COA seeks probe on SSS sale of P5.69-B Meralco shares

MANILA, Philippines - The Commission on Audit (COA) is calling for the investigation of the Social Security System (SSS)’s P5.699-billion sale of its Manila Electric Co. (Meralco) common shares to an unknown investment company which had net assets of only P60.21 million when the deal was closed in 2009.

According to a COA report released yesterday, the “management caused SSS to assume a greater risk of loss by selling its Meralco holdings to a primary buyer that is a newly created company, has no track record of profitability at the time of the transaction, and is 72 times undercapitalized relative to its P4.535-billion installment obligation to SSS.”

State auditors said a probe should be conducted to determine if anyone should be held accountable for such a high risk transaction, which has resulted in huge losses because of failure by concerned officials to observe “due diligence and prudence” in investing money.

COA also briefly mentioned the transaction in its 2010 audit of the financial books of the Development Bank of the Philippines (DBP), which engaged in a similar deal on its own Meralco shares with the same unnamed investment firm also in late 2008.

The auditing body reported in detail the supposed circumstances surrounding the SSS transaction, through a Share Purchase Agreement (SPA) that was executed on Jan. 14, 2009 when former National Economic and Development Authority (NEDA) director general Romulo Neri was president and chief executive officer (CEO) of the SSS.

COA said SSS sold on installment its 62,990,638 Meralco common shares for a total principal consideration of P5.669 billion at P90 per share, for which it received a down payment of P1.13 billion.

The decision to pursue the transaction, COA said, is contrary to Section 26 of Republic Act 8282 or the amended and strengthened Social Security Law which states that Investment Reserve Funds (IRF) should be managed and invested “with skill, care, prudence and diligence.”

The state auditors said the sale goes against the Guidelines for Social Security Funds All, which declares that “investments shall be made with due diligence and prudence and shall adhere strictly to sound business practices and financial principles” and that in general, “investments shall benefit as many members of the system as possible.”

COA noted that the government actually lost or failed to earn interest of P76.30 million which was supposed to have been collected when the unnamed investment firm failed to pay the first installment on the due date.

Records show that the SPA executed by the SSS on Jan. 14, 2009 with the unnamed investment company as the primary buyer and the DBP as secondary buyer, it received a down payment of over P1.133 billion on Feb. 13, 2009.

Under the agreement, the balance of P4,535,325,936 in addition to the fixed-term interest of P729.3 million are payable in three installments, with the final installment due last Jan. 31, 2012.

Due to the circumstances under which the sale of the Meralco holdings of SSS was approved, the state auditors said “it is our view that the prudent man of Section 26 who is acting in the best interest of SSS… would not have agreed to sell to a primary buyer who is evidently not creditworthy.”

COA reasoned, a prudent man “would not have made such a decision on the basis alone of a secondary buyer’s good credit rating and would not have agreed to a condition restricting the obligation of the secondary buyer, which would effectively negate the security against loss for which the secondary buyer stepped forward in the first place.”

Buyer gained P595.2 million in just 11 months

Meanwhile, the cash dividends totaling to P595,261,529 received last Jan. 31, 2011 were immediately accrued in favor of the primary buyer and applied as partial payments of its outstanding principal obligations, which in effect means that “the primary buyer had already gained P595,261,529 in 11 months.”

State auditors explained that based on the SPA, prior to the full payment of the total price, the proprietary rights inherent in the ownership of the Meralco holdings shall be subject to rules favoring the unnamed firm.

The agreement states, “Upon receipt by the Seller from the Primary Buyer of the Downpayment, any and all dividends in whatever form, and other benefits declared by Meralco in relation to the Sale Shares, shall accrue in favor of the Primary Buyer. Any additional shares of stock of Meralco issued in relation to the Sale Shares in the form of dividends, or otherwise, shall accrue to the Primary Buyer. The Seller and the Primary Buyer confirm that all cash dividends declared by Meralco prior to the full payment by the Primary Buyer of the Third Installment shall be automatically applied as partial payment of the remaining balance of the Consideration.”

COA disclosed that the SPA provision resulted in a P595,261,529 dividend income loss for SSS: “The provision of the SPA referred to in paragraph 1.9 above is plainly disadvantageous to SSS who, as the owner/seller of the Meralco holdings that are not yet fully paid, should have remained entitled to the said dividends until the primary buyer has paid the final installment on Jan. 31, 2012.”

The state auditors noted the first principal installment of P1,133,831,484 was not even paid on the due date of Jan. 31, 2010 but the interest for the second year that was collected from the buyer amounted to P238,104,611 only, which is the fixed-term interest calculated based on an assumed outstanding principal balance of P3,401,494,452.

“This is incorrect. Since the first principal installment of P1,133,831,484 was not paid on due date, the outstanding principal consideration as of Jan. 31, 2011 should still be P4,535,325,936 and should be the basis for calculating the fixed-term interest. Based on such a calculation, the interest due for the period Jan. 31, 2010 to Jan. 31, 2011 should have been P314,404,942 instead of P238,104,611,” state auditors explained.

The audit team added, “By agreeing to the fixed-term interest calculation that assumes the payment of each installment amount even if it was not actually paid, Management has caused SSS to incur an interest income deficiency of P76,300,331.”

Because of its findings, COA urge SSS to demand payment of the interest income deficiency and renegotiate the terms of the SPA so that it could receive the dividends on the Meralco holdings as owner and as-yet unpaid seller of such holdings, and not as payment for the primary buyer’s obligations under the SPA.

The state auditors even recommended that existing policies and/or guidelines on the disposal of investments be revisited in order to safeguard the SSS Fund.

The SSS management tried to defend its sale of Meralco shares by declaring that the primary buyer is a 100 percent owned subsidiary of a parent company whose 2009 audited balance sheet showed a cash hoard of P209 billion, or about 46 times the remaining receivables of SSS from the unnamed firm.

COA, however, stood firm in its findings that the SPA has actually resulted in SSS incurring an interest income deficiency of P76.30 million and P595.261 million in lost dividend income.