The Organization for Economic Co-operation and Development (OECD) said more needs to be done in enforcing corporate governance rules and guidelines in the local equities market.
In an assessment report of the local capital market, the OECD noted the need for regulators to ease up on listing requirements to deepen the listed companies’ pool, particularly those in the growth phase of their developments.
The assessment, done through an initiative by the Securities and Exchange Commission (SEC), is aimed at getting an “objective third-party view of the capital market” for targeted programs by the Philippine capital markets regulator.
In highlighting the need for more corporate governance rules, the OECD said the “dominance of conglomerates containing within-group banks creates both financial risks and corporate governance challenges.”
While the country’s own corporate governance code provides key provisions, enforcement is “weak,” it added.
“Moreover, the SEC has a wide mandate, limiting resources available for supervision and enforcement,” it said.
According to the OECD, regulators should be provided with the resources and a clearer mandate to enforce corporate governance rules and guidelines, “with a special focus on board and audit committee independence, related party transactions and cross-shareholdings.”
“The authorities could consider updating the Philippine Code of Corporate Governance in line with the G20/OECD Principles of Corporate Governance revised in 2023. The authorities could also consider fully separating the stock exchange’s regulatory and commercial functions, and the focus of the SEC could be streamlined towards supervision. Finally, the authorities could consider strengthening the role of the public-private Capital Markets Development Council (CMDC),” the OECD said.
The SEC also noted the need to ease listing requirements to encourage companies with growth potential, and deepen the pool of listed companies.
Since 2000, the Philippines recorded the lowest number of listings and the lowest amount of capital raised via initial public offering among Southeast Asian countries.
“The listing process is long and suffers from organizational challenges, with requirements being less flexible than in peers. Regarding smaller firms, the SME (small and medium enterprises) Board only has 10 companies and the private equity market is nascent. Listing fees are relatively high and the fee structure is more complex than in peer countries. While tax reforms are being proposed, an IPO tax and stamp duty tax affect the appeal of IPOs,” the OECD said.
It said a single listing submission process and a three-month commitment for IPO approval could streamline the process, while reducing fees, simplifying the structure and lowering the stamp duty tax could encourage listings.
“Introducing a special program to support the listing of large unlisted companies and large SOEs (state-owned enterprises) could increase the attractiveness of the local stock market. To improve access to financing for smaller companies, requirements for the SME Board should be more flexible and proportional,” the OECD said.
It said regulators might want to consider establishing minimum payout ratios and incentives for companies to deliver higher value to shareholders.
Meanwhile, the OECD suggested that regulators look into incentivizing higher free-float levels through easier and less costly follow-on offerings and allowing companies to deduct a notional interest on new equity issuance to promote increased liquidity of the stock market.
“Support for independent company research could be implemented, as could incentives for being a market maker. Regulators should ensure the regulatory framework is in place for the development of a derivatives market and support market participants to overcome barriers for using securities lending and borrowing. The authorities could also consider reducing the stock transaction tax on the sale of listed shares,” it said.
The investment floors of the public pension funds for investments in equities and corporate bonds could be relaxed to deepen the capital market’s investor base, the OECD added.
“Authorities could also consider further promoting Personal Equity and Retirement Accounts, while removing outstanding frictions and broadening the administrator base. Regarding investment funds, the authorities should approve the laws to reconcile regulations and harmonize taxes,” it said.
The OECD also suggested that the SEC consider a single-step registration process for mutual funds while introducing a wider range of products and exchange traded funds (ETFs) to boost international investor interest.
“To boost household participation, the government should seek to facilitate access to low cost and easy-onboarding digital platforms that allow small minimum investments. Finally, efforts should continue to increase financial literacy and awareness of the consumer protection system in place,” it said.
Emilio Aquino, SEC chairman, said the OECD assessment serves as a helpful guide for the SEC and affirms some of the priority areas it has identified to bring the country at par with Asian peers.
“We remain committed to fostering a robust and dynamic capital market, consistent with our goal of becoming one of the best in Southeast Asia,” Aquino said.
“The SEC welcomes the assessment by the OECD of the market conditions and issues that have shaped our financial system over the years,” he added.
