Q&A: 'It's about time for companies that have
enjoyed incentives to give something back'
Atty. Francisco Lim
President and CEO, Philippine
Stock Exchange, Inc.
The Philippine Stock Exchange (PSE) never had it so good in 2005. Proceeds from various offerings last year reached P55.5 billion, which was 25 times bigger than the P2.1 billion raised the year before. The amount of capital from last year's offerings was also at its highest level since 1997, when a financial crisis hammered down stocks and currencies in the region. What these figures mean is that lots of people and business organizations made billions last year, a phenomenon that Atty. Francisco Lim, PSE president and chief executive, expects to continue through the rest of 2006, politics nothwithstanding.
This year, the PSE is strengthening its campaign for companies to go public. The primary targets are mining ventures, companies registered with the Board of Investments, as well as small and medium enterprises.
In an interview with BusinessMirror's Emeterio Perez and Dave Llorito, Lim said PSE is undertaking several policy reforms to attract more players, including the possible inclusion of a standalone subject on the stock market in both public and private school curricula to promote greater understanding and appreciation of the stock market. Plans are also afoot for the merging of the Makati and Ortigas trading floors into one in Fort Bonifacio . Excerpts:
Is there anything that PSE needs in terms of rules and regulations to attract more companies to go public?
We have 237 listed corporations at the end of 2005 and we want to add more to our roster by holding an active campaign for privately owned corporations to go public. This year we target at least 10 corporations to go public. We have identified potential clusters where we can get new listings. They include a fresh wave of mining ventures that have revived their interest in the country after the Supreme Court upheld a liberal interpretation of the mining law. I think 90 percent of local corporations also belong to the category of small- and medium-sized enterprises, or SMEs. So we will also urge SMEs to try the stock market as an inexpensive tool to raise their needed capital.
Then we have corporations that are registered with the Board of Investments or BOI. These BOI-registered enterprises are supposed to go public in exchange for the incentives they got from the government. But we will not just sit and wait at our front desk for these firms to approach us. We will work hard and adopt measures to get them listed. For instance, the PSE adopted last August a liberal interpretation of its rules governing mining companies. We did it because we expect more mining firms to open their ventures in the country this year.
We are also studying more liberal rules that will govern the listing of SMEs. We think the proposal, once approved by the PSE's board of directors, will go a long way in encouraging SMEs to go public. As to the BOI-registered firms, we are coordinating with concerned government agencies for help in persuading these preferred business enterprises to go public.
Our targets are corporations that have long enjoyed incentives from our country. It's about time for them to give something back to our people.
Do you intend to go nationwide to tap the money outside Metro Manila ? It seems like PSE has been just concentrating its operations in Metro Manila .
That's one reason why we have proposed to [the Department of Education] for the introduction of a stand-alone subject on the capital markets as part of the curriculum in business college courses. That's long term. One of our biggest problems now is that many of our investors or potential investors do not know much about the stock market. A big part of the reason is that when they were studying, the stock market is only a topic in a subject. I thought that if we are able to make the capital market a stand-alone subject in business courses, it will go a long way. We will be implementing this nationwide so we will need the cooperation of CHED [Commission on Higher Education]. It will need the cooperation of the Philippine Association of Collegiate Schools for Business, SEC [Securities and Exchange Commission], and even of course the Capital Market Institute of the Philippines (CMIP), which is a new organization.
We have to agree on a course outline and that's where we are at now. Some people say the course should just cover the basic. Other schools are saying that the curriculum should include the technical aspects, including fundamental analysis, technical analysis, and so on. We are not just interested in these students becoming investors; they should also become analysts and stock brokers later on. I think I agree more or less with the second recommendation.
How about public investors? Do they need more share allocations to make a listed company really public? Most of the listed companies are more than 90 percent controlled by the majority stockholders, usually the family that used to own them before they undertook IPOs. Example: Ayala Land Inc. was owned close to 99 percent by the Ayalas when it listed years ago.
Our existing rules require listed companies to set aside shares, equivalent to 10 percent to 30 percent of their market capitalization, for sale to the public when they undertake an initial public offering. But once these firms are listed, the PSE wants market forces to dictate the level of ownership that the public will hold.
It's the reason why the PSE board has approved a proposal to scrap the minimum public ownership (MPO) requirement as a continuing listing requirement. Our proposal to scrap the MPO is now pending approval at the Securities and Exchange Commission.
You probably will ask, why do you want to abolish the MPO requirement? I'll answer you with another question: Can you compel a majority owner to sell more shares just for the sake of keeping the minimum public ownership, even if he does not like the price? Do you think it's fair? Or let's reverse the situation: Do you think the MPO requirement is necessary, if the majority owner gets an offer he or she cannot refuse? I think the majority owner will sell everything, not only 30 percent.
This is what we mean by our position to just let the market forces dictate the level of public ownership after the listing of a company.
Besides, it's the minority stockholder who will suffer if we delist a company for failing to meet the MPO requirement. If the minority owner sells, he or she will have only the majority stockholder as a possible buyer. I doubt if the selling minority stockholder will get a good price under such a situation.
From your point of view as official of the exchange, do listed companies really need independent directors who have no say at all in the board?
Yes. This is to keep our country on a par with international best practices. I have seen the concept work in listed companies, especially in critical matters involving the corporation. These independent directors are listened to and in many cases, their votes spell the difference.
In any event, I would like to point out that once elected to the board of a listed company, a director is expected to exercise independent judgment in carrying out his or her responsibilities to protect the interest of the corporation, including that of the minority owners. It's also worth noting that the independent director exercises the same rights as other directors. His or her vote carries the same weight and count as the other directors identified with the majority owners.
What are the SME companies doing at PSE when their shares are not traded at all? Are they using the exchange to lessen the amount of taxes due on sale of shares?
It is a misconception to say that shares of the three SMEs-SQL Wizard, Makati Finance Corp. and Cashrounds-are not being traded at the PSE. If you check the historical prices of their shares at our web site (www.pse.com.ph), you will find out that their stocks traded, say, during the last 30 days. The frequency of trade may not be as often as the other issues, but I guess the more important consideration boils down to this: These SMEs benefited from the listing. The benefits include an inexpensive means to raise capital, which is very important, especially when ordinary SMEs find it difficult to access funds from the bank.
What happens to the plan of PSE to transfer to Fort Bonifacio ? Will the present management pursue this? When will the exchange start operating there?
I think eventually, we will have to transfer to Fort Bonifacio . Of course, if we vacate this place [PSE Ortigas] and Makati , we will have to find uses for them, for example renting it out, possibly selling it. We have to convert this into something productive or income-producing asset for us.
Would that mean there would only be one trading floor?
We have two options. When we go to Fort Bonifacio , at best there will be one trading floor. But we may go beyond that. One of the options being considered is having no trading floor because that seems to be the in thing now. But we will have to decide on that at a point in time.
By the way, how did the stock market perform in 2005?
The PSE enjoyed a banner year in 2005 as some indicators are at their best levels in 10 years, while others are at their all-time-high marks. I can rattle off some of the indicators.
For instance, proceeds from various offerings last year reached P55.5 billion, which was 25 times bigger than the P2.1 billion raised the year before. The amount of capital from last year's offerings was also at its highest level since 1997, when a financial crisis hammered down stocks and currencies in the region.
Daily value turnover also doubled to P1.6 billion from only P800 million in 2004. Not surprisingly, annual turnover was exceedingly good, reaching P383.5 billion, or 85.6 percent above its P206-billion size a year earlier. Market capitalization hit a new all-time high last year at P5.9 trillion, which was 25 percent higher than the previous high of P4.7 trillion recorded in 2004.
We ended the year with the second-fastest growth in stock prices within the Asean, and only Indonesia managed to post a bigger hike in stock prices. But losing to Indonesia is not that embarrassing. If we were playing basketball, we lost only by a free throw to Indonesia , because less than two percentage points separated the growth rates between the Phisix and the Jakarta Composite Index. The Phisix went up by 14.99 percent, while the Jakarta Index chalked up a 16.24-percent hike. As far as index growth is concerned, we beat Singapore , Malaysia and Thailand . In fact, the Phisix advanced last year at twice the speed of the SET Index of Thailand. Prices of Malaysian stocks, on the other hand, shrank by almost one percent.
What negative or positive factors affected the market's performance in 2005?
The Phisix got a lot of lift from the implementation of the expanded value added tax, or E-VAT. I think we cannot deny that, because the movement of the Phisix at the height of the E-VAT debate can prove the connection. The Phisix jumped above the 2,100-point mark in March 2005 right after Congress approved a bill to implement the E-VAT. But four months later, when the Supreme Court temporarily stopped the implementation of the tax, the Phisix retreated and almost fell below the 1,800-point level. The main market indicator again recovered and raced above the 2,100-point mark after the government finally implemented the new tax measure in November. But I believe the Phisix, which is a very good barometer of the market's sentiment, could have performed better, had it not been for disturbing controversies coming from the political front.
Will that optimism carry through 2006?
I am very optimistic the local stock market can scale greater heights this year, but its actual performance will depend largely on how the political drama gripping the country will play out. If we prove to the whole world that we have the maturity to deal with our political problems in accordance with established and nonviolent norms, then investors will cast their own vote of confidence for us by plunking in money to Philippine businesses, including the stock market.
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