THE Securities and Exchange Commission (SEC) may have to overhaul its formula in computing the ratio of ownership between Filipino and foreigners in a stock corporation following the ruling of the Supreme Court that the process in arriving at a 60:40-percent ratio of ownership in favor of Filipinos should based only on common voting shares, that is, common shares with the right to elect the members of the board. And it took one former lawmaker to seek the interpretation of the constitution; the High Court’s ruling is now the talk of the town, particularly among the big players who trade on stocks listed on the Philippine Stock Exchange

Wilson Gamboa, a former lawmaker, has questioned the acquisition by the First Pacific Co. Ltd. of Hong Kong of shares in Philippine Long Distance Telephone Co. (PLDT) that were owned by the government but were held by the Philippine Telecommunication Investment Corp. Such acquisition, he claimed, would result in foreigners owning more than the constitutional limit of 40 percent in a public utility company.

With the ruling, the SEC may have to review its procedures in registering a corporation with foreign equity. What would be more important and interesting, particularly for the companies that are covered by the 40-percent foreign ownership limit, is for the securities regulator to disclose the formula that it has been applying all these years which probably dates back to 1988, or may be even earlier. It appeared from public statements issued by Manuel V. Pangilinan, PLDT chairman, that the telecom giant—which he said was not a respondent in the suit—has been faithfully complying with the law in allowing foreigners to buy its shares.

Apparently, PLDT’s foreign investors or stockholders were guided by the SEC’s formula in determining the constitutional limitation on foreign ownership in certain companies such as public utilities and those engaged in the exploration of natural resources. And  the SEC’s formula covers the entire capital stock of a stock corporation, that is to include both common and preferred shares. The preferred shares however, depending on its features, could either be voting or non-voting.

First Pacific alone is not in violation of the 40-percent foreign ownership limit. It is the total foreign ownership of PLDT common shares that exceed the 40-percent legal limit.  If one were to go by PLDT’s filings, First Pacific and NTT DoCoMo-NTT Communications combine for 47.57 percent of PLDT’s outstanding shares. But a computation based on the capital stock to include both common and preferred shares would result in foreigners owning only 26.987 percent of outstanding.

If the ownership computation in stock corporations has been made complicated by the composition of a capital stock, blame this on the expansion of capital stock.  In the beginning, foreign ownership in such entities as public utilities, mining and oil companies, which are listed, was not likely to exceed the 40-percent maximum because their common shares were classified into common A and common B shares.

The classification allowed for easier regulatory monitoring as foreigners were allowed to buy only the B shares.

Over the years, the SEC has been telling listed companies to get rid of the A and B classifications but there are still a few that maintain the classifications such as Benguet Corp. Then came the preferred shares, which could either be voting or non-voting and further classified and defined by the letters of the alphabets. PLDT, being  heavily capitalized by preferred shares, identified the preferred shares listed on the exchange starting with TELA, which were listed on October 22, 1973, until TELZ. As of yesterday, PLDT has listed additional preferred shares with double letters starting with TLAA. It listed TLHH on September 17, 2010.

The question is how the SC ruling would impact on the entry of foreign investments? Will this mean the exodus of those that have breached the 40-percent exposure in certain listed companies and close corporations? As for PLDT, the telecom giant may be off the hook sooner or later. It can easily cure and correct the violation, according to SEC insiders.

All eyes, meanwhile, are now focused on the SEC as the securities industry regulatory agency has been tasked by the High Court to make the correct count.