The proposed Special Assets Management Companies Act: A loophole that needs to be plugged

On Oct. 23, 2002 just before Congress went on recess, the Senate passed on third reading the proposed Special Assets Management Companies (SAMC) Act, formerly called the Special Purpose Assets Vehicles Act or the SPAV Bill.

The SAMC Act proposes to give tax incentives to special assets management companies (SAMCs) in order to induce them to acquire non-performing assets in the form of non-performing loans and acquired assets (ROPAs) of the banking industry. The bill is intended to liquefy these NPAs not only to prevent the collapse of the financial sector, but also to inject more liquidity into the financial system, which can be harnessed to propel economic growth.

The bill contains several provisions to help achieve its objectives. For example, the concept of a minimum capita stock was included in order to help ensure that SAMCs are proposed to be regulated by the Securities and Exchange Commission (SEC) to ensure that they are monitored in ding what they are envisioned the law to do. Stringent requirements such as the submission of a SAMC scheme and reportorial requirements to the SEC have been prescribed as part of the regulatory requirements that must be followed by the SAMCs. Lastly, the concept of a true sale was injected upon the suggestion of the BSP in order to ensure that he sale by a bank of a non-performing asset to a SAMC is not just a window-dressing mechanism to make the financial statements of a bank appear better. A bank, for example, is prohibited from having management participation in the SAMC that acquires its NPLs or ROPOAs. The BSP correctly reasoned out that if the concept is not included, the problem which the bill seeks to address may not really be solved because there might not be an honest-to-goodness disposition on the NPL or ROPOA by the transferring financial institution.

In the last days of the Senate deliberations, Senator Joker Arroyo complained that the proposed SAMC Act did not give any incentives to borrowers and the general public. He proposed pro-people amendments to the bill. To address the concerns of Senator Arroyo, the Committee on Ways and Means, headed by Senator Ralph Rector, countered with a proposed amendments to the effect that the tax incentives and fee privileges granted to SAMCs be, likewise, enjoyed by any person who wishes to acquire ROPOAs worth not more than P2 million. The purpose of the proposed amendment, which was discussed with Finance Secretary Jose Isidro Camacho in one of the causes, was to enable the general public to buy foreclosed residential properties not only from the private banks but also from government financial institutions and government corporations like the GSIS and SSS. Senator Rector hoped that his proposal would address senator Arroyo’s pro-people concerns.

Senator Arroyo was not satisfied with the Recto amendment. He therefore proposed on the floor an amendatory provision to the effect that all tax exemptions, incentives and fee privileges granted under the Act shall likewise be extended to any person, party or entity. In practical terms, for example, non-SAMCs will be able to buy, tax-free, ROPOAs from a bank and sell them, also tax-free, to third parties. An astute businessman can tae full advantage of the Arroyo amendment to the hilt.

The Arroyo amendments is well meaning and laudable. It not only helps achieve the objectives of the proposed law in the sense that it expands the market for NPLs and ROPOAs. Banks may sell their non-performing assets not only to SAMCs but also to any person or entity who will enjoy the same tax incentives and fee privileges as were proposed to be granted to SAMCs only. There is therefore greater likelihood for the non-performing assets problem of the financial sector to be solved.

There is, however, a big loophole that needs to be plugged. As the proposed law is currently worded, the stringent requirements such as the capital and regulatory requirements are applicable only to SAMCs. For example, non-SAMCs will not be subjected to the minimum capitalization requirement of the proposed law. Neither is a transferring financial institution prohibited from having direct or indirect management of the transferee SAMC. Lawyers worth their salt will therefore advise their clients not to form SAMCs, but instead form ordinary corporations to engage in the buying and selling of NPAs. These non-SAMCs will have the best of both worlds: they will be able to enjoy the same tax exemptions and fee privileges granted to SAMCs without being subjected to the same stringent requirements prescribed of SAMCs. The government, meanwhile, will lose millions of tax money in favor of these unregulated entities, which will most likely engage in the buying and selling of NPLs and ROPOAs.

Fortunately, the House-approved version does not have an identical or similar provision as the Arroyo amendment. There are therefore disagreeing provisions that can be reconciled at the bicameral conference committee. Perhaps, one way of plugging the loophole is to have a provision that if these non-SAMCs will engage in the buying and selling of NPAs, they should be subjected to the same requirements that the SAMCs are required to comply with. That, to me, is fair to the government, which stands to forego millions of taxes and fees and will make the playing field an even-level playing field for everybody concerned.

(The author is senior partner of the Abello Concepcion Regala & Cruz Law Offices or ACCRALAW. He may be contacted at 830-8000.)