DOJ Opinion No. 036, s. 1998

DOJ OPINION NO. 036 , s. 1998 March 12, 1998 The Secretary Department of Finance Manila Sir : This has reference to the request for opinion of that Department on whether the National Government may cancel government securities obligations held as assets of the Securities Stabilization Fund (SSF) portfolio of the Bureau of the Treasury (BTr). It is stated that the SSF is an asset portfolio consisting of government securities or NG obligations; that the SSF was established pursuant to Section 121 of Republic Act No. 7653, otherwise known as "The New Central Bank Act"; and that in compliance with Section 129 of the said Act, which mandates the transfer of the fiscal agency functions of the Bangko Sentral Ng Pilipinas (BSP) to the Department of Finance (DoF), the SSF is now being administered by the BTr as an arm of the DoF. That Department is of the view that the National Government (NG) may cancel government securities obligations held as assets of the SSF portfolio of the BTr on the ground that under Article 1275 of the New Civil Code of the Philippines, an obligation like the NG government securities is extinguished from the time the characters of creditor, i.e., NG as holder of government securities in the SSF portfolio, and debtor, i.e., NG as issuer of the same government securities, are merged in the same person i.e., NG as represented by the DoF. It is observed that cancellation of NG specific bond obligations against the same bonds in the SSF will effectively reduce the country's debt stock, not to mention the savings in administrative cost. We disagree with the abovestated view. The term "securities" under the Revised Securities Act, or Batas Pambansa Blg. 178, is a definition by enumeration. Section 2 of said Act provides: "(a) "Securities" shall include bonds, debentures, notes, evidences of indebtedness, shares in a company, pre-organization certificates or subscriptions, investment contracts, certificates of interest or participation in a profit sharing agreement, collateral trust certificates, equipment trust certificates (including conditional sale contracts or similar interests or instruments serving the same purpose) . . . or commercial papers evidencing indebtedness of any person, financial or non-financial entity, irrespective of maturity, issued, endorsed, sold, transferred or in any manner conveyed to another with or without recourse, such as promissory notes, repurchase agreements, certificates of assignments, certificates of participation, trust certificates or similar instruments . . ." The term "securities", as defined in Section 2, supra , includes debt instruments like bonds, debentures, notes and other evidences of indebtedness. Particularly, when we speak of government securities, we refer to evidences of indebtedness of the government. As defined under Section 3391.1, Part III, Book IV Central Bank Manual of Regulations for Banks and Other Financial Intermediaries, which is a restatement of Central Bank Circular 573 issued on July 28, 1977, government securities: ". . . shall include evidences of indebtedness of the Republic of the Philippines, the Central Bank of the Philippines and other evidences of indebtedness or obligations of government entities the servicing and repayment of which are fully guaranteed by the Republic of the Philippines." Previously, the issuance of securities representing obligations of the Government was made through the Bangko Sentral. However, by virtue of Section 129 of Republic Act No. 7653, otherwise known as the New Central Bank Act, such function was transferred to the DOF, together with other fiscal agency functions such as placement and servicing of securities. The pertinent provisions of R.A. No. 7653 read as follows: "SEC. 129. Phase-out of Fiscal Agency Functions . Unless circumstances warrant otherwise and approved by the Congress Oversight Committee, the Bangko Sentral shall, within a period of three (3) years but in no case longer than five (5) years from the approval of this Act, phase out all fiscal agency functions provided in Section 117, 118, 119 and 120 as well as in other pertinent provisions of this Act and transfer the same to the Department of Finance. "SEC. 117. Issue of Government Obligations . The issue of securities representing obligations of the Government, its political subdivisions or instrumentalities, may be made through the Bangko Sentral, which may act as agent of, and for the account of, the Government or its respective subdivisions or instrumentality, as the case may be . . ." "SEC. 118. Methods of Placing Government Securities . The Bangko Sentral may place the securities to which the preceding section refers through direct sale to financial institutions and the public. The Bangko Sentral shall not be a member of any stock exchange or syndicate, but may intervene therein for the sole purpose of regulating their operations in the placing of government securities. The Government or its political subdivisions or instrumentalities shall reimburse the Bangko Sentral for the expenses incurred in the placing of the aforesaid securities". "SEC. 119. Servicing and Redemption of the Public Debt . The servicing and redemption of the public debt shall also be effected through the Bangko Sentral." "SEC. 120 The Securities Stabilization Fund . There shall be established a 'Securities Stabilization Fund' which shall be administered by the Bangko Sentral for the account of the Government. The Operations of the Securities Stabilization Fund shall consist of purchases and sales, in the open market, of bonds and other evidences of indebtedness issued or fully guaranteed by the Government. The purpose of these operations shall be to increase the liquidity and stabilize the value of said securities in order thereby to promote private investment in government obligations. The Monetary Board shall use the resources of the Fund to prevent, or moderate, sharp fluctuations in the quotations of said government obligations, but shall not endeavor to alter movements of the market resulting from basic changes in the pattern or level of interest rates. The Monetary Board shall issue such regulations as may be necessary to implement the provisions of this section." Pursuant to the aforequoted provisions, among the fiscal agency functions transferred to the DoF are: 1) issuance of securities under Section 117 and 2) administration of the SSF under Section 120. By virtue of Section 120, the SSF engages in the purchase and sale of government securities. Its assets are in the form of government securities payment of which is fully guaranteed by the government. LLjur The view has been advanced that since DoF, representing NG and acting through BTr, now issues government securities representing obligations of NG, and since DoF administers the SSF which has government securities in its portfolio, there is a merger of the character of debtor (NG as issuer of the government securities) and creditor (NG as holder of government securities in the SSF portfolio), and, therefore, it is possible to cancel the bond obligations of the HG in the SSF, since these bond obligations are owed by, and owing to, the same entity, which is the NG. We are informed that the bond obligations of the government are satisfied out of the appropriations for debt service in the general appropriations act. On the other hand, the SSF is a fund established by law the resources of which are to be used to prevent, or moderate, sharp fluctuations in the quotations of such government obligations' with a view to increasing the liquidity or stabilizing the value of government securities and thereby promote private investment in government obligations. While technically, the NG owns the assets of the SSF which are in the form of government securities, and is, therefore, deemed to be a creditor of itself as issuer of the government securities, however. since the SSF has been established for a distinct purpose the accomplishment of which requires the continued liquidity of the SSF, it will not be legally possible to cancel the bond obligations of NG in the SSF because to do so would result in the depletion of the resources of the SSF and would defeat the very purposes for which it was established. Under Section 120, supra , the SSF is mandated to invest in government securities. As an investor, it should have a return on its investments which will certainly not be realized if the NG were allowed to offset or cancel its bond obligations in the SSF. Moreover, the SSF operates on a self-liquidating basis. It is authorized to retain its net profits, but at the same time, it shall bear its own losses (Sec. 122, R.A. No. 7653). Cancellation of the bond obligations of the NG in the SSF would mean non-accrual of income to the SSF which could prove to be detrimental to the operation of the SSF. Wherefore, we answer the herein query in the negative. Very truly yours, (SGD.) SILVESTRE H. BELLO III Secretary