The Philippine Stock Exchange (PSE) has slapped billionaire Dennis Uy’s DITO CME Holdings and China Bank Capital Corp. with the maximum penalty allowed under its charter for canceling DITO’s P8 billion stock rights offering (SRO) in January.
DITO CME is the holding company of Dito Telecommunity, which is a joint venture company comprised of Udenna Corp., Chelsea Logistics Holdings Corp., and China Telecommunications Corp. China Bank Capital is DITO CME’s underwriter.
Although the PSE as a rule does not divulge detailed information regarding breaches committed by listed companies and corresponding sanctions, an unimpeachable source told BusinessWise that the two companies were slapped a fine of P35 million each, although some members of the Board were pushing for a much larger amount, considering the gravity of the offense.
A high-ranking China Bank Capital official who begged for anonymity acknowledged the penalty, but says the company will contest it legally, even as its head for investor relations, Gerald ‘Dodjie’ Florentino told BusinessWise: “This matter is still being discussed internally” and that “an official statement will be released at the proper time.” Udenna Corp.’s vice president for corporate affairs Adel Tamano did not respond to our query, while Securities and Exchange Commission (SEC) Chair Emilio Benito Aquino was out of reach.
The withdrawal of the SRO has shaken the integrity of the capital market, which is already unsteady, what with the numerous scandals it has to deal with over the years.
Barely a year ago, on June 11, the Special Hearing Panel of the Markets and Securities Regulation Department of the SEC revoked the broker’s license of Venture Securities, Inc., a stock brokerage owned by Eusebio H. Tanco. SEC imposed steep fines against Venture and its officers for alleged fraudulent transfer of client shares from R&L Investments, Inc., a stock brokerage owned by the Lee Family, with Joseph Lee as president, through what are known as EQ trades. EQ trades are essentially transfers of shares by the same account holder from his or her account in one brokerage company to another. In this way, there’s no actual transfer of beneficial ownership, it’s still the same person who owns the shares at the end of the transaction. R&L allegedly lost P700 million worth of client shares.
The PSE insider says that DITO CME and its underwriter’s action was “so irresponsible that it deserves more than the maximum penalty” such that “the PSE management had to engage external legal counsels to review the case.” The PSE source explains that DITO CME and China Bank Capital defied the Securities Regulation Code, its Implementing Rules and Regulations, and the Consolidated Listing and Disclosure Rules of the Exchange when they cancelled DITO’s SRO.
Both companies’ action, I believe, hurts ordinary investors the most. They don’t possess sustainable capital and their (and other investors) only recourse to get back what they invested is a signed waiver that exonerates DITO CME, China Bank Capital, and AB Stock Transfers Corporation from any liability or suit, “except when such claims are due to the gross negligence or willful violation of law of the indemnified party.” Signing this waiver is a requisite before subscribers could be refunded.
The cancellation of the SRO has tainted the underwriting model that stockbrokers has adhered to through the years. It is certainly a travesty and, if remained unchecked, could erode the credibility of the country’s capital market. This concept is basically a commitment by the underwriter to purchase unsubscribed shares. This serves as a protection to investors since the underwriter is supposed to guarantee the SRO’s success. China Bank Capital was the sole underwriter of this rights offering, which allows a company to raise money from current stockholders. In the SRO’s prospectus circulated to investors months before the offering date, China Bank Capital had stated that “it will firmly underwrite the rights offer and purchase the unsubscribed rights shares pursuant to its firm underwriting commitment.”
In a Philippine Inquirer interview, PSE President Ramon Monzon conceded that there was little the PSE could do to prevent the share issuer from scuttling a deal. He noted that affected investors could lodge complaints before the SEC. But with the required waiver, I don’t see how this is possible. Monzon also said that many minority stockholders likely incurred an “actual loss” if they sold DITO CME shares “after the price was adjusted lower after the Dec. 20, 2021, ex-rights date. This is not a theoretical loss. There is an actual loss to investors who sold after the ex-rights date because they have sold at a lower price.”
The PSE halted DITO CME’s trading on January 31 this year due to the SRO’s deferment, and agreed to resume it a day after, with the provision that the move “should not be construed as an approval by the Exchange of the deferment of the offering and is without prejudice to any regulatory action that the Exchange may pursue in order to ensure full compliance with the applicable rules and for the protection of the investing public.”
DITO CME is in a wobbly financial footing. Records from PSE Edge Portal states that, for the quarterly period ending September 21, 2021, the company incurred total liabilities of P102,847,293,872, backed up by total assets of P108,187,859,968. Its retained earnings registered a deficit of P153,524,394. For the first three months of this year, its gross expense of P1,750,638,358 outpaced its gross revenue of P327,273,425 resulting in a net income loss (after tax) of P2,824,764,577.
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