THE Securities and Exchange Commission (SEC) has proposed to ban subsidiaries from acquiring shares of their parent firm in a draft set of rules on cross-shareholding structure for publicly listed companies.

“Studies show that the ill-effects of cross-shareholding outweighs its benefits,” the corporate watchdog said in a proposed memorandum circular.

Cross-shareholding, as defined by the SEC, refers to a structure where a subsidiary company owns or acquires a stake in its parent company. This may be done directly or indirectly through intermediaries.

The commission said cross-shareholding in complex networks may cloak beneficial ownership. It may also lead to “anti-competitive business practices favoring only existing networks.”

“[It] may result in conflict of interest situations wherein the same ownership over shares is shared by parties with conflicting interests, thereby resulting [in] inefficient use of capital,” the SEC said.

Subsidiaries that acquired shares before the passage of the circular will be exempted. The proposed circular will also not apply to companies that bought shares before becoming subsidiaries in their parent firms.

“In both cases, the parent company shall cause the conversion of the subject shares into non-voting shares within 12 months from the effectivity of this memorandum circular,” the commission said.

Stockholders will also be allowed to dispose of or exercise their right to appraise their shares within the same timeframe.

Transfer agreements or subscription to shares violating the rule will be considered void.

“If, after due notice and hearing, the commission finds that any provision of this memorandum circular has been violated, the commission may impose any or all of the sanctions provided under Section 158 of the Revised Corporation Code,” the SEC said.

The administrative sanctions include a penalty fee of P5,000 to P2 million, and not more than P1,000 to P2 million for each day of continued violation.

Violators may also be issued a permanent cease-and-desist order, face suspension or revocation of their certificate of incorporation, and/or the dissolution of the corporation and the forfeiture of its assets.

The SEC will be accepting comments from the public regarding the memorandum circular until April 2. — Keren Concepcion G. Valmonte