SEC urged to regulate 'backdoor listing' at PSE

A USAID-accredited consultancy warned that foreign investors' confidence in the local capital markets may be eroded further if government regulators continue to tolerate "backdoor listings" of listed companies in the Philippine Stock Exchange (PSE).

The Accelerating Growth Investment and Liberalization with Equity (AGILE) said the Securities and Exchange Commission (SEC) should take a firm position and decide to regulate the takeover of dominant companies that are still listed on the PSE because of the perception that the shares of these companies are manipulated for the benefit of the new controlling shareholders.

The SEC sought the advise of AGILE on how to effectively regulate the increasing number of backdoor listings. The corporate watchdog noted that in recent weeks, there has been an unusual trading activity involving shares like South Seas Natural Resources Inc., Acoje Holdings, Imperial Resources, Polar Mines, Magman Holdings.

AGILE said the SEC has to adopt measures to protect minority shareholdres or those who either are entitled to receive a tender offer from the new controlling shareholder or group, or to seek appraisal of their shares when substantially all of the assets of the company are to be sold off.

AGILE, for one has recommended the suspension of trading of a company's shares until it has amended its last annual report so that its new status is fully reflected according to full disclosure rules.

AGILE said piece meal reporting should not be allowed as a substitute for full disclosure. It added that the PSE should also "carefully enforce its rules for unstructured disclosure with respect to the company, and the SEC "should monitor the PSE enforcement effort for a responsible period of time after trading has been allowed to resume.

Another possibility, AGILE said, would be for the SEC to require that the PSE rules be changed to require a re-listing of a company that has changed its primary corporate or business purpose.

To further protect minority shareholders from having to deal with potential problems such as the lack of full disclosure about the business, operations and finances of the company with respect to its new business ventures, and the manipulation of the trading market by the promoter, possibly through secret agreements with brokerage firms, would be to require the company to include a clear description of its business.

Failure to satisfy the SEC requirements would mean the new shares may only be issued and sold pursuant to a registration statement or exemption granted by the SEC, and the price for the new shares should meet the requirements of the Corporation Code, including the fair pricing duty imposed on the company's directors.

Moreover, the shares will be permanently locked up because the controlling shareholders are underwriters within the Revised Securities Act.

So far AGILE noted that the takeover by the Ongpin group of South Seas Natural Resources, is an example of what "may well be a perfectly proper and legal backdoor listing in the Philippines."