On PDRs and media ownership

There has been a lot of interest lately in derivatives and so-called Philippine depositary receipts or PDRs, especially since companies like ABS-CBN Holdings and GMA Holdings, both publicly listed companies in the Philippines, have sold PDRs to foreigners.

Article XIV, Section 11 of the 1987 Constitution provides that 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.

ABS-CBN Holdings, a company formed to invest in shares, owns equity in ABS-CBN Broadcasting Corp. which is the company involved in mass media and which under the Constitution is required to be wholly owned and managed by Philippine nationals.

GMA Holdings, meanwhile, is a holding company which issued the PDRs which are listed in the Philippine Stock Exchange. According to GMA Holdings, it does not engage in any other business or purpose except in relation to the issuance of the PDRs relating to GMA Network Inc. common shares.

With the application for franchise renewal of ABS-CBN Broadcasting still pending in Congress, some legislators insist that the company has violated the constitutional requirement of 100 percent ownership and management of mass media with the issuance of ABS-CBN Holdings of these publicly listed PDRs ,which have shares in ABS-CBN Broadcasting as their underlying value, to foreigners.

The same question applies to GMA Network. With some of the PDRs, which derive their value from GMA Network shares, issued by GMA Holdings in the hands of foreigners, does this mean that GMA Network, whose franchise was renewed in 2019 by President Duterte for another 25 years, also violated the constitutional requirement?

A derivative is a financial instrument with a value that is reliant upon or derived from an underlying asset. The most common underlying assets for derivatives are stocks, bonds, commodities, currencies, interest rates, and market indexes.

A PDR, just like the American Depositary Receipt from which it is copied, is similar to a derivative in that it also grants the PDR holder the right but not the obligation to purchase the underlying asset.

The Philippine Stock Exchange itself has said that PDRs listed and traded in the stock exchange are not considered as evidence or statements nor certificates of ownership of a corporation.

Note that a person who purchases a PDR from the PSE does not buy the underlying stock, unless he elects the option to buy these shares.

In 2013, SycipLaw advised Mercury Media Holdings Ltd. in the purchase of PDRs issued by ABS-CBN Holdings from Marathon Asset Management LLP effected as a special block sale on the PSE that “under existing laws, the underlying shares may not be owned or registered in the name of non-Philippine nationals and that in the event of exercise of the right to purchase the underlying share by a PDR holder who is not a Philippine national, the underlying share will be sold by an eligible broker in the open market to a qualified person.”

The same goes with ABS-CBN Holdings and ABS-CBN Broadcasting.

ABS-CBN legal counsel Atty. Cynthia del Castillo told Congress that PDRs issued by ABS-CBN Holdings are purely financial instruments and its holders are “passive investors’ who have no rights to own, manage, or to vote in ABS-CBN Broadcasting.

She added that in issuing these PDRs, ABS-CBN Holdings had the necessary approvals and licenses from the SEC and the PSE.

So if the foreigners who own the PDRs issued by ABSCBN Holdings and GMA Holdings are not shareholders of the respective broadcasting stations nor do they participate in the management, then it is clear that there is no violation of the constitutional prohibition against ownership and management of foreigners of mass media entities.

But how is this different from the case of Rappler? Recall that the SEC revoked Rappler’s license and voided the PDRs issued to foreign entity Omidyar Network Fund LLC because the issuance violated the same constitutional provision.

Former SEC chairperson Teresita Herbosa has explained that unlike GMA and ABS-CBN which applied for registration of the securities and whose PDRs were evaluated by SEC, in the case of Rappler, the PDRs did not undergo the same process since they were not going to be offered publicly but instead sold directly to Omidyar or other entities and persons.

In addition, the concerned Omidyar PDR provision required parent firm Rappler Holdings Corp. to get the approval of two-thirds of PDR holders on corporate matters, which the SEC said is a violation of the foreign equity restriction under the Constitution.

DOSRI violation The business of banking is fiduciary in nature, meaning one based on trust, and banks are required to exercise the highest degree of diligence since their business is one imbued with public interest, not to mention that they are handling other people’s money.

As a limit to the lending function of banks, the General Banking Law regulates, but does not prohibit per se, DOSRI loans or loans to directors, officers, stockholders and related interests. But violation of DOSRI rules are meted severe penalties, including imprisonment and fine for the responsible bank personnel, and even bank closure and liquidation.

In 2019, the Bangko Sentral ng Pilipinas came out with the BSP Citizen’s Charter, which among others gave an assurance of a reply on BSP’s action within five banking days from the time it is notified of a complaint.

Just recently, a newspaper article revealed that an entrepreneur engaged in town mall development has filed a complaint with the Monetary Board to investigate the top officials of one of the country’s top private universal banks due to over P4 billion worth of unreported and illegal DOSRI loans. The complainant invoked the so-called Citizen’s Charter adopted by the MB last year.

The bank is said to be part of an investment firm with investments in the banking, property, and retail sectors, and is now being investigated by the BSP due to selfdealing transactions.

According to the report, the investment firm obtained a majority equity in the complainant’s firm through corporate layering and an offshore corporation not registered to do business in the Philippines after the firm promised to give the complainant’s company access to credit from the bank where the investment firm owns a 20 percent equity.

The same report showed that one bank director approved the disbursement vouchers of the borrower company while another director of both the investment firm is a co-signatory in time deposits.

In case a loan is classified as a DOSRI loan, there are a number of requirements that must be complied with, including amount of the loan, disclosure to the MB, waiver of secrecy of bank deposits, that the presence and vote of the directors, officer (DOSRI) concerned was not necessary to meet the quorum requirement in the meeting of the bank directors when the loan was approvedand in the number of votes required for the approval, among others. Many of these have not been complied with in this particular case, the report revealed.