New SEC ruling on foreign ownership limited

GLO, TEL, MWC, ICT, ALI and media companies to be the most affected by SEC’s draft rules on foreign ownership

SEC: Foreign ownership limit to be imposed on each class of shares. On November 5, the Security and Exchange Commission (SEC) released its draft rules and guidelines on foreign ownership. The two most important items from the rules were that 1.) the SEC will require all covered corporations to observe the 40% foreign ownership restrictions for each class of shares, given that these classes of shares have different rights, privileges and limitations; and 2.) all companies in violation of this ownership restriction are given a maximum of five years to comply.

GLO, TEL, MWC, ICT and ALI to be the most negatively affected. Listed companies that are in violation of the foreign ownership limit based on the stricter definition of the SEC are TEL, GLO, MWC, ALI and ICT. Share price performance of the five stocks would most likely be negatively affected by this development. If the SEC upholds the draft, the five companies would either have to force foreign shareholders to sell down shares to local investors or issue new common shares to local investors, leading to dilution. The value of shares that will have to change hands or raised is also significant and could be a challenge (see exhibit 1 for details). Assuming that all five companies choose to sell existing shares held by foreigners to local investors, local investors would have to absorb Php160 Bil worth of shares. On the other hand, assuming that all five companies issue new common shares to local investors, the amount of capital to be raised is Php400 Bil. Foreign investors would also not be allowed to buy shares of the five companies and this would negatively affect the liquidity of the stocks.

Media companies to also be negatively affected as PDRs to be subject to foreign ownership limits. Issuing Philippine Depository Receipts (PDRs) to address foreign ownership limit might not be allowed as the draft rules state that depositary receipts are “subject to the ownership restrictions prescribed by the Constitution”. Note that PDRs are derivative instruments that only receive the economic benefit of the underlying common share. Owners of PDRs do not have voting rights, and as such, PDRs were not included in the computation of foreign ownership in the past. Recall that foreign ownership is not allowed in media companies, and ABS and GMA issued PDRs in the past to allow foreigners to indirectly invest in their stock. However, under the new rules, PDRs will also be subject to foreign ownership limits. As such, foreign investors who own PDRs of ABS and GMA will also have to sell them to local investors. The value of PDRs that will have to be sold down is Php8.8 Bil.

Companies to most likely engage in a discussion with the SEC. We would like to stress that these are just draft rules and still subject to change. Although we have yet to receive any comments from potentially non-compliant companies, we believe that these companies would most likely engage in a discussion with the SEC given the potentially adverse impact of the proposed rules on foreign ownership limit on the market and on their shares.