New guidelines to govern cash-strapped companies

Exit mechanism from firms ‘under financial distress’

THE PHILIPPINE Stock Exchange has approved new guidelines governing cash-strapped companies, incorporating red alerts in a bid to provide “additional safeguards to minority stockholders” before such problematic issuers succumb to bankruptcy.

In a statement issued yesterday, the PSE said its board approved for submission to the Securities and Exchange Commission (SEC) the proposed rules for companies under financial distress. A separate framework was drawn up to govern companies undergoing court-assisted corporate rehabilitation.

Under the proposed rules for companies under financial distress, listed issuers that will become the subject of the following conditions are required to immediately disclose such fact: (a) cessation of business operations for at least six months for any reason; (b) reporting of negative stockholders’ equity; (c) delay in the payment of loans amounting to at least 10 percent of its total assets, and (d) adverse or qualified auditor’s opinion on the financial statements of the company for three consecutive years.

Upon the PSE’s receipt of the relevant disclosure, the issuer will be flagged as a company “under financial distress” in the PSE’s trading reports as well as the issuer’s stock information page on the PSE’s website. An issuer may request for the removal of the notice of financial distress anytime within a period of three years once it has proven that the ground upon which such category was issued no longer exists.

“The pre-rehabilitation guidelines are being proposed to give more information to the investing public about listed companies under financial distress and provide an effective exit mechanism for those who may wish to trade their shares of such companies experiencing financial distress,” PSE president Hans Sicat said.

The rules for companies under corporate rehabilitation proposed that the PSE impose trading suspension on the shares of the company five trading days after the filing of the disclosure on corporate rehabilitation. The existing guidelines call for the immediate imposition of a trading suspension on the shares of a company only upon receipt of the company’s relevant disclosure, which means minority investors are more prone to be trapped in illiquid stocks.

The proposed rules for companies under corporate rehabilitation also incorporates possible rehabilitation schemes envisioned in the Financial Rehabilitation and Insolvency Act of 2010, namely court-supervised rehabilitation initiated either by the debtor or the creditor; pre-negotiated rehabilitation, and informal or out-ofcourt rehabilitation.

“The PSE is not alone in adopting such rules as other stock markets in Asia have similar rules in place. What we are doing is to align our rules with best practices. We trust that the SEC will be behind us to support this initiative,” Sicat said.

The guidelines were firmed up by the PSE after seeking public comments on a draft paper published in March.