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Now, we
have a number of decisions of the Supreme Court on what is doing
business or not. They are very controversial.
Top-weld Manufacturer case. The court had
this obiter dictum that granting a local corporation a license or
a franchise is doing business. That is wrong. That is not doing
business. It is well-settled in American jurisprudence. Anyway that’s
an obiter dictum, the court said here that the franchise had
expired.
Securities
Regulation Code
Now
this Securities Regulation Code. Well the Code contains a definition of
securities which includes:
- Shares of stock
- Evidence of
indebtedness. That is why these commercial papers, they are
securities, and they have to be registered before you can sell them
to the public. Like San Miguel Corporation, since its needs for
capital is great that even if you exhaust the single limit borrower
of all banks in the Philippines, they would not be enough. So San
Miguel floats commercial papers, it sells promissory notes to the
public. These are the money market placements. They have to be
registered with the SEC.
- Investment
contracts
- Certificates of
deposit for a future subscription
- Interest in
oil, gas or mineral rights
- Derivatives.
The simplest definition I came across of a derivative is that
it is a financial instrument whose value depends on the
fluctuation of the value of another financial instrument. A
very simple form of that would be a forward exchange cover. Here is
somebody, he buys dollars from the bank to be delivered one month
from now and they fix the price – “I will buy at P51.50.” If the
value of the dollar goes up, the bank will still have to sell them
at P51.50. So the bank suffers the foreign exchange loss. But if
the rate goes down at P51.25. He still has to pay at P51.50.
Whether or not he will gain or he will lose depends on the
fluctuation of the rate of exchange. That is a derivative.
You have the interest rate
swap. Instead of your usual time deposit at a fixed rate, you make your
placement with the bank. You play on whether or not the interest will
go up or go down. If the interest goes down you get a loss. If the
interest goes up, you make a gain.
Here, there are no
fixed-term definition or classification of derivatives, the
possibilities are limitless. Anything that a creative financial man can
think of, he can sell it. Like in that forward exchange cover. Now the
bank will make sure that it is protected. When it commits that it will
buy at P51.50. It will enter into another contract with somebody else
also to sell him dollars so that it will pass on the risk. It will not
take that risk.
Well, derivatives are
supposed to give the edge against inflation because as I’ve said, there
is no perfect hedge. The only perfect hedge can be found in a Japanese
Garden. J
- Warrants.
That is an option to buy shares in the future.
- Certificates of
participation.
- Voting trust
certificates.
- Proprietary
memberships in corporations. ‘Yan yung share sa Manila
Golf Club. Manila Polo club. Or these time-sharing. SEC said that
is a security. Here is a country club with cottages but the members
will not stay there the whole year. Most of the time they won’t be
there. So they sell the unused time. Time-sharing. You pay so
much, you can use that for how many days. That is also a sale of
securities.
- Pre-need plans.
They are also securities. Like this educational plan. The parents
pay so much so this company that they will pay for the schooling of
the children when they reach college. Or these memorial plans.
These MaxiCare. Health plans. They are not insurance
contracts because they involve services.
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