PSE into the 21st century... finally

ON September 23 the Philippine Stock Exchange (PSE) released a Consultation Paper titled “Proposed Amendments to the Main Board and Small, Medium and Emerging Board Listing Rules.”

The document begins by acknowledging the fact that “the Philippine stock market lags behind other Asean exchanges in terms of number of new listings and total number of listed companies.” While trying not to be rude, we must ask, “What took you so long to figure that out?” There are two purposes to a stock exchange, neither of which is to be used as a propaganda tool to make politicians look good. The first is to provide a platform and facilities to allow companies to raise capital from public investors by selling company equity. The second purpose is to provide a fair and regulated environment for subsequent shareholders to buy and sell ownership in the listed companies. Think of it this way. The wet market or palengke does not sell you anything. It provides a venue for vendors and customers to come together to do business. However, the market has a moral if not legal obligation to make sure that if a stall has a sign that says “Pork for Sale,” it is pig and not horse or cat meat that is being sold. Further, the local government regulators expect the market owner to help insure that its vendors comply with all health and licensing rules. The PSE was still writing buy/sell postings on a blackboard with chalk when the London Stock Exchange and others had gone to eliminating their trading floors and executing all orders electronically. The listing requirements of the PSE have always favored “big companies,” which actually mirrored the New York Stock Exchange from 1900 to the 1980s. The proposed new listings requirements for the “Main Board” has the potential to immediately open the door to dozens if not more new public companies. Smaller companies—by capitalization and projected market capitalization size—will now be judged by their record of profitability. “PSE intends to use net income, instead of EBITDA, as measure of profitability, to ensure that companies admitted for listing on the Main Board have the ability to generate profits for the benefit of investors.” That is better common business sense and that’s good. Amazon Inc. went public in 1997 and is now “AMZN,” the third largest company in the world. The 1997 Amazon could not be listed on the PSE Main Board today, as it was not profitable. It lost $5.78 million that year. It would be lucky to qualify for the SME Board. But the past 30 years has been a period of incredible corporate innovation and risk-taking venture capital. Now the SME requirements will be based on what you look for in a not-yet-profitable start-up, which drives economies and investment. The proposal calls for “cumulative net sales or operating revenues of at least P150 million for the last 3 years or such shorter period as the company has been operating, with at least 20 percent average net sales or operating revenues growth rate over the last 2 years.” The proposed changes to the listing requirements should be adopted as quickly as possible so that we can move into 2021 on a positive note. These changes will not only bring in more public companies but will open different industry sectors that have not been available before to investors.