FUNDAMENTALS OF FINANCIALMARKET Chapter 7 EQUITY SECURITIES MARKET- FUNDAMENTALS OF FINANCIAL MARKET. Equity Security Market In accounting perspective, shareholder's equity, or more commonly known as equity, refers to the difference between the assets and liabilities of a company. Fundamentally, equity represents ownership of a firm. Same with debt, investors can put out cash to purchase equity and trade these in financial markets through equity instruments. Equity instrument is a type of financial instrument wherein the issuer (company) agrees to pay an amount to the investor in the future based on the future earnings of the company, if any. The earnings used as basis of the amount to be paid to equity instrument holder is determined after setting all required payments (i.e. interest for debt security holders) of the business. The most common example of equity instruments is shares. Basically, shares (or stocks) represent ownership in a company. May it be one share, 10% of total outstanding shares or all authorized shares, having shares means that @ party owns a portion of the business. An individual or a party who owns a share is called @ shareholder or stockholder. Shareholders own a percentage interest in a company in relation to the total outstanding shares. Stock certificates, the legal document which certifies the ownership of specific number of shares of a corporation, is given to shareholders. In equity instruments, the company is the issuing party and the shareholders who purchased the shares are the investors. Authorized capital stock refers to the total maximum amount stated in the Articles of Incorporation that can be subscribed to or paid by investors of a corporation if the shares have a par value. Par value is the nominal value of the share that is indicated in the face of the stock certificate. A company cannot issue additional shares in excess of its authorized capital stock. Companies may increase its authorized capital stock by amending its Articles of Incorporation and seeking approval from regulatory agencies. If the shares do not have a par value, the corporation does not have an authorized capital stock, but it has an authorized number of shares it may issue. Outstanding shares refer to the total shares of stock issued under binding subscription agreements to subscribers or stockholders, whether partially or fully paid. Outstanding shares do not include treasury shares. Treasury shares are shares that are repurchased or bought back by the company from its stockholders. Issued shares refer to all shares that were issued by the company, whether outstanding or treasury shares. In the Philippines, there are three major forms of business organizations: * Sole proprietorship ‘Type of business organization which an individual personally owns a business. The sole proprietorship has no distinct personality from the owner, thus, the owner is responsible for all debts and obligations (unlimited liability). The owner has full control regarding decision making of the business. 171 |FUNDAMENTALS OF FINANCIAL MARKET $$ AAA an a vin OF FINANCIAL MARKET * Partnership Formed when two or more persons bind themselves to contribute money, property OF industry toa common fund with the intention of dividing the profits and ownership among themselves. Though the partnership is a separate legal entity from the partners, the partners are still personally obliged to pay for the debts of the Partnership. In case of bankruptcy, creditors can compel the partners to pay up to the extent of their personal assets * Corporation Legal entity has a personality separate and distinct from the owners / shareholders. Limited liability, i.e. legal provision that protects shareholders from losing more than they invested in the company, exists. Responsibility of shareholders to creditors is only up to the extent of their capital contribution. This means that even if the corporation goes bankrupt, shareholders will only lose up to the extent of the amount they spent in buying shares. Ownership in corporations is evidenced through shares. Among the three, only corporations can issue shares. Investors prefer to put their money on shares because of the concept of limited liability Why Invest in Equity Instruments? Investors may eam from equity instruments through two methods: capital appreciation and dividends. Capital Appreciation Capital appreciation refers to the rise in the value of an asset in relation to the increase in its marketprice. Since shares can be traded in the secondary market, investors may sell shares they originally bought to other investors who are interested to buy. As long as the buyer and seller agree on the price, the trade can occur. The price at which they can trade is based on the interaction of different market factors. As a result, market prices of shares can be very volatile and may change from time to time. It is not 100% certain alll the time that market price of shares will go up. This uncertainty increases the risk associated with shares. For example, Investor A bought 1,000 shares from Company X at Php 10 per share. After six months, share price increased to Php 12 per share. In this case, capital appreciation occurred since share price increase by Php 2 per share; the total value of the investment in equity securities increased by Php 2,000. If Investor A sells the shares at Php 12, he will realize the Php 2,000 gain and receive the money. Otherwise, the PhP 172 |a FUNDAMENTALS OF FINANCIAL MARKET. 2,000 becomes unr are sold. Unrealized the prevailing market alized gain. Gain or loss will only be realized or finalized when shares gains or losses are temporary and may still go up or down based on price of the shares at a given point in time. aioe anne sie Investor A held on to the shares for another six months and the share Php 1,000, Th NP 11. As a result, total unrealized gain decreased from Php 2,000 to share is Mahon aes stil capital appreciation as the prevailing market price of Php 44 per s 's higher than the original investment cost of Php 10 per share. It Investor A still did not sell shares for another six months, and the share price dipped to PS share, then Investor A now has an unrealized loss of P2 share or P2,000. In this case, capital depreciation occurred, or the investment lost value because of lower Market price of the share. The risk of capital depreciation also exists when it comes to investment in equity securities. As long as Investor A does not sell these shares, the unrealized loss is still temporary and can be recovered if the market price of the share increases in the future. idends Dividends are payments made by corporations to shareholders representing excess eamings of the company. Dividends are usually paid out quarterly, but some companies pay it semi-annually or annually. Dividends are distributed to shareholders based on discretion and approval of the board of directors. In some cases, managemert can recommend amount to be declared as dividend still subject to final approval of board of directors. Dividends can be in the form of cash, property (usually share investment in another company) and own shares of the company. Cash is the most common type of dividend. Dividends are only paid out once all claims from debt such as maturing interest and principal repayments are settled. Dividends are not dependent on capital appreciation of the share; instead, it is based on the current performance of the business. Dividends may be declared even if share price is going down as long as the company is allowed to declare dividends. The ability to declare dividends may be restricted by covenants in loan agreements entered by the corporation. The restrictive rule in dividend declaration is designed to make sure that the company will have the money to pay the creditors first before distributing cash to shareholders. In instances wherein, the company report successive losses, they may temporarily suspend declaring dividends. In the Philippines, corporations are encouraged to declare dividends when needed through the imposition of improperly accumulated earnings tax (IAET). The IAET is a penalty tax imposed on corporations who intend to accumulate excess earnings to enable its shareholders to avoid paying the 10% final tax on dividends that they might have received if these were declared. Since declaration of dividends is based on the discretion of the board of directors, companies may opt to ‘delay declaring dividends. As a result, the government loses cash ‘earned from the tax on dividend. To prevent this, an IAET of 10% is that it should have o ? “ imposed on the improperly accumulated earnings if corporations are found to be guilty of 173 |FUNDAMENTALS OF FINANCIAL MARKET EE eT improperly accumulating earnings. Improper accumulation means the unjustifiable accumulation beyond the reasonable needs of the business. According to Section 43 of the Corporation Code, stock corporations are not allowed to maintain retained earnings more than 100% of its paid-up capitalization at par (any additional paid-up capital or excess over par is excluded). Corporate taxpayers have ‘one year from the end of the taxable year to dispose excess retained earnings: whether through appropriation of retained earnings for business expansion or redemption of long- term debt via board resolutions or dividend declaration. The 10% IAET is pattemed to the 10% final tax on dividends which the government should have received if the dividends were declared properly. Comparison between Debt vs. Equity In debt, creditors or lenders possess the legal right to receive payment on the amount that they invested or lent out. This means that the payment is required, and the issuing business is compelled to repay once the debt becomes due. For equity. shareholders only have an expectation of being repaid in the future. There is no clear certainty that the money they used to pay for the shares can be recovered in the future. The value that shareholders may enjoy depends on the future performance of the company. This distinction makes equity instruments riskier compared with debt instruments. Other distinctions between debt and equity is summarized below: Voice in management | No Yes Since shareholders are owners of the company, they possess voting rights on certain decisions that affect the company such as election of company directors and other special issues. Subordinate to Debt Creditors do not have voting privileges on company matters. They only rely on the contractual obligation inherent to the debt. Claim on Assets and | Prioritized over Equity Income Claims of the creditors should be satisfied first before board of directors can distribute dividends to shareholders. Upon liquidation, shareholders only receive any remaining proceeds after satisfying principal and interest claims of creditors. Claims of the creditors, i.e. interest on debt and principal repayment, shall be paid first before claims on income of shareholders are satisfied. If a company fails then liquidates, creditors also have a prioritized claim on assets over equity holders. This means that once assets are_sold, proceeds will be 1741FUNDAMENTALS OF FINANCIAL MARKET secured creditors, unsecured creditors and : shareholders. ‘Type of Financing Temporary Permanent Maturity Has a maturity date when the | Has no maturity date. issuing company needs to repay the debt Although shares have a ready secondary market, prices at which the shares _ : can be sold at may fluctuate. Risk Profile Lower risk relative to equity _| Higher risk relative to debt Return of invested money | High uncertainty of returns (and interest) of creditors is | associated with shares more certain because of the | (yearly earnings ~=——and contractual obligation | proceeds = from —asset inherent to debt. liquidation). Fluctuating price of shares in secondary market As a result, shareholders expect higher return (i.e. high interest rate) from shares vs. debt. Return Expectations | Lower compared to equity Higher compared to debt Return is only up to| Return (dividends and capital contracted interest appreciation) may increase infinitely as long as the business keep on growing Tax Implication Can be used as tax-|Dividend payments to deductible expense by the | shareholders cannot be used issuing company, _ thus, | as tax deductible expense by reduces their income tax | the issuing company. payable to the government. Types of Shares Investors should have an idea what type of shares they want to put their money on based on their investment objectives. There are two types of shares that corporations can issue: preference (or preferred) shares and ordinary (or common) shares. Both shares represent ownership of the corporation but differ in several aspects. 17s |eee FUNDAMENTALS OF FINANCIALMARKET Preference shares Preference shares give its holders distinct rights that enable them to be prioritized over ordinary shares. A fixed periodic dividend, whether percentage or peso amount, is Promised to holders of preference shares. Par-value preference shares have stated face values and the annual dividend is expressed as a percentage of the face value. On the other hand, no-par preference shares do not have stated face value; its annual dividend is usually stated in peso amount per share. Since dividends on preference shares are fixed, its share price is usually stable. Normally, preference shareholders do not have voting rights, but corporations can opt to give them voting rights explicitly in the Articles of Incorporation. Companies often choose to issue preference shares if they need additional financing, but they do not want to dilute ownership of the corporation. As mentioned, preference shares have senior rights over ordinary shares Preference shares are treated as quasi-debt, the required dividend associated with preference shares is like the interest on debt. This should be settled first prior to settling any claims by ordinary shareholders. However, unlike debt, preference shares do not have maturity date. Issuing preference shares commonly costs the firm more than if they issue debt In instances of liquidation of the assets of the corporation, the claim of preference shareholders is only up to the par value of the preferenceshares. Preference shareholders will be paid before ordinary shareholders but only once liabilities to creditors and lenders are fully settled. When preference shares are issued, an agreement like a bond indenture is made which contains relevant information such as par value of the share, amount of dividend, date of payments and other restrictive covenants to ensure continued existence of the business and consistent dividend payments. The restrictive provisions include omitting payment of dividends, minimum liquidity requirements, mergers and acquisitions, sale of assets and repurchases of ordinary shares. Violation of any of these provisions usually allow preference shareholders to have representation in the board of directors or forcethe corporation to redeem the preference shares held by the shareholders at an amount higher than its par or stated value. Other features that may be included with preference shares are the following: Cumulative. All dividends in arrears (i.e. dividends not paid in previous periods), together with the current dividend, should be paid prior to paying dividends to ordinary shareholders. If preference shares are non-cumulative, this means that the corporation can pass on paying dividends on preference shares and will only be required to pay the current dividend, not the dividend in arrears. » Callable. Allows the issuing corporation to retire or repurchase outstanding shares within a predetermined period of a time at a specified price. Usually, the call price is established higher than the issuance price but may gradually decrease over time. Callable preference shares permit the issuing corporation to end the fixed-payment commitment associated with preference shares if market conditions make It favorable to do so. 176 |— FUNDAMENTALS OF FINANCIALMARKET * Co mvertible. Allows shareholders to convert the preference shares to a stated felen Of ordinary shares after a certain date. The number of ordinary shares b Preference shares can be exchanged into may also change over time awed On A predetermine formula, Ordinary Shares rod pasinecy, shares represent the true owners of a corporation, They are called as esidual Owners since they will only receive what will remain after all claims of creditors and preference shareholders on the income and assets are satisfied. It is possible that shareholders would be multiples times richer if the business goes well in the future. Although, If upon liquidation, the corporation has no leftover assets, ordinary shareholders also get nothing. Dividends are also not guaranteed for ordinary shareholders unlike preference shareholders. The only assurance that ordinary shareholders have relies on the concept of limited liability — they can only lose up to the extent that they have invested in the company. Because of the level of uncertainty associated with returns related with ordinary shares, shareholders usually expect to have higher returns in the form of dividends and capital gains Ordinary shares can be * Privately owned, Owned by private investors and shares are generally, Not publicly traded (if to be traded, transactions are usually between private investors only and consent of the organization is needed) * Closely owned. Owned by an individual investor or a small group of private investors like a family * Publicly owned or publicly traded. Owned by mix of public and private investors and shares are actively traded in stock market * Widely owned. Owned by many unrelated individual or institutional parties Ordinary shareholders generally possess the voting rights to decide on certain corporate decisions like electing the board of directors, issuance of new shares or change in fundamental corporate direction. As a result, ordinary shareholders are granted preemptive rights. Preemptive right permits ordinary shareholders to retain their proportionate ownership in the firm in case of new share issuances, hereby protecting them against dilution of ownership. Dilution of ownership occurs when fractional ownership of an existing shareholder is reduced as a result of the company issuing additional shares. Preemptive rights allow existing shareholders to maintain their current voting influence and protect them from dilution of earnings i.e, reduction of claim on earnings as a result of lowering of its fractional ownership. To exercise the preemptive right, companies give stock rights to the shareholders. A stock right is a financial instrument which permits shareholders to buy additional shares from the company at a price cheaper than the market price, in direct proportion of the number of shares they own. Rights is very important for companies who need financing but intend to protect the ownership percentage or proportionate control of the shareholders in the company. Companies use rights as a better financing option as this is cheaper compared with public offering of shares. 177 |FUNDAMENTALS OF FINANCIALMARKET ene, Basically, each ordinary share grants one vote to the shareholder. Votes can be assigned and cast during shareholders’ meeting. Since small shareholders often do not attend the shareholder meeting to vote, they can opt to sign a proxy statement to transfer their votes to another shareholder. Solicitation of proxies is controlled by the Securities and Exchange Commission to make sure that the solicitation is not based on misleading information. In recent years, other types of ordinary shares were offered to shareholders to suit different objectives. * Supervoting shares. Shares that have multiple votes associated with one share. This allows controlling shareholders to maintain control against any outside group who may plan for a hostile takeover. Hostile takeover occurs when an outside group tries to gain controlling ownership of a company without the support of the management by buying more shares from existing shareholders. * Nonvoting ordinary shares. Shares that have no voting rights. Offered by companies that want to raise capital but does not want to give up any voting control. Stock Market The stock market is composed of exchanges and over the counters where shares are issued and traded publicly. The actual stock market is both physical and virtual as electronic trading of stocks has been increasingly relevant due to the easy access to technology. The stock market can be considered both a primary and secondary market. However, since most of the transactions are buying and selling existing stocks of investors (compared with new share issuances), the secondary marketis considerably bigger than the primary market. The physical site where shares are purchased and sold face-to-face on a trading floor is called a stock exchange. The most well-known organized exchange is the New York Stock Exchange. Before, buyers and sellers who participate in organized exchanges meet in a specified location and uses an open out-cry auction model to trade securities. Since exchange is already transitioned to a more virtual made of trading, this method is less frequently used. Organized exchanges, being auction markets, employ floor traders that oversee and facilitate the trading of specific shares. The floor traders, who are representatives of different brokerage firms, meet at the trading post on the exchange and gather the current bid and ask prices. The quoted prices are called out loud. In around 90% of trades, the floor traders match buy and sell orders from their clients. In the remaining 10%, the floor traders buy the shares themselves or sell shares from their inventory. Floor traders are responsible to maintain an orderly market for the share even if it requires buying shares in a declining market. avalFUNDAMENTALS OF FINANCIAL MARKET. An -the- dealers that are Counter market refers to the market wherein shares can be traded by makers) opera: ected electronically by computers. Dealers (also called as market orders they rece are market try to “make a market” by matching the buy and sell investors. Deal ii trade in the OTC market to balance buy and esters Kap an inventory of shares that they Giaehot es ac usually responsible to set bid and ask prices. There can be multiple system. Onci Goes: Given stock and each shall provide their bid and ask quote in the the o @ this ts done, they are required to buy or sell a minimum of 1,000 securities GIVEN price. Once trade is executed, they can enter a new bid or ask quote in the system. Dealers earn through two means: through the spread between the bid price (price to pay for shares) and ask price (price at which shares are sold at) and through commissions on trades. Dealers are ver importa in e success of the OTC imriet Decions Soars al Point of Information! ere iS Continuous liquidity for each available OTC market in stock in the market. Dealers allow small shares ee one Eh Nationa ° with liquidity that can help them get accepted in | Association of Securities Dealers the market. Without dealers whois alwaysready | Automated Quotation System or to buy/sell shares, investors would be reluctant | NASDAQ. NASDAQ provides the to purchase shares from unknown firms. This | current bid and ask prices for makes it difficult for start-up firms to gather | about 3,000 actively traded necessary funding securities. Aside from organized exchanges and OTC markets, new modes to trade stocks have surfaced due to the advancement of technology and changing appetites of investors. These are electronic communications networks and exchange traded funds. Electronic communications network (ECN) is a network which directly links major brokerage firms and traders and removes the need for a middleman. ECNhas been gaining ground lately because of the following reasons: * Transparency. Traders in the ECN can easily view if there are unfilled orders timely. This input allows them to understand supply and demand for the shares and modify their strategy accordingly. Some exchanges also provide this information but not as timely and complete as ECN can provide. * Cost reduction. The removal of middleman and commission reduces the transaction costs associated with the trade. Spread is also reduced and sometimes removed. « Faster execution. Trades are matched faster and confirmed quicker since the ECN is fully automated. Individual trades are done with minimal human intervention. This is very critical for investors who trade on small price fluctuations. are)FUNDAMENTALS OF FINANCIALMARKET a aoa aaeewnaii * After-hours trading. Trading can continue at any time of the day because of the availability of ECN. Traders can react accordingly based on news reports and information that come out after trading hours of exchanges. However, ECNs can only work well with shares that has a substantial amount of trading volume. Since ECN also requires matching between seller and buyer, thinly traded stocks may go for long periods without trading. Exchange-traded funds (ETF) happens when a portfolio containing various securities is purchased and a share is created based on this specific portfolio which can be traded in the exchange. ETFs are listed and can be traded as individual shares in the exchange. ETFs are often indexed instead of being actively managed. ETFs are valued based on the underlying net asset value of the shares inside the index portfolio Information about the shares inside the ETF is publicly available so that intraday arbitrage can help keep ETF price close to the implied value ETFs do not have minimum investment amount unlike mutual funds. Although they are somewhat like stock index mutual funds, ETFs can be preferable since they can be traded like a normal share — limit orders, short sales, stop-loss orders and ability to purchase on margin. ETFs also have lower management fees than comparable index mutual funds. However, since ETFs trade like stocks, they are subject to commission to brokers when they are being traded. In terms of value, the top 10 largest stock markets in the world are the following: New York Stock Exchange Tokyo SE Group NASDAQ OMX NYSE Euronext (Europe) London Stock Exchange Shanghai Stock Exchange Hong Kong Exchanges TSX Group (Canada) BME Sapnish Exchanges 0. BM & FBOVESPA The overall performance of a stock market is measured through stock market indexes, which represents the average of stock prices currently being traded. The value of a stock market index is usually set at 100 in a base year. Stock market indexes intend to show movementsof price over time instead of the actual stock value. It is forthis reason why the year selected as base year is not as relevant. If stock prices increase by more than 20%, it is usually called bull market or bullish. On the other hand, the decline of more than 20% of stock prices means it is a bear market or bearish ZOPNOMSONA Investors use stock market indexes to gain some insight on how a group of stocks could have performed in the market. Different stock market indexes may contain different mix of companies or group of stocks. Understanding the performance of the stock market is important as it can have further implications in other segments of the economy. Economists believe that changes 180 |FUNDAMENTALS OF FINANCIALMARKET, Bek Bikes may affect the economy since it affects spending households and ieee Wei | ee share prices may influence higher spending while declining share a Sirplerenea sowen spending. Increased spending means higher production level and vice vi . ‘ following levels: ersa. Impact of changes in stock prices can be felt at the a. Large corporations treat the stock market as an essential fund source for expansion projects. High share prices allow them to receive higher funds they can use for capital investments such as machineries and plants and research & developments when they issue new shares. b. Ata macrolevel, shares account for significant portion of household wealth. Share prices and household wealth has a positive correlation. If share prices increase, household wealth also increases and vice versa. Household tends to spend more if they have higher wealth than spend less if their wealth declines. Consequently, movements in share prices affect household spending. ¢. Fluctuations in share prices affect expectations of consumers and business. This is perhaps the most important consequence of movements in share prices. Historically, significant declines in share prices are usually followed by economic recessions. As a result, consumers who observe significant decline in share prices tend to have more uncertainty regarding the future of their jobs and income. This uncertain outlook makes consumer moreconscious on their spending. They spend less on consumer durables like vehicles, appliances and furniture. The reduced spending consequently leads to decline in production and employment. Lower share prices also deter firms in spending on capital investments as the funds they will receive if they issue new shares are lower. Philippine Stock Exchange Exchange or PSE is the national and sole stock exchange idered as one of the oldest stock exchanges in Asia starting ‘Stock Exchange. The trading floor of PSE is currently PSE is composed of a The Philippine Stock of the Philippines. PSE is consi in 1927 when it was still Manila situated in the PSE Tower in Bonifacio Global City, Taguig. The 15-man Board of Directors with Jose T. Pardo as Chairman. The Philippine Stock Exchange was created in 1992 due to the merger of the country's two former stock exchanges: The Manila Stock Exchange (MSE), ‘established gn August 8, 1927, and the Makati Stock Exchange (MkSE), which was established on May 27, 1963. PSE has been granted a “Self-Reguiatory Organization” or SRO status by the SEC in June 1998. This means the PSE can implementits own rules and set penalties on erring trade participants and listed companies. Formerly, PSE used to be an on-profit, non-stock, member-governed organization. In 2001, PSE was transformed to its current structure which is a shareholder-based, 181 |FUNDAMENTALS OF FINANCIALMARKET frevenue-earning corporation headed by a president and a board of directors. PSE eventually listed its own shares in the exchange under the ticker PSE. The PSE through the Philippine Central Depository (PCD) uses the computerized book-entry system to transfer ownership of securities from one investor to another, thus, eliminating the need for physical exchange of scrip between the seller and buyer. Scripless trading describes the system where settlement is carried out via book-entries, rather than by the movement of physical certificates. However, investors may still request for an upliftment of their shareholdings to get a physical certificate. The PSE regulates trading activities through the Capital Markets Integrity Corporation (CMIC), a spinoff of the Market Regulation Division of PSE, to monitor and penalize trading participants that violate the Securities Regulation Code and its implementing rules and regulations; the Anti-Money Laundering Law and its implementing rules and regulations; the Code of Conduct and Professional Ethics for Traders and Salesmen; CMIC Rules; and other relevant laws and regulations. The CMIC shall also have the authority to investigate and resolve trading-related irregularities and unusual trading activities involving issuers based on complaints received, findings and reports. The CMIC oversees the market through a world-class and sophisticated surveillance system called Total Market Surveillance (TMS), which was developed by the Korea Exchange. TMS is equipped with the critical elements of the surveillance process and provides a robust monitoring and warning mechanism. It is designed to safeguard the integrity of the stock market from fraud, manipulation, and breaches of marketplace rules of erring market players. The CMIC conducts investigation of unusual price and volume movements to identify and sanction trading participants, issuers or investors who might have committed unfair market practices. CMIC, with the approval of the PSE President, shall have the power to restrict, halt or suspend the trading of a listed security of an issuer or the trading by a trading participant of a particular listed security in cases of unusual trading activities or possible trading- related irregularities. Other initiatives to safeguard interests of the investors include + Enforcement of static and dynamic thresholds to protect against unusual share price fluctuations. The Static Threshold enforces a 50% trading band within which the price of a stock is allowed to move. When the stock priceincreases by 50% (price ceiling) or decreases by 50% (floor price) on a particular day, to be determined from the last closing price or the last adjusted closing price, the trading of the stock shall be automatically frozen by the PSE upon reaching said limit, unless there is an official announcement from the listed company or the proper government agency which would justify such price fluctuations. The Dynamic Threshold is the maximum allowable price difference between an update in the Last Traded Price (LTP) of a given stock or group of stocks and its preceding LTP that is equal to a percentage set by the PSE, subject to the classification of a stock or @ group of stocks based on its trade frequency. The Dynamic Threshold of 4 listed stock may vary from 10% , 15% and 20% depending on its trade frequency. ae$$ ______ FUNDAMENTALS OF FINANGATVAREET * Disclosure requirement for publicly listed companies. The PSE requires that Material information, which may affect listed company's stock price positively or Negatively, are disclosed within 10 minutes after its occurrence. Disclosures must also be done first to the PSE so that it will cascade information to every investor and general public through its communication channels and not to a selected group of individuals only. This is very important to ensure the fairness and efficiency of the trading happening in the market. The PSE ensures that listed companies Promptly disclose only factual and truthful information. Non-compliance with or Violations of the disclosure rules are heavily penalized with fines, trading suspension, or even delisting from the PSE. * Securities Investors Protection Fund, Inc. or SIPF. The SIPF, which is comparable to the Philippine Deposit Insurance Corporation providing insurance for bank deposits, seeks to build and enhance investors' confidence in the market and is envisioned to protect the investing public from extraordinary losses, other than the ordinary market fluctuations, arising as a result of fraud, failure of business, or judicial insolvency of PSE-accredited stockbrokers. Protection to investors is automatic upon the opening of an account with a PSE-accredited stockbroker and given by way of compensation for trade-related obligations of stockbrokers to its customers. Corporate Compliance Companies who plant to list publicly in the Philippine Stock Exchange should: a. Comply with the laws, regulations and full disclosure rules and policies of the Philippine government b. Have standards of quality, operations, and size under efficient and effective management; ¢. Conduct issuance, offering and marketing of securities in a fair and orderly manner and ensure that securities are widely and equitably distributed to the ublic a. Sie adequate, fair and accurate information about the company and its securities to the general public to enable them to make informed investment decisions e. Ensure that directors and officers actin the interest of all security holders as a whole, particularly where the public represents only a minority of the security holders or where a director or security holder owning a substantial amount of shares has a material interest in a transaction entered into by the company. General Criteria for Admission to Listing in the PSE a. Track Record of Profitable Operations — The company must have cumulative consolidated earnings before interest, taxes, depreciation, and amortization (EBITDA), excluding nonrecurring items, of at least P50 Million for three (3) full fiscal years immediately preceding the application for listing and a minimum EBITDA of 10 Million for each of the three fiscal years. The applicant must further be engaged in materially the same businesses and must have a proven track record ofFUNDAMENTALS OF FINANCIAL MARKET management throughout the last three (3) years prior to the filing of the application. To show this, the company submits audited consolidated Financial Statements for the last three (3) full fiscal years preceding the filing of the application to the PSE. The Financial Statements must be accompanied by an unqualified external auditor's opinion Exception to the 3-year Track Record Requirement — The following are the exceptions to the three (3) year track record rule: + The company has been operating for at least ten (10) years prior to the filing of the application and has a cumulative EBITDA of at least P50 Million for at least two (2) of the three (3) fiscal years immediately preceding the filing of the listing application. * The company is a newly formed holding company which uses the operational track record of its subsidiary. Positive Stockholders’ Equity — The company must have a positive stockholders’ equity in the fiscal year immediately preceding the filing of the listing application. Market Capitalization — At listing, the market capitalization of the company must be at least 500 Million. Operating History — The company must have an operating history of at least three (3) years prior to its application for listing. Minimum Capital Requirement — The company must have a minimum authorized capital stock of 500 Million, of which a minimum of twenty-five percent (25%) must be subscribed and fully paid. Minimum Offering to the Public — The minimum offering to the public for initial listing shall be based on the following schedule: Public Offer 33% or P50M whichever is higher 25% or 100M whichever is higher 20% or 250M whichever is higher 15% or P750M whichever is higher 10% or ®1B whichever is higher Market Capitalization Not exceeding #500 M ‘Over P500M to P18 Over P1B to P5B Over P5B to P10B Over F108 Minimum Number of Stockholders — Upon listing, the company shall have at least ‘one thousand (1,000) stockholders, each owning stocks equivalent to at least one (1) board lot. The requirement to have at least one thousand (1,000) securily holders each owning securities equivalent to at least one (1) board lot is only required upon listing. Once listed, companies shall, at all times, maintain © minimum percentage of listed securities held by the public of ten percent (10%) & the listed companies issued and outstanding shares, exclusive of any treasury shares, or as such percentage that may be prescribed by the Exchange. 184 |___ FUNDAMENTALS OF FINANCIAL MARKI | Valuation of Assets — When required by the PSE, the company shall engage the services of an independent appraiser duly accredited by PSE and SEC determining the value of its assets. j. Full Payment of Issued and Outstanding Shares — The company shall cause all its subscribed shares of the same type and class applied for listing to be paid in full. k. Investor Relation Program — The company shall have an investor relation program to ensure that information affecting the company is communicated effectively to investors. Such program shall include, at the minimum, a corporate website that contains, at the minimum, the following information: * Company information — organizational structure, board of directors, and management team; * Company news — analyst briefing report, latest news, press releases, newsletter (if any); * Financial report — annual and quarterly reports, at least for the past 2 years; * Disclosures — recent disclosures to the Exchange and the Commission for the past 2 years; + Investor FAQs — commonly asked questions of stockholders; * Investor Contact — email address for feedback/comments, shareholder assistance and service; and * Stock Information — key figures, dividends, and stock information A company that incurs negative stockholders’ equity for three (3) consecutive years shall be subject to delisting, in accordance with the rules of the Exchange. The delisting of the company's securities shall take effect thirty (30) days from approval by the PSE Board of Directors of the said delisting. The Exchange shall send notice of such delisting immediately to the listed company and the Securities and Exchange Commission. The Exchange shall likewise publish an announcement relative thereto on the Exchange website. Disclosure Rules All companies listed in the PSE is required to comply with its disclosure rules. The basic principle of the Exchange is to ensure full, fair, timely and accurate disclosure of material information from all listed companies. This principle shall apply to all the required disclosure requirements of listed companies. Corporate disclosures are classified into two: the structured and the unstructured corporate disclosures. ‘Structured continuing disclosures are reportorial requirements submitted within specific time frames such as annual, quarterly and monthly r . Unstructured continuing disclosures are communications of corporate developments as they happen and are intended to update the investing public on the activities, operations and business of the company. Structured continuing disclosures include the following:rye FUNDAMENTALS OF FINANCIALMARKET * Annual report (SEC Form 17-A) - To be submitted within 105 days after end of fiscal year , * Three Quarterly Reports (SEC Form 17-Q) — To be submitted within forty-five (45) days from end of the first three (3) quarters of the fiscal year * Reports on Beneficial Ownership * Other periodical reports to update and keep current information on the operation of the business and financial condition of the company. On the other hand, the objective of requiring unstructured disclosures is for the company to update the investing public with any material fact or event that occurs which would reasonably be expected to affect yestors' decision in relation to the trading of its securities. A material factor event is one which would reasonably be expected to affect vestors’ decisions in relation to those securities. This includes, but is not limited to, any significant and relevant information relating to the business and operations of the Issuer that, if and when disclosed, would result in or would reasonably be expected to cause a significant change in the trading and/or market value of the company’s securities. Disclosures must be made promptly by the issuing company if it meets any of the following standards: a. Where the information is necessary to enable the company and the public to appraise their position or standing, such as, but not limited to, those relating to the company’s financial condition, prospects, development projects, contracts entered into in the ordinary course of business or otherwise, mergers and acquisitions, dealings with employees, suppliers, customers and others, as well as information concerning a significant change in ovmership of the Issuer's securities owned by insiders or those representing control of the Issuer; or b. Where such information is necessary to avoid the creation of a false market for its securities; or c. Where such information may reasonably be expected to materially affect marketactivity and the price of its securities. Events that prompt disclosure if required from listed companies include Change in the control of the company Filing of legal proceeding against the company involving a claim amounting to 10% company’s assets * Change in corporate purpose and material alterations in company's activities or operations * Resignation of removal of directors, officers or senior management and their replacernents and the reasons for such + Any decision taken 10 carry out extraordinary investments or the entering into financial of commercial tranvactions that might have a material impact on the company’s vituation + Losses of potential lowses, the aggregate of which amounts to at least ten percent (10%) oA the consolidated total assets of the company ° Dissolution 186 |UN DAMENTALS OF FINANCIAL MARKET. * Acts and facts of any nature that mi i obstruct corporate activities and its iiplcatione. aoe Bates SSS * Any licensing or franchising agreement or its cancellation which may materially affect the company’s operations * Any delay in the payment of debentures, negotiable obligations, bonds other publicly traded security - " alae + Creation of mortgages or pledges on assets exceeding ten percent (10%) or more of the company’s total assets * Any purchase or sale of stock or convertible debt securities of other companies when the amount is ten percent (10%) or more of the company’s total assets; * Contracts of any nature that might limit the distribution of profits, * Facts of any nature that materially affect or might materially affect the economic, financial or equity situation of those companies controlling, or controlled by the Issuer including the sale of or the constitution of sureties/pledges on a substantial part of its assets * Authorization, suspension, retirement or cancellation of the listing of the Issuer's securities on an exchange or electronic marketplace domestically or abroad * Fines of more than 50,000.00 and/or other penalties on the company or on its subsidiaries by regulatory authorities and the reasons Merger, consolidation or spin-off of the company Modification in the rights of the holders of any class of securities issued by the company and the corresponding effect of such modification upon the rights of the holders Declaration of cash dividend, stock dividend and pre-emptive rights by the Board of Directors * Any change in the company’s fiscal year and the reason(s) behind All resolutions, approving material acts or transactions, taken up in meetings of the Board of Directors and stockholders of the company A joint venture, consolidation, acquisition, tender offer, take-over or reverse take- over and a merger; Capitalization issues, options, directors/officers/employee stock, option plans, warrants, stock splits and reverse splits; All calls to be made on unpaid subscriptions to the capital stock of the company; ‘Any change of address and contact numbers of the registered office of the company; Any change in the auditors of the company and the corresponding reason forsuch change; Any proposed amendment to the Articles of Incorporation and By- Laws and its ‘subsequent approval by the Commission; Any action filed in court, or any application filed with the Commission, to dissolve or wind-up the company or any of its subsidiaries, or any amendment to the Articles of Incorporation shortening its corporate term The appointment of a receiver or liquidator for the company or any of its subsidiaries; ‘Any acquisition of shares of another corporation or any transaction resulting in Such corporation becoming a subsidiary of the Company;