclosable minimum transaction, however, is computed on the number of outstanding shares and not on the number of listed shares available for trading. However, as a matter of courtesy to the public who own only a few listed shares, the computation of insiders’ trades should be treated as influencing factors of stock prices.

Wrong computation

The problem with the 5-percent trading rule lies with computation, which should not be based on the outstanding common shares. Instead, it should be computed on the number of listed shares, and if possible, on the average of transactions in a given period.

Unfortunately for the public, a number of companies limit trading on their common shares by listing only a fraction of their outstanding capital stock.

The PSE website lists companies’ profiles according to capital composition. It shows outstanding shares and issued shares that may or may not be the same. It also lists some companies that had made available for trading only a portion of their outstanding shares.

Outstanding shares and issued shares differ when companies buy back their own shares either in the open market or from significant stockholders. When this happens, the public would notice the reduction in the number of outstanding shares resulting from the treatment of reacquired shares as treasury shares.

Due Diligencer prefers to let the SEC do its own review of companies and the number of their listed shares compared with their outstanding and issued shares. It would not preempt the commission’s market examiners in arriving at a conclusion based on data shown on the PSE website.

Full disclosure?

Perhaps the stock market would attract more public investors if it would make every insider’s trades transparent. As suggested here, full disclosure of even minimal transactions made by insiders is a must for the public to anticipate their effects on stock prices.

Besides, by examining insiders’ trades more closely, the SEC may be able to understand that the lack of a rule that should cover trades by the owners is anti-public.

Due Diligencer suggests that the SEC strictly monitor the market trades of company owners who also are also directors. As had already been taken up in a previous piece, the ownership of listed shares lodged with PCD Nominee Corp. should also be made transparent for public investors to know who they are dealing with.

Why hide behind PCD Nominee when the full disclosure rule should apply to every market transaction?

Ablin has a good point in his poser. The problem is, the existing rule covers only the equivalent of 5 percent of outstanding shares that are either bought or sold. Applying this to Now, 5 percent of 1.517 billion outstanding common shares equals 75.85 million shares. Who could afford to buy such a huge block? And who would sell?



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