9 November 2020
In response to the dampened economy brought about by the 2019 Coronavirus Disease (“COVID-19”) pandemic and to avert credit and liquidity crises, the Securities of Exchange Commission (“SEC”) issued SEC Memorandum Circular No.23, Series of 2020 laying out the rules on corporate debt vehicle.
A Corporate Debt Vehicle (“CDV”) refers to a closed-end Investment Company to be offered to any number of Qualified Buyers (QBs) and/or non-Qualified Buyers (non-QBs) not exceeding 19 persons in the Philippines during any 12-month period with the specific objective of investing in the corporate debts of large corporations and medium-sized enterprises. Corporate debt shall mean any bonds, notes, commercial papers, debentures and other evidence of indebtedness, whether secured or unsecured, of (i) large and medium-sized corporations operating or deriving income in the Philippines; or (ii) any company guaranteed by a large or medium-sized domestic corporation or by the Philippine government and/or its agencies or by multi-lateral agencies involving exempt securities under Securities Regulation Code (“SRC”) Rule 9.1.2.3.
Implications for business in the Philippines
CDV provides large corporations and medium-sized enterprises the necessary funding to meet their obligation and sustain their operations. The issuance of the regulatory framework of CDVs will help companies maintain liquidity amid the COVID-19 pandemic by sanctioning the sale of corporate debt papers of large and medium enterprises.
Significant provisions of the Rules
Entities which are permitted to offer CDVs
A CDV may only be offered by a closed-end Investment Company with the primary objective of investing in portfolios of corporate debt papers. A closed-end company is an Investment Company that offers for sale of fixed number of units of participation or shares which cannot be redeemed at any time.
Capitalisation requirement
An Investment Company organised as a CDV shall have a minimum subscribed and paid-up capital of PHP 50 million. However, if the CDV is one of or part of a group of Investment Companies to be created or already in existence to be managed or under management by the same Fund Manager, the subscribed and paid-up capital shall not be lower than PHP 1 million provided the specific guidelines regarding Fund Managers under the Rules shall be followed.
Denial of pre-emptive right of stockholders
Section 38 of the Revised Corporation Code grants all stockholders of a stock corporation the pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to their shareholdings, unless such rights is denied by the articles of incorporation or an amendment thereto.
The Rules mandate that the articles of incorporation of an Investment Company desiring to register and incorporate as a CDV shall deny the pre-emptive right of stockholders to all issues or disposition of shares in proportion to their respective shareholding.
Authority to offer different share or unit classes
A CDV is authorised by the rules to offer different share or unit classes with similar investment objective but managed as separate asset pools. Each class corresponds to a distinct part of the assets and liabilities of the CDV. To complement this authority granted to CDVs, one of the minimum requirements for the incorporation and registration of an Investment Company organised as a CDV with various share/unit classes, is a stipulation in the by-laws providing for the power of the Board of Directors to create and set up new classes of shares/units not exceeding the total number of shares/units approved or confirmed by the SEC.
Offering of CDV
A CDV is a closed-end fund and subscription is done only on initial public offering. CDVs are not required to be listed or traded in an exchange, however, SEC requires that CDVs submit a monthly report detailing information such as its net assets, corporate debts acquired and outstanding balance of investments.
Conclusion
The rules issued by the SEC introduces a more convenient mode for enterprises to maintain its liquidity and operations and preserve jobs amidst the COVID-19 pandemic and the business reverses brought about by several government rules and regulations as a response to the pandemic. While the rules simplified the registration and incorporation of Investment Companies organised as CDVs, it has emphasised that the rules is without prejudice to the provisions of the Investment Company Act and its implementing rules and regulations. Thus, the standards, such as rules on public disclosure and pricing and costs incurred imposed on Investment Companies shall still be complied with by CDVs.
For more information, please contact:
Felix T Sy, Partner, Insights Abodago Philippines (a member of ZICO Law)
felix.sy@insights-law.com
