Ownership of funding firms

Ownership of funding firms

By Raul J. Palabrica
Philippine Daily Inquirer
First Posted 23:43:00 01/20/2011

Filed Under: Financial & Business Services, Laws
FINANCING COMPANIES in the country have one less regulatory requirement to worry about.

In an opinion rendered recently by Justice Secretary Lilia De Lima, she stated that foreigners could already own up to 60 percent of the capital of these companies.

By way of background, financing companies are corporations organized for the purpose of, among others, extending credit facilities to consumers and commercial enterprises.

The definition does not cover banks, investment houses, savings and loan associations, insurance companies, cooperatives and other financial institutions that are governed by special laws.

Financing companies engage in quasi-banking activities, such as direct lending, discounting of commercial papers and a myriad of other funding acts (outside of the formal banking system) that make capital available to those who need it.

The most common experience of Filipinos with financing companies is in the acquisition of what many consider as a sign of financial success—a brand-new car. Unless paid in full, its purchase is usually done through a financing company.

Ownership

In her opinion, De Lima pointed out that initially, under Republic Act No. 5980, financing companies were partially nationalized, that is, at least 60 percent of their capital was required to be owned by Filipino citizens.

Foreigners can own up to 40 percent of the capital, and their representation in the board of directors should be proportionate to their actual or allowable investment.

With this limitation, these companies came under the coverage of the Anti-Dummy Law, which bars foreigners from intervening in their management, operation, administration or control in any capacity, even without compensation.

The prohibition does not, however, apply to “technical personnel whose employment may be specifically authorized by the Secretary of Justice.”

The ownership constraint was later changed by Rep. Act 8556, which provides that “at least 40 percent of the voting stock” of these companies should be owned by Filipinos.

With the amendment, the investment opportunity for foreigners was expanded from 40 to 60 percent and the minimum capitalization requirement for Filipinos was correspondingly reduced to 40 percent.

Employment

De Lima explained that the intention of the legislature to liberalize the financing business is clear from the change in the mandatory ownership structure.

This desire is further underscored by the fact that the standpoint from which such ownership proportion shall be determined was changed from “capital” to “voting stock.”

She pointed out that capital “refers to the entire property or assets of the corporation which includes the amount invested by the stockholders plus the undistributed earnings less losses and expenses.”

Voting stock is “a stock that entitles the holder thereof the right to vote in the election of the directors of the corporation and on matters that are put to vote.”

The net effect of these changes is to remove financing companies from the list of companies that are required to have at least 60 percent Filipino capital ownership before they can be allowed to organize and operate in our country.

Since the financing business is no longer considered “nationalized,” the financing companies are already excluded from the coverage of the Anti-Dummy Law.

Thus, according to De Lima, they can employ foreign nationals to manage their business without securing prior permission from the Secretary of Justice for such action.

Lending

Lest it be misunderstood, the subject opinion applies only to financing companies, not to lending companies.

Although both companies engage in the business of lending or extending credit facilities, they are governed by different laws and regulations because of differences in the nature and scale of their operation.

Financing companies are involved in medium-sized transactions (as against big-ticket deals that run to hundreds of millions of pesos), while lending companies are mom-and-pop entities that lend money— that usually do not exceed P50,000—to small-scale businesses or people with limited income, such as, market vendors and pensioners.

While financing companies are allowed to raise funds from various sources, i.e., through money market operations and sale of bonds, lending companies are not similarly authorized.

They cannot solicit investments or incur loans from more than 19 lenders including their shareholders. Their funding source is practically limited to the pockets of their stockholders.

On account of their target market and limited funding, most lending companies hold office near commercial areas or where there is a high density of pedestrian traffic.

The law requires the majority (or 51 percent) of the voting capital stock of these companies to be owned by Filipino citizens. The rest of the equity may be owned by foreigners whose countries grant reciprocal rights to Filipinos.

The nationality requirement is aimed at ensuring that grassroots-level financing remains in Filipino hands in the same manner that, except for certain capital criteria, the retail trade business is reserved for Filipinos.

Koreans and Indians, please take note.

(For feedback, please write to rpalabrica@inquirer.com.ph.)

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