NOT everyone was surprised by the move by the Securities and Exchange Commission on Tuesday to reject the proposed acquisition of bond market operator PDS Holdings by the Philippine Stock Exchange, but it is doubtful that anyone, whether they agree with the SEC’s decision or not, is very happy about it.
What the SEC declined was a request from the PSE for an exemption from a rule that stipulates an owner of an exchange cannot have more than a 20-percent stake. The rule permits the SEC to grant an exception in cases in which they judge that the public interest will be better served, or at least not harmed, by allowing an owner to have greater than a 20-percent ownership share. The PSE, of course, is seeking to merge the country’s equity and fixed-income exchanges by taking a controlling stake in PDS, and so applied for the exemption.
All things being equal, the reasons for the rule and the SEC’s determination that the PSE was not entitled to an exemption from it are sensible enough. A financial market arguably has a bigger public interest component than most corporations, because it has to serve the best interests of a large number of investors, as well as its own shareholders.
Limiting the size of any single ownership stake to 20 percent in a sense democratizes management of the exchange; any management decision unavoidably becomes a consensus of no fewer than five people. Without the rule, there is the potential for something worse than a monopoly, because market operations have a direct impact on the financial well being of hundreds of corporations, as well as the national treasury and the government’s debt management strategy.
The SEC’s dissent, expressed in unusually frank terms, was based on misgivings about the PSE’s competence and preparation, rather than questions of propriety. The commission bluntly said that the PSE failed to present a business plan, had not prepared all the requisite documentation to support its exemption appeal. As a consequence, the SEC couldn’t possibly put the two markets, which have a combined annual trade value turnover of about P10 trillion,” in the hands of someone who can’t manage,” according to SEC Associate Commissioner Luis Amatong.
When the news first made the rounds late Monday (the SEC announced its decision on Monday afternoon, then held a briefing Tuesday to explain it in greater detail), my first impression was that it was a mistake. When the acquisition was first proposed a couple of years ago, there were reasons to be skeptical. Some of those reasons were the same ones explained by the SEC on Tuesday, others were more qualitative; the country’s three financial markets (stocks, fixed-income securities, and currency, which is already part of the PDS organization) are not particularly broad or sophisticated, and a fairly sound argument could be made that the efforts to maximize the potential of all of them would be put to better use by keeping them separated, rather than folding them into one larger enterprise.
In the interim, however, both the PSE and PDS have been working toward the merger, and put to rest many if not all the concerns—the opinion of the SEC notwithstanding—about how effectively a combined exchange would be run. The initiative has also taken on much wider significance in view of the objective of the Asean financial market integration: A prerequisite to linking the financial markets of the Asean member countries is for each of them to have their own integrated financial markets.
That effort, which is difficult under the best of circumstances, had gotten a boost from the progress toward the PSE-PDS merger, according to people at the Asean; the uncertainty whether the merger would happen had largely disappeared, which meant that plans that assumed an integrated Philippine market could proceed. That is, until the SEC poured sand in the Vaseline with its decision on Monday.
The SEC decision doesn’t necessarily disorder the plans of the entire Asean, but what it does is put the Philippines at a serious disadvantage among the regional bloc. With the SEC decision, which may push the planned merger back by a year or more, the Philippines is now the only country in Asean that does not have integrated financial markets. Work toward Asean financial integration will continue, but will exclude the Philippines in some areas, and perhaps more significantly, will make the country less attractive to some market investors.
The SEC may have made a legitimate decision based on the Securities Code and other regulations, but it was not a decision that was at all based on common sense. While the misgivings expressed about the management risks the PSE acquisition poses are not entirely misplaced, the SEC ought to realize that a corporation like the PSE is by its very nature held to tough performance standards. If it is doing a bad job of managing the exchange, it must answer to investors and corporate participants alike—a tough crowd, because what the PSE does ultimately impacts how much money the members of that crowd can earn. From that perspective, given that the stock exchange is generally regarded by participants and observers alike as being acceptably efficient and productive, the PSE is entitled to a substantial benefit of the doubt.
The SEC should have used the flexibility the rules allow, and permitted the acquisition to proceed—conditionally, perhaps, if there were questions the SEC simply could not tolerate leaving unanswered, but not stopped entirely. The consequences of the SEC’s decision —whether positive or negative—extend far beyond the well-being of the two organizations involved, yet there is nothing except a vague and misplaced acknowledgement of “public interest” to suggest the SEC was even aware of a bigger picture, let alone understood it. If we are to follow the SEC’s rationale that it must, at the very least, make the decision that does the least harm, then we have to conclude that it made precisely the wrong decision in this case.