PSE clarifies issues in Due Diligencer column

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This pertains to the article published in the Due Diligencer column entitled “Stockbrokers  control PSE ownership, but not the board”, written by Mr. Emeterio Sd. Perez which was published on the November 24, 2014 issue of The Manila Times. Please allow us to shed some light and clarification on the issues pointed out in the said article point by point.

The article writes: “Apparently, the computation made PSE “too much public”, a description that some may find exaggerated. But it really is. “

The rules on the computation of a company’s public ownership are posted in the Philippine Stock Exchange (PSE) website. The computation of the PSE is consistent with these rules which are also being used by all listed companies. Under the rules, any shareholder owning more than 10 percent of the company’s shares is considered a principal shareholder and this is the reason why San Miguel Retirement Fund (SMRF) is listed as the only principal stockholder. It is only SMRF that owns more than 10 percent of the company. The article is correct to point out  that shareholdings of directors and officers are also non-public and as such, the PSE also classifies these as non-public shares.

Our records do not show any other entity that should be considered as non-public based on the rules that govern the computation of public ownership.


The article writes: “As of Sept. 30, 2014, the public ownership report showed that SMCRF’s ownership consisted of 15 directors (8,245 shares) and the member of PSE management (51,994 shares).”

The public ownership report of the PSE reports the shareholdings of non-public shareholders of the PSE. It does not report SMCRF’s ownership consisting of 15 directors.

We are not aware of information on how many directors SMCRF has and we do not need, and are not in a position, to make this representation; for this reason, we do not make such representation in our public ownership report. We are sure, however, that SMCRF’s ownership does not consist of members of PSE management and as such, we do not make any such representation in our public ownership report. This can be vetted with public documents that we submit to the SEC and are posted at the PSE EDGE disclosure portal.

The article writes; “As for the stockbrokers, or the trading participants – they are the unnamed stockholders who owned all PSE shares originally until they were required (or forced?) to give up total control in favor of the outsiders. Their individual holdings are found in the list of PSE’s top 100 stockholders. Ironically, stockbrokers control the ownership but not PSE board despite the size of their holdings.”

Stockbrokers do not control the ownership of PSE as they own less than 30 percent of the PSE.

Please note that while the Top 100 stockholders report, as referenced by the article, may reflect the name of a stockbroker, it does not necessarily mean that the brokerage firm owns the shares.

The shares may actually be held by the brokers on behalf of their clients. This is standard convention in the capital markets as the depository participant is the registered owner of the scripless shares in the books of the central securities depository to facilitate the immediate transfer of share ownership from one investor to another when trading stocks.

Thus, to conclude that if the brokers own the shares where their name appears in the top 100 stockholders’ report is misguided.

On the board composition, the Securities Regulation Code, which has been in place since 2000,  requires that there should be more non-brokers as directors of any securities Exchange. Section 33.2 of the SRC provides:

“(f) That the brokers in the board of the Exchange shall comprise of not more than forty-nine percent (49%) of such board …

(g) For the board of the Exchange to include in its composition (i) the president of the Exchange, and (ii) no less than fifty one percent (51 %) of the remaining members of the board to be comprised of three (3) independent directors and persons who represent the interests of issuers, investors, and other market participants, who are not associated with any broker or dealer or member of the Exchange for a period of two (2) years prior to his/her appointment.”

At present, the number of broker directors at the PSE is the maximum that is allowed by the SRC. Thus, to suggest that brokers should have more board directors than they have now is a suggestion that will run counter to the explicit legal provisions.

The article writes: “At the same time, stockholders’ equity also got a big boost from additional paid-in capital (APIC) of P1.01 billion, resulting from an issue of additional shares in 2001 and 2004. APIC represents the amount of premium over par value in the sale of shares. In the case of PSE, in August 2001, it sold 9.2 million shares at P31.16 each, resulting in APIC of P277.472 million. In January 2004, it sold 6.078 million additional shares at P120.50 each for P726.321 million of APIC. As a result of the two issues, total APIC topped P1 billion. “

Immediately thereafter, the article writes: “Wiping out the deficit. If you happen to have invested in a losing company, you should look at its financials to determine its recovery prospects. The numbers to look for are those pertaining to additional paid-in capital and retained earnings. Does the company have enough paid-in capital (note to emi: originally filed as “earnings” and corrected to paid-in capital) to erase an accumulated deficit, which appears in financial filings only when continued losses have wiped out retained earnings?

The figures that were cited pertaining to PSE’s additional paid-in capital are taken from the financial statements. As clearly explained in PSE’s financial statements, the additional paid-in capital arose from the demutualization of the PSE in 2001 and the issuance of new shares in 2004 for private placements by investors as part of the efforts of the PSE to comply with the Securities Regulation Code.

A discussion on the relationship of additional paid-in capital and wiping out the deficit thereafter is clearly misplaced unless there is an intent, albeit unfounded, to mislead the readers that the PSE may be suffering from an accumulated deficit. At the point of the infusion of the additional paid-in capital and many years thereafter even up to date, the PSE has continued to accumulate positive retained earnings. In fact, in 2013, the PSE booked retained earnings amounting to P1.52 billion. In addition, over the past five years, the average dividend pay-out ratio of PSE has represented about 90% of its net income.

While it is practice that some companies adjust their paid-in capital to erase their deficits, these are done through quasi-reorganization where, for instance, adjustments in par value are made.

All these must be disclosed to guide investors accordingly. These also require SEC approval.

Records would show that the PSE has at no point sought for any such approval nor does it plan to seek any given its healthy balance sheet.

The article writes: “Executive compensation. The PSE is, perhaps, the most generous employer when it comes to rewarding its management team.

In a compensation filing, PSE said it paid its president and vice presidents and other executives as a group P50.592 million in 2012; P51.133 million in 2013; and as projected, P52.557 million by Dec. 31, 2014. In the three-year period, the group’s compensations (note to emi: changed from pays) and perks amounted to P154.282 million.

A separate posting showed PSE also paid well its key management personnel, meaning, its other  officers not covered by the executive compensation package. In 2013, it raised the salaries of its  management personnel by 37.271 percent to P86.276 million from P62.851 million in 2012, up  34.995 percent. In 2011, it paid the group P46.558 million.”

The compensation of PSE officers with the rank of Assistant Vice President upwards are fully disclosed in our information and financial statements. The PSE is proud of its management team and our reports show that we have been able to roll out new products and services while reporting significant net income growth as a company. Despite this, PSE remains mindful of its expenditures and the figures cited by the article actually bear this out. The executive compensation of the parent company only increased by 2.8 percent and 1.0 percent in 2013 and 2012, respectively.

The subsequent figures on executive compensation that showed the jump in figures refer to the compensation on a consolidated basis, i.e., including the compensation of subsidiaries. We note that the PSE has been building up the capacity of the Capital Markets Integrity Corporation (CMIC) which was set-up in 2011, with the approval of the Securities and Exchange Commission. The CMIC was established to enhance the independence of the regulatory function of the PSE over trading participants. If at all, the increase in expenditures for the CMIC since its founding is a representation of the commitment of the PSE to higher governance standards and practices.

Finally, the article writes: “Due Diligencer was reviewing the disclosures posted by the PSE on its website and found the approval by the board of the reappointment of Punongbayan &  Araullo “as external auditor for 2013 with a fee of P600,000.” The filing also announced that the board “will recommend their appointment to the stockholders in the annual meeting on 18 May 2013.”

As a matter of fact, Vicente Graciano P. Felizmenio, director of SEC’s market regulation department, approved the release of the disclosure.

Sorry, Mr. Felizmenio, but you acted on a misleading report submitted to your office at 9: a.m. on April 11. At 1:47 p.m. of the same day, PSE rushed a correction that its board has not approved the reappointment of P&A because SGV has reclaimed the PSE account for the year 2014.”

On the disclosures pertaining to the appointment of Punongbayan & Araullo (P&A) as PSE external auditor, Mr. Perez mentioned that at 1:47 p.m. on April 11, PSE rushed a correction that its board has not approved the reappointment of P&A because SGV has reclaimed the PSE account for the year 2014. Records will show, and this can be found in the PSE website, that on April 11, 2013, the PSE sent a correction on its earlier disclosure not because it appointed SGV instead of P&A. The correction made was merely to correct the word “reappointed” to  “appointed” as the PSE did not engage P&A in the immediately preceding year and thus, the use of “reappointed” was not appropriate. The appointment of SGV & Company as external auditor was in 2014 and not 2013 and this was duly disclosed by the PSE on March 27 and May 26, 2014 respectively. We note that a cursory verification of the facts before publication would have yielded the foregoing conclusions. It is unfortunate that even the actions of the SEC on this matter was being questioned when it is the author that is providing inaccurate and grossly misleading information.

The PSE has written Mr. Perez on previous occasions to correct the information in his column.

Given the preceding events, we would like to request Mr. Perez to exercise diligence when writing about publicly listed companies as it is a disservice to the investing public if they read an article that is misleading and inaccurate.

Our lines are always open if the author wishes to be clarified on the disclosures of the PSE.
We hope we have clarified the points raised in the column and we hope that our views can be included in the succeeding issues of your newspaper.

Thank you very much.

Very truly yours,

HANS B. SICAT
President and CEO
PHILIPPINE STOCK EXCHANGE
December 15, 2014

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