SEC deems market merger too risky


The Securities and Exchange Commission, explaining its disapproval of the takeover by the Philippine Stock Exchange of PDS Holdings Inc., the country’s fixed-income market operator, said the integration could pose a serious threat on the country’s capital markets.

In a press briefing held on Tuesday, SEC Chairperson Teresita Herbosa, said the decision to deny the application for exemptive relief by the PSE was based on the paramount importance of public interest.

“The reason given in the exemption from complying with the 20 percent ownership requirement is really the interest of the public. That should be the main consideration,” Herbosa said.

“Overall, viewing it holistically, we feel the application did not justify the request for exemption. The trend as they said now is that the fixed income and equities markets are integrated, yet we still cannot sacrifice our unique present two system market, if there is no assurance that all those goals for the benefit of the public could be achieved,” Herbosa said.

The government official said that the PSE initially wrote a three-page letter expressing its interest in acquiring PSE, and that they be given an exemptive relief. Then for a year, the PSE would study as to how the fixed-income market works.

The SEC explained that the rationale behind the 20 percent ownership limit under the Securities Regulation Code is that control over the PSE by a group of small brokers with a vested interest in maintaining the status quo results in abuses to the detriment of the investing public.

“Hence, if you want to be exempt you should prove to us that you are entitled to it, the PSE was not able to prove that it is entitled, and they are estopped from questioning our authority since they were the one who sought for our approval,” Herbosa said.

No business plan
Ephyro Luis Amatong, one of the agency’s associate commissioners, said that the larger fear in the proposed merger was that the PSE does not fully appreciate the central importance of the fixed income market in financial intermediation and does not have a concrete plan on how to develop and manage such a market going forward.

“A year ago, the PSE asked us to give them an exemptive relief and allow them to acquire the PDS Holdings, in order for them to study how the fixed income market works. Of course we cannot allow that. Right now, based on their submissions, still it shows their lack of business plan and risk management to operate the combined entities.” Amatong said.

Amatong said that it was the PSE which imposed the deadline on them as to the approval of the merger, however, the PSE he said, failed to submit the details of its planned merger.

The SEC required PSE to submit a written proposal on the acquisition, copies of the Share Purchase Agreements and intended composition of the Board of Directors of the post-acquisition entity.

Conversely, PSE only provided the SEC with salient portions of the Shares Purchase Agreement and Term Sheet, which is incomplete and has a non-compete clause, making the agreement anti-competitive which ultimately offends the Philippine Constitution with respect to restrain of trade.

Amatong further said that the proposed merger would only translate to a 0.1-percent reduction in depositary fees, according to the PSE, which is too meager a benefit to outweigh the risk.

The SEC likewise cited other issues such as the high probability that the merger would result in monopoly, which would run afoul of the Constitutional prohibition against monopolies and in restraint of trade.

“We cannot leave in the hands of an exchange, the annual value turnover of P4.5 trillion [with respect to PSE]and P5.5 trillion [Philippine Dealing & Exchange] that does not know how to manage,” Amatong added.

The SEC said that should the PSE come up with a more concrete vision and plan, it is not precluded from seeking an exemptive relief from the SEC in the future.


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