What is a PDR?

What is a PDR — this strange acronym for what has kicked at the shin, the 1987 Constitution Section 11, Article XVI that insists, “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.”

There are at least three high-profile media corporations namely ABS-CBN, GMA, and Rappler that have used Philippine Depository Receipts (PDRs) to obtain foreign investment, even at the expense of recognizing the constitutional prohibition of foreign ownership in the industry of mass media (Lorenzo E. Delgado, editor-in-chief, The Bedan Review, January 2018: “Philippine Depositary Receipts: Mass Media’s Existing or Emerging Loophole To Constitutionally Mandated Full Filipino Ownership?”) 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 (Ibid.).”

PDRs are not new, perhaps copied from one of the most common types of Deposit Receipts (DRs) — the American Depository Receipt (ADR), which has been offering companies, investors and traders global investment opportunities since the 1920s. These are negotiable (transferable) certificates, traded on the local (US Stock Exchanges) but with underlying other security, usually in the form of equity, that is issued by a foreign publicly listed company (Investopedia: Jan. 10). There are also global depositary receipts (GDRs) — the European DRs and international DRs, denominated in dollars or in euros, traded on the stock exchange of the investor’s country as certificates/receipts rather than the actual equity share, which is deposited in a foreign bank (Ibid.).

The ADR (or the PDR) likens to a financial derivative evolved from an original equity investment, and may be traded as a derivative at its level, while it is also an option bought by the investor to be exercised when and if the investor wants to convert to the underlying equity itself.

The Philippine Stock Exchange affirms that “a Philippine Depositary Receipt (PDR) is a security which grants the holder the right to the delivery of sale of the underlying share (as cited in the Bedan Review, op. cit.). A PDR consists of a deposit price and an option price, which is considered as payment when the buyer opts to convert 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 (Ibid.).

SyCipLaw advised Mercury Media Holdings Ltd. in the special block purchase of P2.3 million PDRs issued by ABS-CBN Holdings Corporation from Marathon Asset Management LLP at the Philippine Stock Exchange in May 2013 (www.syciplaw.com, June 14, 2013).

Lawyers specified that “under existing Philippine law, the Underlying Shares may not be owned by, or registered in the name of, non-Philippine nationals. In the event of exercise of the right of delivery of the Underlying Share by a PDR holder that is not a Philippine national, the Underlying Share will be sold by an eligible broker in the open market to a qualified person, and the proceeds of the sale will be paid to or to the order of the PDR holder (Ibid.).

In 2015, Rappler, Inc. (RI) and Rappler Holdings (RH, owns RI) filed SEC 10-1 Notice of Application for Confirmation Exempt Transactions reporting some 20 million PDRs issued to NBM Rappler and Omidyar Network Fund LLC variously (www.sec.gov.ph).

In December 2016, the SEC received a letter from the Solicitor General asking for an investigation into the Rappler PDRs “for any possible contravention of the 1987 Constitution (Ibid.).” The SEC investigation focused on the covenant between Rappler and the NBM/Omidyar PDRs (called the ON PDRs) that said that RH/RI will “not without prior good faith discussion with ON PDR holders and without the approval of at least 2/3 of ON PDR Holders alter, modify or otherwise change the Company (RH/RI) Articles of Incorporation or By-Laws or take any other action where such alteration, modification or action will prejudice the rights in relation to the ON PDRs (see SEC Commission en banc Decision Jan.11 re Rappler, Inc. and Rappler Holdings Corporation, SP case No. 08-17 001, @sec.gov.ph).

The SEC found “Rappler, Inc., and Rappler Holdings Corporation, a mass media entity, and its alter ego violating the constitutional and statutory Foreign equity Restrictions in Mass Media enforceable through laws and rules within the mandate of the Constitution (Ibid.).” The Omidyar PDRs were declared null and void pursuant to Sec. 17.2 of the Securities Regulation Code (SRC) for being a fraudulent transaction under the ambit of Sec 16.1 of the SRC. The certificates of registration of Rappler, Inc. and Rappler Holdings were revoked for selling control to foreigners (Ibid.).

It may not be fair to cast aspersions on the motivations of Rappler, a known media fighter for truth and righteousness, nor would it be thinkable that the esteemed and respected SEC would allow itself to be used as a political tool to persecute Rappler for its frequent tirades against the incumbent administration.

In fact the SEC must be commended for firmly upholding their interpretation of the law without fear or favor, and indirectly but loudly affirming that everyone, even the ruling powers-that-be must always observe the rule of law. Yet something there is, that tells us that perhaps this PDR thing is more basic than the ethereal love of country condensing in ugly politics.

Let us look at the imbroglio wrought by these PDRs without the indignation on the implied political attack on press freedom that Rappler so represented: on the purely finance and accounting side for practitioners and participants in the stock and financial markets — does not the creativeness and exuberance for newfangled finance schemes mimicked from foreign markets often bring us, with our less developed markets, to convoluted ramifications of unforeseen risks and trouble?

The PDRs are different from the ADRs, GDRs, and DRs of the world.

First of all, mass media companies here in the Philippines really must observe the all-Filipino rule for mass media in the Constitution. No ifs or buts, no indirect or backdoor sneaking in and around this.

And what must not be forgotten in finance is never to invest or offer something which you do not fully understand, unless, as the SEC implied — do you precisely want to skirt the attendant issues?

Amelia H. C. Ylagan is a Doctor of Business Administration from the University of the Philippines.

ahcylagan@yahoo.com