Press Start

Philippine Stock Exchange (PSE) entered the new year with an old habit. PSE halted trading on 3 January 2024 from 9:32 AM to 11:55 AM when most trading participants were unable to connect to the front-end order management system and to send buy and sell orders for processing to the trading system. Based on the PSE statement dated 5 January 2024, the underlying cause of the technical problem was due to the mobile trading application and the process of authenticating active accounts and inactive accounts that had neither been accessed nor had registered a trading activity. To pour freezing water over the scorching argument, the PSE and the front-end order management system developer stated that they had implemented a design optimization on the mobile trading application and are working on related enhancements for deployment to prevent the recurrence of analogous technical problems. It is worth mentioning that this unfortunate event could be best described as a frequent annual occasion as it happened on 4 January 2022 when the PSE delayed the market opening and canceled trading before the market closing due to an arcane technical problem. For two consecutive days, the PSE canceled trading on 5 January 2022 when most trading participants were unable to connect to the Flextrade front-end system and to send buy and sell orders for processing to the NASDAQ trading engine. Through the constant coordination and collaboration with the representatives of Flextrade and NASDAQ, the PSE was able to determine and resolved the technical problem and had resumed trading on 6 January 2022. What an irony that the technical problem emerged a day after the PSE announced that it was named as the Best Stock Exchange in Southeast Asia at the Marquee Awards of the Annual Best Deal and Solution Awards 2021 by the institutional investment magazine Alpha Southeast Asia. We do understand that managing an Information Technology (IT) system is complicated and requires a competent manpower to minimize if not eliminate its technical vulnerabilities. What we do not understand is why does the PSE kept on making one step forward and two steps backward when it comes to operating and maintaining an IT system between the trading participants and trading system? Perhaps the PSE should stop justifying a trading suspension and start deploying an IT system operated and maintained by capable IT companies. A proactive approach not only strengthens the foundation created by the IT system developers but promotes a culture of stewardship and accountability. 

Low Tax

Tax is the price paid by a citizen for the services rendered to and for him by the state. This theory is based on a presumed contract or agreement between the citizen and the state. In case you had bought and sold a stock of a public company that is listed in the Philippine Stock Exchange (PSE) then you would have observed that the difference in the total transaction cost between buying and selling is the additional stock transaction tax for selling. Although the stock transaction tax could be miniscule for most investors who use a buy-and-hold investment strategy, it is a burden for most speculators who follow a buy-and-sell trading strategy. On 26 February 2018, the Bureau of Internal Revenue had issued the rules and regulations implementing the increase in the stock transaction tax from 0.5% to 0.6% pursuant to the provisions of the Tax Reform for Acceleration and Inclusion Act. While the increase in the stock transaction tax is expected to raise P1.7 billion in additional annual revenues for the government, the PSE had raised apprehension that the higher stock transaction tax would make the local capital market less competitive as compared to its regional counterparts. Hence it is reasonable to lower the stock transaction tax to a bare minimum to decrease trading charges, increase market liquidity, enhance stock tradability, encourage foreign capital, maximize potential profit and expand market participation among investors and speculators. It is worth mentioning that the 0.6% stock transaction tax of the Philippines is the highest among the Association of Southeast Asian Nations (ASEAN) member countries. Whereas Vietnam and Indonesia impose a 0.1% stock transaction tax, the other ASEAN member countries tax-exempt the sale of stocks. We are writing this blog post to express our earnest support to the House Bill 8958 or Capital Markets Efficiency Promotion Act that proposes to lower the stock transaction tax from 0.6% to 0.1% and the dividend tax of non-resident foreigners from 25% to 10%. The lower stock transaction tax and dividend tax of non-resident foreigners would promote a favorable business environment for investments, support capital raising for companies and simplify the tax system as the distinction on the tax on trading of domestic stocks whether in the local or foreign stock exchanges will be removed. We encourage the members of the legislative branch of government to support and vote in favor of the Capital Markets Efficiency Promotion Act. 

Wrong Move

Greek philosopher Heraclitus who wrote about the nature of change in his book Fragments once stated that the only constant in this world is change. We adhere to his philosophical thinking and we advocate change if and when the chosen modification is the best possible proposition among the selections. We were elated when the Axelum Resources Corporation (AXLM) announced that its board approved a measure to reallocate P350 million of the Initial Public Offering (IPO) proceeds from the global network expansion to product development, marketing expenses and capital expenditure. The justification for the reallocation of the IPO proceeds is that it makes available supplementary financial resources to the aforementioned business activities that are needed by management in implementing the business objectives. Through its associate company the AMDG Foundation, AXLM acquired the San Isidro Polymedic General Hospital – a leading secondary–level hospital in Gingoog City, Misamis Oriental. The hospital is furnished with a 100-bed capacity and offers comprehensive professional healthcare services which include but not limited to surgery, neonatal, radiology, pharmacy, laboratory, diagnostics, hemodialysis, intensive care, delivery rooms, outpatient clinics and emergency services. Some trading and market participants would argue that a reallocation of the IPO proceeds should be considered as a red flag since AXLM would be breaking its own rules as stated in its prospectus describing the original use of the IPO proceeds and other related information that an investor could use when deciding whether or not to invest. Although we have not come to an agreement with these trading and market participants as long as the purpose of the reallocation of the IPO proceeds is to ensure that the business operations could generate the highest possible return at the lowest possible risk, the corporate action made by AXLM neither created operational nor financial synergies. It is worth mentioning that AXLM is engaged in the manufacturing of coconut products such as coconut oil, coconut milk, coconut water, sweetened coconut and dehydrated coconut among others. No matter how eloquent the press release of AXLM is regarding the acquisition of the San Isidro Polymedic General Hospital, the fact remains that the reallocation of the IPO proceeds is a wrong move. Based on Investopedia.com, business synergy is the concept that the combined value and performance of merged companies would be greater than the sum of the separate companies. If that is the case then where are the operational and financial synergies in this corporate action? 

Broken Vow

Full disclosure principle states that an accurate and complete information that could have a material impact on the financial statements and operating performance of companies should be included in public filings to ensure that information asymmetry between the company insiders such as the directors, managers and shareholders, and company outsiders such as the lenders, creditors and investors would be mitigated if not eliminated. Companies are required to practice corporate governance and transparency that promotes cooperation, collaboration and communication among the concerned parties supported by a sequence of protocols in delivering and increasing value to shareholders. But we should not depend on the strong adherence of the company insiders because the position that they hold in an organization make available to them material non-public information that could have an impact on the share prices of companies in which they could make the most of to have an undue advantage in realizing an above average investment return. Although morality cannot be legislated, behavior can be regulated so the private sector should endorse the best possible solution to the market predicament while the public sector should enact relevant laws to regulate the behavior of company insiders. Whether or not the market structure is competitive or non-competitive, insider trading can happen in an idealized competitive economy. In this regard, the Securities and Exchange Commission warned companies that the electronic submission of reportorial requirements would be considered accurate and complete while errors would be punished with corresponding penalties. The revised Corporation Code of the Philippines noted that companies including their authorized representatives who submitted the erroneous and deficient information would be held liable for the corresponding penalties imposed ranging from P20,000 to P400,000. We do know that the revision of the Corporation Code of the Philippines by the lawmakers and the implementation of the electronic submission of reportorial requirements by the regulators would benefit the shareholders but what we do not know is whether the corresponding penalties are more than enough to discourage violations and encourage compliance. In our opinion, the corresponding penalties could be described as negligible considering that the amount would not make a dent on the financial statements and operating performance of most companies. Perhaps it would be best for the lawmakers and the regulators to increase the corresponding penalties to unreasonable level or else non-compliant companies including their authorized representatives would continue to submit erroneous and deficient information to pump and dump the share prices for personal financial gain at the expense of the unsuspecting market participants.