Philippines launches inquiry into $866 million capital spending budget overrun

The Philippines’ Securities and Exchange Commission has launched an inquiry into the 48-billion peso ($866 million) capital spending budget overrun at PLDT Inc. that triggered a record plunge in the stock amid questions over its corporate governance and fiscal control.

PLDT shares tumbled more than 19% on Monday, with almost 62 billion pesos in market value wiped out.

The spending probe casts a stain on the finances and governance of PLDT, the country’s biggest phone company by revenue and among the nation’s most widely held stocks by foreign investors. It also raised questions about the management of PLDT Chairman Manuel Pangilinan, 76, who was also president and CEO until June 2021.

The cost overrun and the selloff in the shares on Friday just ahead of PLDT’s disclosure are “areas of concern” for SEC, the regulator said in a statement, adding that it immediately commenced an inquiry into the matter. The commission also ordered the Philippine Stock Exchange to submit its report on its own investigation on the Dec. 16 trading activities.

The regulator’s move should provide clarity to investors on what’s happening in PLDT, said Japhet Tantiangco, analyst at Philstocks Financial Inc. “It’s highly possible that there were lapses and violations committed that led to this problem and PLDT as a public company must explain to investors what happened,” Tantiangco said. “The SEC must see to it that investors are protected.”

The SEC said it “will closely monitor the investigation and will continue to conduct a parallel, independent inquiry into the matter.”

PLDT’s US-traded depositary receipts dropped 2.4% on Friday, when PLDT announced the budget irregularity from 2019 through 2022 when it spent 379 billion pesos to bulk up its network for broadband and data to stave off rival Globe Telecom Inc.

“The core issue here and the primary reason PLDT is getting sold down is corporate governance,” said Manny Cruz, strategist at Papa Securities Corp. “The overrun is quite a substantial amount and it went on for years. That raises questions on how that could have happened to a blue chip company.”

The budget overrun is almost equivalent to PLDT’s combined 2020 and 2021 net income. It’s also more than twice the 21.46 billion pesos of cash and cash equivalents that PLDT had at the end of last quarter. While PLDT hasn’t given details, Pangilinan said in a Philippine Daily Inquirer report that as much as 130 billion pesos in undocumented purchases were made from 2019 through 2022 and an audit lowered the “questionable deals” to 48 billion pesos.

Given the growing scrutiny on environmental, social and governance issues, PLDT’s debacle will raise concerns among its large base of foreign investors, which currently hold more than 40% stake in the company. More than 1.18 million PLDT shares changed hands Monday, the most since June 2017.

SGV & Co., the nation’s biggest auditing firm, is on its 20th year as the company’s external auditor. In other jurisdictions like the European Union, a company is required to invite bids for other auditors or have joint audits after 10 years.

PLDT also has the second lowest percentage of independent directors among the 30 companies in the benchmark Philippine Stock Exchange Index, according to data compiled by Bloomberg. In the broader MSCI Asia Pacific, it ranks 1,453 out of 1,486 companies.

The Philippine Stock Exchange will look into trades involving shares of PLDT after bourse officials noticed heavy selling before the market closed Friday and an hour before the company disclosed the overrun, the Philippine Daily Inquirer reported, citing PSE President Ramon Monzon.

“It’s too early to judge PLDT’s quality of governance without the details” on how this came about, said Noel Reyes, chief investment officer at Security Bank Corp. “PLDT never had an issue like this before under Pangilinan.”

PLDT’s shareholders include Japan’s Nippon Telegraph & Telephone Corp., Hong Kong’s First Pacific Co. and Manila-based JG Summit Holdings Inc. Vanguard Group Inc. and BlackRock Inc. are among the biggest asset managers that hold the stock, according to Bloomberg data.

Several other companies of which Pangilinan is also chairman declined. Metro Pacific Investments Corp., owned by First Pacific, sank as much as 5.4%, while Manila Electric Co. fell as much as 3.6%.

Pangilinan stunned the Philippines in 1998 when he engineered a 30-billion peso takeover of PLDT that he later merged with Smart Communications Inc., a mobile phone startup he funded through First Pacific.

“Pangilinan will have to take responsibility for what transpired following the principles of command responsibility,” said Papa Securities’ Cruz. “This could end his career on a sour note and blemish a sterling legacy.” Bloomberg