PSE seeks changes in 1-yr old Securities Regulatio

Only a year after its effectivity, the Securities Regulation Code (SRC) is facing a major overhaul as the Philippine Stock Exchange (PSE) has prepared a draft legislation to amend a number of its provisions.

The proposed bill, which will be submitted to the 12th Congress, will seek to change controversial aspects of the SRC to include the tender offer rule, the broker-dealer and broker-director prohibition, and the ownership limitation in the newly-demutualized exchange.

Although hailed as a landmark law designed to restore investor confidence, instill professionalism among industry participants and promote the development of the capital markets badly bruised by the BW Resources trading scandal in 1999, the PSE said within a year, "we have seen certain effects of this law which instead of promoting a vibrant and healthy capital markets have, in fact stifled the development of the same."

On the mandatory tender offer rule, the bill proposes to increase the current thresholds of 15 percent and 30 percent which are seen to unduly restrict investments and acquisitions in public companies, "since the burdensome and restrictive requirements of a tender offer will have to be complied with even for relatively small transactions which do not result in change in control."

Under the SRC, a purchasing party is required to tender an offer to the remaining stockholders upon acquisition of at least 15 percent of a listed company or 30 percent within a 12-month period. These mandatory tender offer requirements are imposed to give the minority shareholders the opportunity to sell their shares at the same price as the majority shareholders in cases where there is a change in control of the company.

Based on the proposal, the minimum threshold would be set at 35 percent of voting rights and secondary thresholds set after the acquisition of simple majority or 50 percent of voting rights, and after the acquisition of absolute majority or two-thirds of voting rights.

Consistent with rules in other countries, a trigger for "creeping" acquisitions, resulting in a consolidation of control, is likewise sought whenever over a one-year period, 10 percent of the voting rights are acquired by a person or persons acting in concert already holding between 35 percent and 50 percent of a public company’s voting rights.

The draft law also targets the lifting of the prohibition of the dual functions of broker-director and broker-dealer since the PSE, for one, had emphasized that such rules are "damaging to the capital markets and has a direct effect on the volume of trades and the market’s efficiency."

The broker-director segregation renders brokers and dealers and their employees who have relatives up to the fourth degree of consaguinity or affinity holding positions of trust in issuer companies virtually unemployable or otherwise, disqualified from working in the brokerage business.

The PSE said these negative consequences conflicts with the SRC‘s own declared policy to promote the development of the capital markets and will result in undue burdens on the brokers and dealers and their stockholders, officers and employees.

Instead, the bill proposes that instead of a blanket prohibition, a broker or dealer may be allowed to buy or sell securities of an issuer in which such broker or dealer is a stockholder, director or officer, provided such person complies with rules the PSE, as the relevant self-regulatory organization (SRO), may prescribe to ensure full disclosure of such transactions.

In the same vein, the prohibition on broker-dealer functions is widely blamed for the drop in market turnover since brokers, while acting as dealers, are "catalysts to liquidity in the market."

"Without dealer intermediation, without a lead to follow, public trading activity thins out. It should be stressed that this function of short-term public trading provides the investor assurance that there will be a market for his shares, and that shares will also be available for accumulation," the PSE-backed bill noted.

It added that since the effectivity of the SRC, there was a drastic reduction in the volume of transactions in the securities market as a direct consequence of the broker-dealer prohibition. "Unless the broker-dealer prohibition is lifted, the very existence of the stock exchange will be jeopardized."

Last week, the PSE started the implementation of a Customer-First Policy in its Maktrade computer system to practically put back in effect the broker-dealer function. The new trading scheme is designed to safeguard against and detect front-running schemes which the broker-dealer segregation intended to avoid in the first place.

The bill also aims to scrap the clause which require that brokers shall proportionately represent the exchange membership in terms of their volume and value of trade and paid-up capital, with the lifting of the 20 percent ownership of the exchange for any industry or business group.

As an alternative, it is proposed that instead of classifying into an industry or business group, no person or entity, together with their related parties and affiliates, are prohibited from owning or controlling directly or indirectly more than 20 percent of their voting rights of the exchange.