By Gerardo P. Sicat
July 20, 2011
Changing times in the face of unchanging laws defines the conflict of the ages: reform vs. status quo, a more prosperous future vs. prosperity for the few, have-nots vs. haves. The restrictive economic provisions of the constitution represent the unchanging laws. The demands for economic reform constitute the pressure to adjust to the needs of the times.
Along this line, Thomas Jefferson’s wise words resonate:
“I am not an advocate of frequent changes in laws and constitutions. But laws and institutions must go hand in hand with the progress of the human mind. As that becomes more developed, more enlightened, as new discoveries are made, new truths discovered and manners and opinions change, with the change in circumstances, institutions must advance also to keep pace with the times.”
Our institutions are handled by men who, no matter how we choose them, are capable of errors of judgment like all of us. It is true of the men we elect as well as the men that elected men appoint. Therefore it is true of those who make judgments about the way to interpret our laws.
“The cost of wrong decisions.” Within the realm of the Supreme Court, there have been outstanding examples of such errors in judgment that produced unfortunate results for the nation. On appeal, the court sometimes corrected itself. But when the losing party gives up on a case that had immense negative impact upon the nation, most of us suffer the ultimate loss.
When the Supreme Court intervened to direct a major petrochemical project of a foreign investor group to transfer the location of its project from Batangas to Bataan, the foreign investor group, appalled by the interventionist nature of the courts in a business issue, withdrew entirely from the scene. Today and more than 20 years later, the country is still trying to set up the industry that the country failed to establish. Many jobs and new industries failed to happen because the investment did not go through.
When the Supreme Court awarded the privatization sale of the Manila Hotel to a Filipino group, the argument employed was to enable a national historic asset from being held by a foreign group. From the line of sight of Jose Rizal’s monument at the Luneta Park today, the Manila Hotel looks like a failing second class hotel. Compare this with the Peninsula Hotel in Hong Kong and the Raffles Hotel in Singapore – two uniquely historic hotels. The latter are fine examples of hotels owned, run and managed by well-financed professional hoteliers engaged in the business of hotels.
In a recent 2005 decision involving foreign investment participation in mining, the Supreme Court made it possible for foreign direct investments to participate in the development and exploitation of natural resources. Through the use of a brilliant even if tortuous reasoning, the court saved the day by reversing itself. But many years had already passed during which significant growth of the Philippine mining industry could have happened.
“The Supreme Court’s definition of capital.” Recently, the Supreme Court made a ruling on the 60-40 equity rule that defines the meaning of capital in the restrictive economic provisions of the constitution. The court said that capital in the context of the issue at hand referred only to the voting shares of a corporation. This means the common stock.
Taking notice of the capital structure of PLDT, the total outstanding shares of the corporation comprise of 22.15 percent in common, or voting, shares and 77.85 percent in preferred shares. Of the common stock, a total of 35.73 percent is held by Filipinos. The rest, or 64.27 percent of the common stock, is owned by foreigners. Of the preferred stock, a total amount of 99.44 percent of the outstanding preferred shares is owned by Filipinos and 0.56 percent by foreigners.
By this reasoning, the capital consisting of preferred shares was of no account in the 60-40 equity rule. Under this interpretation, the PLDT shares owned by foreigners would be far above the 40 percent called under the rule, since foreign shares are 64.27 percent. This would preclude the purchase of an additional 6.3 percent of the total common stock by PLDT, which was the main issue at hand in the problem that was before the court.
Actually, the Supreme Court took cognizance of the structure but directed the Securities and Exchange Commission to study this for compliance and for exacting the appropriate penalties for infraction against the capital requirement.
There is a problem here. It was the SEC as regulator that allowed the practice of taking a liberal interpretation of the capital requirement to take root. How is one to penalize infractions against the rule? Should the blame then be on SEC for allowing a different state of affairs? How could private investors be penalized for following the rule of the regulator to begin with?
“SEC practice was different from the Supreme Court definition.” Under the SEC regulation, however, PLDT would be very much within the 60-40 rule of equity. The Securities and Exchange Commission, the regulatory body that deals with such issues, has ruled before that 60-40 rule of Filipino to foreign equity was to be interpreted as the combined common and preferred shares outstanding. These were physical number of shares outstanding, not shares weighted by value.
SEC adopted this definition as a means of permitting a higher volume of foreign capital inflows into the country. Was there a policy decision at the top of the government, for which an order or interpretation was given so that more foreign capital could be attracted under a more liberal interpretation of the 60-40 rule?
Be that as it may, the SEC as regulator having defined the nature of the capital ownership for purposes of dealing with the 60-40 equity rule, it became the practice in the financial industry to use this definition. Foreign capital infusion in relation to industrial expansion projects, in large industries and in public utilities as well as regulated industries, used this design in the financial packaging.
Such practice has been used in financial institutions that intermediate large savings and wealth instruments to invest in securities of major enterprises in the country. The practice has taken root within the financial system.
“Disruptive impact on development.” This is where the Supreme Court ruling has a disruptive impact on the country’s capital market. By unsettling the capital structure of the major public utilities, the whole financial system is partly shaken up because it also invests in these corporations. The future implication is for the divestment of some foreign capital. This could lead to forced sale of capital assets to domestic groups with capital.
But the times have called for the country to seek an expansion of foreign capital to supplement the nation’s investment needs. Moreover, the court’s move cannot possibly lead to an effect in the other direction – meaning more inflows of foreign capital – since the measure upsets the foreign investment climate. Once again, it demonstrates the oft common complaint against us – changing of the rules of the game.
This decision of the Supreme Court typifies the notion that I described in the last week’s column. As a nation we are faced with many rules that make us unproductively very busy. The outcome could even be worse. It sets us back in our development. It is not only unproductive but is, sadly, destructive of the little gains achieved in attracting foreign capital.
Visit this site for more information, feedback and commentary: http://econ.upd.edu.ph/gpsicat/
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Source: Philippine Star
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