SEC may raise minimum paid-in capital for financing companies

The Securities and Exchange Commission (SEC) is studying the possibility of increasing the paid-in capitalization of financing companies to level the playing field.

The plan is intended to plug the loopholes in the capital requirements for financing companies as it was noted that most financing firms were successful in circumventing the rule by first establishing its head office in the provinces in order to pay a lower paid-up capital and eventually branching out in Metro Manila.

Under the existing rules, financing companies operating in Metro Manila and first class cities should have a minimum capitalization of P10 million while those in other cities should have at least P5 million. Those in the provinces, on the other hand, should have at least P2.5 million in capital.

The rules also provide that financing companies that branch out in Metro Manila would need to shell out P1 million, P500,000 in second-class cities, and P250,000 in the provinces.

"We’re trying to rationalize the paid-in capital of finance companies by seeing what we can do. Their paid-in capital will have to be increased. In principle we agreed that we should plug this practice of them skirting around the rule. We need to level the playing field," SEC chairman Fe Barin said.

Justina Callangan, head of the SEC’s Corporation Finance Department, said the commission would soon require financing companies to submit a capital build-up plan.

From only 522 in end-2003, the number of financing companies has now grown to 722 as of Oct. 8, based on records filed with the SEC.

Callangan attributed the increase in the number of finance companies to the improving economy.

"It is possible that a lot of companies or individuals are borrowing for small businesses to take advantage of the improving economy," she said.

She is urging the passage of a law that will regulate lending investors. Despite a SEC directive requiring lending investors to convert into financing companies as required under the Financing Company Act, the compliance ratio, she said, is still low.

There are still over 10,000 lending investors that refuse to convert into financing companies since this would entail additional capital on their part.

Once the Lending Company Regulation Act is signed into law, lending investors will fall under the jurisdiction of the Department of Trade and Industry (DTI).

The bill, filed Bacolod City Rep. Monico Fuentevella, will lay down the minimum requirements and standards for the creation of lending firms.

Under the proposed measure, lending corporations shall register as a corporation and file with the DTI a schedule of liabilities and its list of debtors as well as other reports that the DTI may require.

These reports shall be signed under oath by the company’s principal executive officer, and principal financial officer.

The proposed bill also provides stiffer penalties for erring lending firms. Violators would be fined not less than P10,000, or maximum imprisonment of 10 years, both at the discretion of the courts.

Fuentevella said while there are special laws such as the Financing Company Act, that govern most non-bank financial companies, there is no specific law that covers lending firms.