What are PDRs?

The recent decision of the Securities and Exchange Commission (SEC) revoking the certificates of incorporation of Rappler, Inc. and Rappler Holdings Corporation has placed Philippine Depositary Receipts or “PDRs” into the limelight.

What are PDRs?

The typical PDR is a security that grants the holder the right to the delivery or sale of the underlying shares of stock, and is usually not an evidence of ownership of a corporation. 

It is essentially a derivative, which is a security that derives its value from an underlying asset.  Common examples of underlying assets are shares of stocks, bonds, interest rates or currency exchange rates. 

As a derivative, the value of a PDR depends on the value its underlying asset – which is the shares of stock of a corporation.  Thus, the value of the PDR may increase or decrease as the value of the underlying shares increases or decreases.

Subject to the terms of the PDR, the issuing corporation ordinarily grants the holder of a PDR the right (but not the obligation) to buy the underlying shares at a specified price or to require the sale, and delivery of the proceeds, of the underlying shares.  This is the “exercise right” in a PDR. 

Aside from this, PDR holders may also be entitled to certain rights, such as cash payments equivalent to the amount of cash dividends to which the underlying shares may be entitled to.

The issuance of PDRs by corporations became popular in the 1990s, as a way to raise additional capital and acquire investments from Filipinos and foreigners alike, without having to issue any shares. 

According to the Philipine Stock Exhange (PSE), PDRs listed and traded in the exchange are not considered as “evidence or statements nor certificates of ownership of a corporation”. 

Thus, a person who purchases a PDR from the PSE does not buy the stock of the issuing company. A PDR holder becomes a stockholder once he elects the option to have the equivalent number of shares delivered or sold to him.  It is only upon the issuance of the shares when he becomes a stockholder of record of the corporation. 

Even with the recent SEC decision, PDRs remain to be among the financial instruments which may be used to raise capital so long as these are not used to circumvent legal restrictions such as Filipino onwnership and control requirements under the Constitution on certain industries like mass media and public utilities. 

In the end, the determination of the validity of PDRs by a corporation would have to be made on a case-to-case basis depending largely on the true arrangement among the parties involved which may be reflected in or inferred from the terms and conditions of the PDRs.

Katrine Paula V. Suyat has been teaching in San Beda College of Law- Mendiola since 2014, handling Constitutional Law, Legal Research and Legal Writing, Statutory Construction, and Criminal Law.