Approaching its 25th anniversary this year, the Philippine Stock Exchange (PSE) has long been criticised for its ‘strict’ rules and regulations in listing and trading. It is not surprising then that IPOs in the country remain scarce. In 2017, there were only four IPOs in the country, same as the previous year. PSE ended 2017 with 267 public companies, excluding delisted firm Calata Corp.
In a bid to change that, the bourse is now willing to embrace changes, including looking at initial coin offerings (ICO) as well as exclusive boards or governing bodies for technology companies and startups, PSE senior VP and chief operating officer (COO) Roel Refran told DEALSTREETASIA in an exclusive interaction.
Refran also talked about the country’s roadmap to a unified capital market infrastructure, referring to PSE’s planned merger with the Philippine Dealing & Exchange Corp (PDEx), the local fixed income FX exchange arm of PDS Holdings Corp.
PDS Holdings’ parent firm PDS Group also owns and operates the Philippine Depository & Trust Corp (PDTC), Philippine Securities Settlement Corp (PSSC), and PDS Academy for Market Development Corp (PDSA).
PSE is a part-owner of PDS. It boosted its shareholding in the company from 20.98 per cent to 44.78 per cent last June.
You mentioned early last year that PSE hopes to double the IPO figures in 2017 from 2016. This obviously did not materialize. What happened?
There were global and local components. In China last year, many (companies) went public but in Japan, Singapore, Malaysia, and the Philippines, companies became cautious.
In the Philippines, a large impact was the uncertainty of the monetary environment because they were poised to increase the interest rates. When that happens, it hurts the equities market, and money will then look for safer haven or assets, although that was kind of settled by mid-2017. That’s the global component. As in local, not so many offered for listing because there were companies who were prepared for listing but have just not yet decided on the date. There were some who filed for application, they decided on a date but were unable to provide enough information or comply with certain must-haves.
I think there could have been two more companies, a manufacturing, and energy company that could have listed in 2017. But these were deferred pending compliance in the review process, especially about their track records. The general rule always is it has to be demonstrated. There has to be a track record, successful projects equivalent to a track record, a good earnings story for the company.
What can you say about criticism that the disclosure and compliance requirements imposed by PSE make it difficult for companies to list?
Our interest is to offer more investment products. The interest of the company that wants to do an IPO is to get funds to support its strategy. How do you strike the balance? That’s where we come in. For us, we wanted those stories of track record concretely demonstrated. It’s not because you met the net income requirement that you are already compliant with the track record rule. That’s the base requirement. But how is the industry? They have to be able to demonstrate their chance of survival. No one can guarantee that but at least you’re able to share your success story via successful projects, via a more permanent relationship like if you have a principal abroad. That’s where I say, not everyone that files for an application would immediately or automatically be allowed to enter the door. Other markets have a different way, just full disclosure, complete papers and you’re good to go. I’m not saying they’re wrong and we are right. I think it all depends on your investors.
So how did the local capital market fare in 2017?
We’re below our target when it comes to capital fundraisings. We were P176 billion in 2016 and P163 billion in 2017. We had four IPOs in both years. Our target is P200 billion every given year. I think the bulk of that should be from rights offerings or follow-on offerings from listed companies. It would be good if you can get that alone from the IPO but normally they’ll fundraise anywhere around P8 billion in IPOs. By default, you really have to get it from the follow-ons, private placements and rights offering.
Is PSE open to amending its IPO and trading rules?
Last time we amended it was in 2013. It was relaxed and became strict for the SME board and now it has track record requirements. The question now is if we are now going to come up with let’s say, a technology board? A startup board? Because the ICOs and the crowdfunders are out there.
The PPP (Public-Private Partnership) program rules were supposed to be a test case for that. However, the government changed the PPP preference and now they have GAA (Government Appropriations Act) or ODA (Official Development Assistance). I really wanted the PPP to be a good case study so we can open it up for startups.
I think the challenge now for us is there will be companies who will tap other facilities to fundraise. Would you rather want them to go there or to us where the rules are much more distinct? For us, we feel it’s in the life cycle of the company. A company that is not yet ready to comply with all the requirements and track record may not be fit for a public offering. It may be fit for venture capital. That’s how I see it.
A startup obviously is in the infancy stage, you have no track record, uncertainty is high, nine out of 10 startups fail, although some say success is 99 per cent failure. As for us, you really can’t blame us for being cautious, maybe even overly cautious, because for 10 success stories all it takes is one failure for people to really tell us you did not do your job.
We really have an investor protection mentality. An exchange is a business. If it’s really just for profit, we would want them to list, list, and list. But no, we have to temper that side of us because we also have our regulatory role.
But we’re going to revise a couple of trading rules to make way for reality. For example, trading now has changed compared to seven years ago. The last time we revised our trading rules was in 2010. We’ve been reviewing it and had recognized that provided parameters and filters are met, you can engage technology to actually do a couple of algorithmic trades. All of these are pending discussions.
Can you elaborate more on the listing component?
I think we only need to benchmark how we can safely allow maybe a startup but with a big brother or a company that’s backing them up so you will have a second layer in case it can’t stand on its own. In London, they have the AIM board of Alternative Investors Market. They have nominated advisors and sponsors. Being backed by a VC is okay because VCs and PEs they need to exit at some point. And this is a perfect avenue for them to exit. They’re anchor investors.
Technology is different from last year or two years ago and regulations have to adapt because it’s not the other way around. Technology will not adapt to regulations. Anywhere you go, they are now saying maybe the core regulations should be maintained, but to add on to regulations may be counter-productive because there are now alternatives.
In Australia and Singapore, what they do is the regulatory sandbox approach. For people not covered by regulations, they allow you to solicit funds from the public but the agreement is ‘I’m here looking over your shoulders’. This will now allow me to come up with regulations. I will allow you to operate within the confines of our agreement. It’s working because it fuels innovation. There are others who are still afraid because of lack of regulations. This one can be a very good case study for developing regulations. I’m not closing my eyes, closing the doors, I’m embracing innovation. But I’m mindful investor protection is very much our mandate.
What do you think about Initial Coin Offerings (ICO) and Blockchain technology?
The Circular 944 that the BSP issued in February is a bit tricky. Think about it, there’s a buzz about Bitcoin, Ethereum, and other virtual currencies. And then there are ICOs, an IPO equivalent of digital offerings, but here it has registration requirements if you will offer. Currently when you go to the US or Singapore, they don’t do it that way. The contract is structured as donation ICO in order so there won’t be any registration with the SEC. There is still no regulation other than BSP’s 944 to register as a VC (virtual currency) exchange but it’s a very limited coverage, only if you allow the exchange from fiat currency VC and vice versa. If there’s no regulation to SEC, it’s prone to fraud.
The good thing about this Bitcoin buzz is people are now more interested in investing. My motto here is you need to learn how to walk first before you can learn to run. Think about mutual funds at first, maybe fixed income or even equities, if you’re a risk taker.
We need to be conservative. We talked to Nasdaq and other providers and they admit that maybe blockchain or distributed ledger technology has potential use in formal exchanges. Whatever it is, it’s not yet known. Most probably not in trading but payments and settlements.
We have installed technology systems. You need to replace that to put the blockchain technology from the ground up. Everyone, from the banks to the brokers, has to be a part of that community of blockchain for data mining. That’s the biggest hurdle. The train is already moving and it’s moving so fast and you can’t just stop it to replace the wheel. I always look at it that way. There’s a process, running so fast, you have to hold on and see what you can do while it is moving. That’s how I see blockchain.
What are the key developments PSE is looking at in 2018?
The year 2018 will be big for PSE, a milestone year for us. We will be celebrating our 25th year. We already got clearance from the Philippine Competition Commission (PCC) for our merger with PDEx which is the country’s fixed-income FX exchange. We’re a part owner now and we have a mandate now from the board to integrate their operations into our operation. What you will see is PSE running it although they will continue to exist as PDEx. But all of these are still subject to SEC approval.
PSE and PDEx will be moving to Bonifacio Global City with our offices just right across a street. So 2018 will be about the integration of operations, and market integration of fixed income.