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By Keith Richard D. Mariano

SEC reviving higher minimum float plan

Posted on March 13, 2017

THE SECURITIES and Exchange Commission (SEC) is considering anew to raise the minimum public ownership requirement for newly listed companies in the middle of the year, as the local market appears headed for improved stability.

Companies making formal applications “midyear” for their proposed initial public offerings (IPOs) may have to allocate 15% of their issued and outstanding common shares for the investing public, SEC Chairperson Teresita J. Herbosa said in a March 9 interview.

The corporate regulator has planned to raise gradually the minimum public float of listed companies to 30% from 10% currently, Commissioner Ephyro Luis B. Amatong told reporters last Feb. 8.

“What has happened in the past two years, if you look at the performance of the index, trading was volatile so we had second thoughts. We did not think it would be right to require you to go 15% while the market was trading downward,” Mr. Amatong said.

“This year might be different. So far, if you look at the index, it’s trading flat at the 7,200-7,300 level.”

The higher public float requirement will initially apply to companies still in the process of going public, including those undertaking follow-on offerings after listing on the Philippine Stock Exchange (PSE) through the back door.

Asked when the SEC will impose the higher requirement to currently listed companies, Mr. Amatong replied: “If I’m one of the companies, which has not raised funds for a long time, it would be hard to increase my public ownership to 15% if the market was down.”

“It would look like being forced to sell. So, we’re looking for that stability and -- so far in the first three months -- although sideways, the index has not sharply fallen to 6,500.”

The Philippine Stock Exchange index (PSEi) ended 1.6% lower at 6,840.64 last year, following leadership changes in the Philippines and the United States, the decision of the Federal Reserve to hike rates and China’s slowing growth, among others.

The barometer of local stock prices managed to recover when trading opened for 2017. It has advanced 4.47% to 7,146.27 year-to-date.

“Late last year, core investors sold out, but now they’re coming back and the exchange has stabilized. So, maybe it’s time that we can do this adjustment and this is to in part provide greater stability to the market,” Mr. Amatong noted.

“This will allow for more investors to have control over a company’s shares and then for international investors, they can see that it’s aligned with standards worldwide -- that as a minority shareholder, I’m not a super minority.”

In separate interviews on Friday last week, executives from BDO Capital & Investment Corp. and First Metro Investment Corp. deemed the regulator’s move to raise the minimum public float of listed companies beneficial to the investing public as well as issuers themselves.

“A bigger public float helps the stock price, so I think in the end it’s positive,” First Metro Executive Vice-President Justino Juan R. Ocampo said.

“Although the companies will have to accept that there will be dilution... eventually it will be good for them because there will be more trading and, therefore, their market capitalization will increase.”

BDO Capital President Eduardo V. Francisco cited the importance of requiring currently listed companies to increase their public float in a gradual manner and ensuring good timing at the equities market.

“The only caveat I have is rates are increasing and we don’t know the impact on the market. Imagine if a corporation is forced to sell five percent more and the market is not doing well. That means they have to price it at a discount.”

Besides, the 30 largest and most actively traded stocks on the bourse supposedly float more than 30% of their issued and outstanding common shares already.

“If you look at best practice, if you consider the PSEi members to have the best practice, the public ownership of listed companies has grown big. So, it’s a way to encourage the smaller ones to follow that and hopefully that will improve also their valuation,” Mr. Francisco said.

Ms. Herbosa wants the minimum public float requirement raised to 20% before ending her seven-year term in May 2018, as part of efforts to encourage more Filipinos to participate in the capital markets.

To further develop the country’s capital markets, the SEC also intends to further enhance its shelf registration program that allows companies to register securities and issue them in tranches within three years.

“Almost everybody is availing of that. Well, now we have three years, but I don’t know if we can extend that and three years seems sufficient to issuers at present,” Ms. Herbosa said.

Last year, private companies registered with the SEC some P280 billion in fixed-rate and deferred coupon-paying bonds and commercial papers. The amount soared 134% from the P120 billion seen in 2015, supposedly due to the enhanced shelf registration program.

The SEC expects more companies -- particularly those in the infrastructure, agriculture and manufacturing sectors -- to take advantage of the shelf registration facility to cover their funding requirements.

“Remember, we’re going into infrastructure bonds -- those are long term, maybe for more than 10 years -- so most likely they’ll do shelf registration,” Ms. Herbosa said.

“Anyway, the market looks good plus, I think, maybe rather than go to the bank -- of course there are limitations when you borrow from the banks -- they will raise publicly.”