Bernardo M. Villegas
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Defining Capital in Public Utilities

            As I mentioned in a previous column, I recently appeared as an amicus curiae in the Supreme Court to express my views about the definition of the word “capital” in the context of foreign equity restrictions in the ownership of public utilities.  I was asked in my capacity as Chairman of the Committee on the National Economy in the Constitutional Commission appointed by former President Corazon Aquino in 1986.

           It is still very vivid in my memory that in one of the committee meetings, the majority of the members decisively rejected the proposal of the UP Law Center then to define capital narrowly as "voting stock or controlling interest."   I felt especially qualified to give my expert opinion on this matter during the committee meetings because of both my economics and accounting background.  In both economic and business terms, the word "capital" found in the balance sheet of any corporation always means the total subscribed capital, both common and preferred.

          As a business economist, I also reminded my fellow committee members that even the non-voting shares in a corporation have a great influence in the major decisions of the organization, such as the amendment of the articles of incorporation; adoption and amendment of by-laws;  any disposition of all or substantially all of the properties of the corporation;  the raising of long-term debt; the increase or decrease of capital stock; decisions on mergers and acquisitions; investment in other corporations or businesses; and dissolution of the corporation.  And finally, I pointed out that there were other Commissioners--not necessarily members of our committee--who had expressed their intention to tighten further the Filipino control of public utilities by limiting the participation of foreign investors in the governing body of the public utility to their proportionate share in the capital and to require that all the executive and managing officers of such corporation or association be citizens of the Philippines.  There were more than enough safeguards against the real or imagined dangers of foreign control of public utilities.

          I was pleasantly surprised that one of the most pro-Filipino members of the Commission, Atty. Jose Suarez, who actually voted No to the entire Constitution because he felt that it was not nationalistic enough, was one of the first to insist during one of the Plenary sessions that we should reject the U.P. Law Center recommendation.  In his words:  "I would feel more comfortable if we go back to the wording of the 1935 and 1973 Constitution that is to say, the 60 - 40 percentage could be based on the capital stock of the corporation."  The final motion was made by Commissioner Efren Trenas in the same Plenary Session when he moved:  "Madam President, may I propose an amendment on line 14 of Section 3 by deleting therefrom 'whose voting stock and controlling interest' and in lieu thereof, insert CAPITAL, so the line should read:  ""associations at least sixty percent of the CAPITAL is owned by such citizens."  After I accepted the amendment in the name of the Committee, the President of the Commission asked for any objection.  When no one objected, the President solemnly announced that the amendment had been approved by the Plenary.

           It is clear, therefore, that in the minds of the Commissioners the word "capital" in Section 11 of Article XII refers, not to voting stock, but to total subscribed capital, both common and preferred. I hope, therefore, that the Supreme Court would reverse its decision defining "capital" to mean voting stock alone.   Such a restrictive definition will surely deal another blow to the inflow of foreign direct investments into the Philippines, already the lowest in East Asia.

          The more constitutional or legal restrictions there are to FDIs, the greater is the intensity of the three most serious disincentives to foreign investments consistently enumerated in numerous surveys about doing business in the Philippines.  These are corruption; red tape and bureaucracy; and inadequate and inefficient infrastructures.  The restrictions to foreign investments often occasion the influence peddling and bribing by those who want to take short cuts (some of the most notorious examples are the FRAPORT and the ZTE scandals).  They also give rise to the proliferation of red tape and bureaucratic obstacles that harass the foreign investors. Finally, they are a deterrent to a significant improvement of our infrastructures which direly need foreign equity capital. The less restrictions there are to the inflow of foreign equity into public utilities and other infrastructures, the more we can compete with our East Asian neighbors in attracting higher levels of FDIs to the country. For comments, my email address is