A FEW years ago the Philippine Stock Exchange Inc. (PSE) began to cross a road its Asian peers have long treaded on: trade in diverse securities. The PSE, however, appears to be stuck in the middle.
The melancholy comes from the lofty aim of the PSE, the operator of the country’s equities trading market, to expand the exchange. The decision came partly in the PSE’s hopes to deepen the Philippine capital market.
The time the PSE decided on taking that path, the country’s Southeast Asian peers have been trading several other types of securities, such as depositary receipts, futures contract and other structured products. Sadly, the Philippines, for long, has been stuck to trading equities and only lately did the trading for fixed-income securities started.
Growing organically—by introducing new products to the market—proved to be a slow route.
For one, the Real Estate Investment Trust (Reit) has, for nine years, been snubbed by investors on taxation issues. For another, the Personal Equity and Retirement Account (Pera), also is not palatable to investors.
The PSE’s solution: buy the only other trading platform there is today, the Philippine Dealing Exchange Corp. (Pdex), which trades fixed-income securities, and then merge the two trading platforms.
Long trek
FOR the last two and a half years, the PSE has been trying to buy PDS Holdings Inc., the company that owns the Pdex.
The deal, however, has dragged on, and exchange officials are showing signs of exasperation.
The bid to purchase the Pdex owner has already cost the job of Hans B. Sicat as president and chief executive officer of the PSE. The target date of acquisition has been moved over and over as regulators questioned the deal, while a new round of acquiring the shares of the PDS minority owners is happening.
“That’s a moving target [PSE’s acquisition of PDS] so, if set again, we’ll move our internal target from July 31 to another date, which I will not tell you anymore because I’m getting embarrassed,” Ramon S. Monzon, the new PSE president and CEO, said when he took over the job from Sicat.
Monzon is not new to the PSE as he was previously the exchange’s independent director. He’s also a seasoned deal-maker as he owns the company that runs Miss Earth beauty pageant.
Walking order
MONZON’S main order of the day after his election as PSE president in May was to continue the process of merging with the PDS, short for Philippine Dealing System.
To do this, Monzon said he will focus on the reduction of stockbrokers’ stake in the PSE as part of regulatory requirements for it to merge with the PDS.
He explained they placed a self-imposed deadline to get the approval of three regulators—the Securities and Exchange Commission (SEC), the Philippine Competition Commission (PCC) and the Bangko Sentral ng Pilipinas (BSP).
After the SEC thumbed down the deal last year, the PSE reviewed its steps and came up with a new plan. That plan was not to gobble the entire PDS, and the PSE may have to leave business to handle government-issued debt papers. The deal costs about P2 billion, lower than the previous price of P2.25 billion.
“What we are actually asking from the SEC is for ‘exemptive’ relief,” Monzon said.
That, if given regulatory go-ahead, exempts the PSE from the 20-percent ownership cap for the fixed-income exchange. To secure this exemption, however, the SEC is requiring the PSE itself to first comply with the same ownership cap.
Deadlines
MONZON said stockbrokers currently own 27.9 percent of the PSE and they are exploring ways to bring this down to 20 percent.
“We’ve written to all these inactive brokers—52 of the 184, telling them that we are giving them three months from June 30…to signify their intention if they are still interested to operate as a broker,” he explained. “If they are not interested to operate as a broker under the PSE rules, then we can declassify them as a trading participant because they have no more plans to operate.”
Monzon added: “If they are no longer considered a broker then their trading privilege automatically becomes vacant and goes back to the PSE.”
The proposal to reduce brokers’ ownership can be simply solved if the PSE sells more shares to the public to dilute ownership. The process, however, involves fund raising that the PSE said it doesn’t need right now as it has more funds to buy the PDS.
PCC card
THE PCC’s approval, meanwhile, proved to be another hurdle that the PSE has to make.
The exchange already submitted its request for the PCC to review and approve the deal. However, the PSE pulled out the request after the anti-trust regulator peppered them with questions on how its acquisition will benefit the public and the investors. These, to note, were the same questions that the SEC hurled at the PSE when it disapproved the deal last year.
“They decided to withdraw and refile the notification so they will have more time [to answer the PCC’s questions],” Philippine Competition Commissioner Johannes Benjamin R. Bernabe said.
Bernabe said their questions centered on the PSE’s plans after acquiring the PDS.
“It pertains to possible efficiencies that the transaction might result in case these were not…adequately fringed prior to the Phase 1 review,” Bernabe said. “We also want to understand how this acquisition would benefit consumers and investors alike.”
Stuck with questions
IN the current setup, bank officers are dealing among themselves at the PDS.
Bernabe said what the PCC wants to know is what will happen to such type of transactions when the PSE takes over the operation.
“There were questions on how would that [merger] facilitate transactions if that is the modality today? How does it help investors if they want to participate in the exchange of bonds of the fixed-income securities,” he said. “So we thought [we should] allow the PSE and the PDS to provide examples or scenarios where these can result in efficiency gain.”
Bernabe added that the PCC also wants to know, “in terms of the certain functions of the PSE, which [of these] might have some overlaps with that of the PDS.”
“How do they intend to smoothen out these overlaps? A number of [how to] operationalize things [remain as questions].”
The PSE, meanwhile, has yet to know how the BSP will react to its merger proposals after the one-two punch it took from the SEC and the PCC.
With the PSE nearing its 25th year since its demutualization, it wanted a new office to be located in the BGC business district in Taguig City. The PSE plans to transfer by the end of the year.
Clearly, officials of the PSE are silently in agreement that they are in the middle of something: to bring with them the PDS deal as a laurel of victory or continue to be embarrassed with regulators raising more questions they can answer.
Image credits: Nonie Reyes, Alysa Salen