Taking the public for granted



LISTED companies are never public and will never become public because it is easy for them to deny the public their preemptive rights.

Why is this so?

Try asking Finance Secretary Cesar Purisima. When he suggested that listed companies should sell the equivalent of 60 percent of their outstanding shares to the public, perhaps he knew something that most of the public didn’t.

As for Due Diligencer, its stand is, the problem lies not in the rule on preemptive rights but somewhere else.

Consider this: A listed company goes into fund-raising activity. In increasing its authorized capital stock, it also amends its corporate charter by removing from it the provision on preemptive rights of existing stockholders. Both the increase and the denial of prior rights to the capital expansion are approved by the board.

These two corporate acts are easy to implement because the Securities and Exchange Commission (SEC) is always ready to approve them. As an administrative body, there is no way it would not allow a listed company’s capital increase even without the right of the public to participate in it.

Public ownership rule
Even selling shares to a few individual investors to the extent of 10 percent of outstanding common shares does not necessarily make a listed company also public. What is 10 percent to crow about when this percentage has never been subjected to any kind of regulatory audit?

In two Due Diligencer columns, I took up preemptive rights as the topic. “Denial of preemptive rights” appeared on Nov. 15, 2015, and “Preemptive rights or privilege” on Oct. 13, 2015.

In reacting to these two pieces, Teddy Sevilla asked, “How could the PSE and SEC encourage Filipinos to invest when they allow shenanigans like this to occur on a regular basis?” He added that, “it is sad the self-regulatory institutions show the same disinterest in guarding the money of the small investors.”

Another reader, who identified himself only as Pepito, suggested that I look into how a mining company skirted the rule and successfully deprived the public of their preemptive rights over the issue of primary shares. His suggestion deserves a response but not now; the stock he mentioned needs full space.

Taken for granted
Mr. Sevilla is right in his assertion that the public who trade on listed stocks are being taken for granted by “self-regulatory institutions” as he calls them. Perhaps, he was referring to the SEC and the Philippine Stock Exchange (PSE).

Picking up from the reader’s comment, why do owners of listed companies take the public for granted? Don’t they realize that without them, they would not enjoy the benefit of paying much less tax every time they issue shares to themselves and their allies?

In the first place, outsiders and not company insiders enable closed corporations to get their shares listed. The latter, of course, are more privileged because they buy shares at a huge discount.

If only the public could get the same protection given the majority stockholders of listed companies, perhaps Mr. Sevilla would not have a raised a howl over the disinterest of both the PSE and the SEC on the welfare of the small investors who trade on listed stocks.

SEC as administrative body
Well, for the information of Mr. Sevilla, when the new Securities Regulation Code took effect in 2001, the SEC lost its quasi-judicial functions to the regular courts. As a result, its officials have been relegated to act as members of an administrative body.

Perhaps, the law has rendered the SEC an ineffective regulator. Under the defanged Securities Regulation Code, it has ceased to be as assertive as it used to be. Without the SEC, to whom could the public turn for protection?

If the public would look more closely at the major changes in the market, they would realize that owners of listed companies mostly never had the intention of taking their companies public. Why should they allow outsiders to own a big chunk of their businesses? All these company owners do to comply with the 10-percent minimum public ownership rule is to present their own computations, and sometimes that even involves making the public as the controlling or majority stockholders of their companies.

Incidentally, even when their shares of stock comprise the majority or the controlling stake in the company, the public never get to elect anyone among themselves to the board. Isn’t that ironic?

The SEC may be tasked to regulate the stock market. Yet, as an administrative body, it does not possess the regulatory prerogative to reject capital increases via private placements by listed companies. This would mean depriving the public of their right to subscribe to primary shares that in certain cases end up monopolized by the majority stockholders and their allies.



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