• Treasury shares should be retired

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    Emeterio Sd. Perez

    Public investors must be fully informed about the use of the money raised by a company from an initial public offering (IPO). More importantly, they should be told about the secondary offering that accompanies an IPO, particularly the price that the sellers paid for their shares.

    It is only by fully disclosing the sale of IPO shares would the public investors learn about company insiders who had bought shares before they decided to take their business public.

    The IPOs and the sale of secondary shares that goes with it are posted on www.pse.com.ph. Deciphering and understanding the details in every report may pose a bigger problem for public investors.

    Does every public investor understand the definitive information statements (DIS) or the preliminary information statements (PIS)? In a number of cases, these postings even carry a PCD Nominee as the top stockholder holding shares for Filipinos and foreigners separately.

    Suggestions

    Earlier, Due Diligencer suggested that the Securities and Exchange Commission (SEC) should require listed companies to disclose the identities of the owners of their corporate stockholders. By doing so, Filipino public investors would know if all listed companies comply with the 10-percent minimum public ownership rule.

    In addition, the Filipino public investors would also find out the identities of the sellers and buyers of the listed shares even among foreigners.

    Of course, it is understandable for the SEC and the PSE to take a much longer time in scrutinizing the list of top 100 stockholders and the public ownership reports (POR) of listed companies.

    The problem, if not the stumbling block, is, few if not most, listed companies attribute to the PCD Nominee certain block of shares that it – PCD – holds only as record stockholder for beneficial or actual owners.
    Whatever happened to the market’s rule on full transparency?

    Secondary offering

    If IPO shares are priced at, say, P4.50 each – this means public investors pay a premium of P3.50 over P1 par value, while the existing stockholders subscribed before their company’s IPO to a big block of shares at P1 and paid only 25 percent of the cost of their subscriptions.

    There is no need to complicate the computations. Simply get 25 percent of P1 to arrive at P0.25 per share, which is what the owners of listed companies usually pay for their holdings before the listing and trading of their company’s shares.

    It is even worse when the owners pay P0.25 per share two months before listing date. At P1 per share alone, the majority stockholders have scored a huge gain of P3.50 per share, or 350 percent.

    Of course, there is nothing wrong with the IPO pricing because there is no rule against making money at the expense of public investors.

    Who cares if upon listing, the price falls below the IPO price of P4.50 per share and closes trading even lower at P3.00? A loss of P1.50, or 33.33 percent of the P4.50 IPO price would mean nothing at all to the owners who, as the saying goes, would be laughing on their way to the bank.

    Buyback

    When the price of listed shares drops below offering price, it is time for either the company itself or the majority stockholders to buy out the outsiders, who are mostly the public investors.

    In buying out the public investors, the company, in effect, is engaged in what is called a buyback, which is the act of reacquiring listed shares on the open market.

    The SEC and PSE should monitor such buyback activities by either the company or the owners. Due Diligencer is not preempting them with any kind of suggestions or even presumptions on the market’s reactions to a buyback.

    It is enough to assume that the public investors would be surprised by an unusual buying binge that presumably has not been noticed by the market monitoring teams of either the SEC or the PSE.

    In the first place, why allow a buyback when the purpose of an IPO is for a company to become public? There is no such thing as public company in this country except when it is owned by the government.

    Treasury shares

    When a company buys back its own shares, it treats them as treasury shares under stockholders’ equity. Why?
    The poser requires an answer or answers from the SEC alone, because PSE shares are also listed on its own board.

    Perhaps, SEC officials know the reason for the buyback but could not do anything about it. They tolerate it because there is no rule against accumulating treasury shares.

    Public investors are aware of the resale of treasury shares by insiders either to the public investors or to the unnamed strategic partners of the majority stockholders.

    Should there be a rule then against selling back to the public investors the shares reacquired by listed companies?

    A set of new rules is needed requiring the retirement of treasury shares. By doing so, it would be protecting the stock market and the investing public from a perception of insider trading.

    esdperez@gmail.com

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