A READER of The Manila Times sent a very important message to Due Diligencer. In an e-mail, the writer, who prefers to remain unnamed, said San Miguel Corp. and Top Frontier Investment Holdings Inc. may be engaged in what he/she described as “ping-pong” trades. (The email sender called the result of the transaction “ping-pong accounting.”)
According to the email, SMC and Top Frontier buy each other’s common shares. With this information, Due Diligencer reviewed some filings of the two companies and came out with the following:
Top Frontier is the majority stockholder of San Miguel Corp. It owns 1.57 billion SMC common shares, or 66.1 percent of the company. Privado Holdings Corp. holds 366.14 million shares, or 15.7 percent. Together, the two stockholders own a combined 1.9 billion shares, or 81.85 percent.
True enough, as the email sender claimed, while Top Frontier is SMC’s majority stockholder, SMC also holds Top Frontier shares. As of March 31, 2015, SMC owned 2.56million Top Frontier common shares and 1.9 million preferred shares. Due Diligencer failed to trace among available PSE postings when SMC bought said block of Top Frontier shares.
What is perhaps a less significant result of Due Diligencer’s review is the ownership report which showed the increase in Top Frontier-owned SMC common shares to 1.57 billion as of March 31, 2015 from 1.35 billion shares as of June 30, 2014.
The question that should be asked is if there is any provision in market rules prohibiting a subsidiary from buying into its parent company. If such rule exists, then the Securities and Exchange Commission should look into the relationship between the parents and their subsidiaries among ALL listed companies. As of now I don’t know if such prohibition exists.
Due Diligencer expanded the ownership analysis to show the effective control of the stockholders of both Top Frontier and SMC.
Top Frontier listed Inigo Zobel as its majority stockholder with 199.6 million shares, or 59.96 percent. Ramon S. Ang, a significant stockholder, owns 86.61 million common shares, or 26 percent.
Zobel’s 59.96 percent ownership in Top Frontier translates to 943.2 million SMC common shares, or 39.6 percent of 2.4 billion outstanding common shares. Privado Holdings’ 26 percent equals 409.5 million SMC common shares, or 17.2 percent.
With his 26 percent ownership participation in Top Frontier, which translates to 409.5 million common shares and his Privado Holdings’ 366.1 million SMC common shares, Ang effectively owns a total of 775.6 million SMC common shares, or 32.6 percent.
Ergo, Zobel is the biggest owner of SMC common shares. His 39.6-percent effective ownership in SMC entitles him to elect 5.9 seats on SMC’s15-person board. Ang, meanwhile, effectively owns 32.6 percent of SMC with the right to elect roughly five seats. With their strong alliance, they control the SMC board and appoint the company’s three independent directors.
Due Diligencer’s email correspondent shows concern for the need for full transparency of insider trades, which can only be maintained with the vigilance of active investors. Will the Securities and Exchange Commission and the Philippine Stock Exchange take the cue from the reader’s suggestion about “ping-pong” accounting or trades by monitoring stock transactions between and among parent firms and their subsidiaries?
In reviewing the filings of SMC and Top Frontier, Due Diligencer discovered something wrong in the public ownership report (POR) filed by listed companies. It seems these PORs are intended only to show them to be more public than others when in truth they are not. To find this out, the more active market investors should take time to study these PORs and compare them with the Top 100 stockholders’ list.
In PORs, certain listed companies may even be shown to be controlled by the public when actually they are not. Due Diligencer has noted this in a few earlier pieces but does not expect to be able to persuade either the SEC or the PSE to revisit the rule on ownership filings. As a matter of fact, a listed company claiming in its POR that more than 40 percent of its outstanding common shares are held by the public should be the subject of SEC vigilance.
How could the public control as much as 40-percent ownership of a listed company but whose board is controlled by only one group as majority stockholder who also appoints the independent directors?