SEC rejects GSIS bid to return PSE shares

No return, no exchange.

This was the position of the Securities and Exchange Commission (SEC) with respect to the Government Service Insurance System’s (GSIS) plan to return its shares in the Philippine Stock Exchange (PSE) on growing disappointment over the infighting among PSE shareholder-brokers.

SEC chairman Lilia R. Bautista said the GSIS is prohibited from returning the 1.4 million shares it bought from the PSE because this would be in violation of the trust fund doctrine.

She said the only reasonable and lawful way to dispose PSE’s 91 percent stake in the bourse is to offer them in the market.

Bautista explained that the outstanding capital stock of a corporation, including unpaid subscriptions, constitutes a trust fund held by the corporation for the benefit of its creditors which cannot be returned to the stockholders.

The SEC chief pointed out that the Corporation Code does not confer upon any stockholder the right to demand refund of investment conformably to the general rule that subscription to the capital stock of a corporation constitutes a trust fund for the benefit of the creditors and no valid agreement can be made by which a subscriber can be released therefrom.

"A contract of subscription is a contract among several subscribers. For this reason, no one among the several subscribers can withdraw from the contract without the consent of all the others and thereby diminish without the universal consent, the common fund which all have acquired interest," Bautista said.

Although a stockholder has the right to dissent and demand payment of the fair value of his share, such appraisal right can only be exercised in case of sale, lease or transfer of all or substantially all of the corporate property and assets, and in case of merger or consolidation, Bautista said.

Bautista said the appraisal right could also be exercised in case any amendment to the articles of incorporation has the effect of changing or restricting the rights of any stockholder or class of shares, or of extending or shortening the term of corporate existence.

"The situation of GSIS and PSE does not fall within the enumerated instances. Thus, the GSIS, although a stockholder, cannot exercise its appraisal right," Bautista said.

Bautista also said the SEC cannot allow the PSE to buy back its shares from the GSIS because this would defeat the purpose of the exchange’s demutualization.

Jose P. Aquino, head of the SEC’s Markets Regulation Department, said brokers are barred from buying PSE shares in lieu of a SEC requirement prohibiting any single industry sector from owning more than 20 percent of the exchange’s outstanding shares.

"The PSE should not take back its shares from the GSIS because they would have more shares to sell to outside investors to comply with the securities law. The PSE still has some 40 percent stake to be disposed off," he said.

The GSIS, however, has reiterated its position to return the PSE shares it purchased last February because of the dissension caused on the entry of new investors which even led to the filing of a case before the court.

The PSE shares were sold at P119.50 each compared with the prevailing market price of P195 at the time of sale.

Some brokers argued that the sale was unfair to existing shareholders because the shares were sold below market price and that the transaction should have been approved by at least two-thirds of PSE’s existing shareholders.

The continued squabble at the PSE board has provoked the GSIS to threaten the pull out of all its investments in the equities market.

The state pension fund has urged the bourse to shape up and move towards the implementation of much needed reforms to perk up the market.

The GSIS warned that the conflict at the PSE could result in the exodus of other local and foreign investors.