PDRs: To ABS-CBN with love

"Again, here are the words of Lorenzo Delgado on the issue of Philippine Depositary Receipts."


(Second of three parts)

Here is the continuation of “Philippine Depositary Receipts: Mass Media’s Existing or Emerging Loophole To Constitutionally Mandated Full Filipino Ownership?”—a well written, scholarly treatise written by Lorenzo E. Delgado, editor-in-chief of The Bedan Review.

“Rappler is the first and only media startup in the Philippines to join broadcasting network giants ABS-CBN and GMA in offering Philippine Depositary Receipts or PDRs to international investors. PDRs are financial instruments that foreign funds can buy into, allowing media and other Filipino firms that must keep foreign ownership at 40%, to raise funds globally.”

With said recognition, it is imperative to understand the nature and consequence of PDRs. 

A Philippine Depositary Receipt(s) (PDR) is a security which grants the holder the right to the delivery of sale of the underlying share. A PDR consists of a deposit price and an option price, which is considered as payment when the buyer opts to exercise his option of converting said PDRs to a corporation’s share. PDRs are not evidences or statements nor certificates of ownership of a corporation. However, each PDR represents a share, even in a restricted company, and when bought by a foreign entity, gives the buyer the right to all the dividends due the shares of stock acquired.

Under International Accounting Standards 32.16, a financial instrument is an equity instrument only if (a) the instrument includes no contractual obligation to deliver cash or another financial asset to another entity, and (b) if the instrument will or may be settled in the issuer’s own equity investments, it is either: (i) a non-derivative that includes no contractual obligation for the issuer to deliver a variable number of its own equity instruments; or (ii) derivative that will be settled only by the issuer exchanging a fixed amount of cash or another financial asset for a fixed number of its own equity instruments.

PDRs therefore, even in an accounting perspective, are deemed to be considered as an equity instrument on the ground that the instrument will or may be settled using, in this case delivering, the issuer’s (mass media corporation’s) own equity investment or shares of stocks. The same fact was corroborated by one of Philippine’s leading mass media corporation which recognized PDRs in its Financial Statement as part of its equity.

Hence, being an equity instrument and enabling the holder thereof to be the ultimate recipient of the benefits accruing therein, i.e. dividends, PDRs indubitably has the ability to enable foreigners to exercise control over a media corporation despite absence of legal title to the same.

The Constitutional and legal mandate: 

Section 11, Article XVI of the 1987 Constitution provides: 1. The ownership and management of mass media shall be limited to citizens of the Philippines, or to corporations, cooperatives or associations, wholly—owned and managed by such citizens. 

The Congress shall regulate or prohibit monopolies in commercial mass media when the public interest so requires. No combinations in restraint of trade or unfair competition therein shall be allowed.

Consistent with the State policy of developing an economy that is effectively controlled by Filipinos, the Constitution explicitly reserves the ownership and operation of public utilities to Philippine nationals, who are defined in the Foreign Investments Act of 1991 as Filipino citizens, or corporations or associations at least 60 percent of whose capital with voting rights belongs to Filipinos. 

The above-quoted constitutional provision undoubtedly states that the ownership and management of mass media must be totally under the control of Filipinos. Said requirement was reiterated by Republic Act No. (R.A.) 7042 otherwise known as Foreign Investment Act, as amended by R.A. 817914 and its Implementing Rules and Regulations as well as Executive Orders15 which has, from time to time, reiterated the same in order to emphasize the mandatory requirement of full ownership of Filipinos to mass media corporations’ shares. 

In view of the said constitutional and legal provisions, the Securities and Exchange Commission issued SEC Memorandum Circular No. 8 Series of 2013 prescribing the guidelines on compliance with the Filipino-foreign ownership requirements prescribed in the Constitution and/ or existing laws by corporations engaged in nationalized and partly nationalized activities. Section 2 thereof provides: 

Sec. 2—All covered corporations shall, at all times, observe the constitutional or statutory ownership requirement. For purposes of determining compliance therewith, the required percentage of Filipino Ownership shall be applied to BOTH (a) the total number of outstanding shares of stock entitled to vote in the election of directors; AND (b) the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors. 

The advent of said memorandum circular inevitably requires that mass media corporations must comply with the one-hundred percent Filipino ownership not only through its outstanding shares of stock entitled to vote in the election of directors but also the total number of outstanding shares of stock, whether or not entitled to vote. 

Corollary, the Foreign Investments Act’s implementing rules explain that for stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate voting rights is essential.

On this score, the Implementing Rules and Regulations of the Securities Regulation Code defines beneficial owner or beneficial ownership as any person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares voting power, which includes the power to vote or direct the voting of such security, and/ or investment returns or power, which also includes the power to dispose of, or direct the disposition of such security.

(Concluded on Wednesday)

Topics: Jonathan Dela Cruz , Philippine Depositary Receipts , PDRs , Lorenzo E. Delgado , The Bedan Review , ABS-CBN
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