DOJ Opinion No. 065, s. 1991

DOJ OPINION NO. 065 , s. 1991 April 19, 1991 The Chief Legal Counsel Development Bank of the Philippines Makati, Metro Manila Sir : This has reference to your request for opinion as to whether or not the proposed privatization of the Development Bank of the Philippines ("DBP") would require a Congressional amendment of its charter (Executive Order No. 81). You stated that under DBP's initial privatization plan, all of its provincial branches, except for 15, will be grouped into 5 distinct regional banks, the equity of which will be privatized gradually; that the Commission on Audit strongly objected to this scheme on the ground of difficulty in determining "how a premium could be paid based on this strategy"; that upon DBP's request, the World Bank recommended that DBP undertake only wholesale banking operations, while it sets up a wholly-owned subsidiary which shall engage in retail banking services, and that his subsidiary be privatized through both public offering and private placement; and that in connection with the aforedescribed privatization strategy, the DBP Board of Directors has raised the following issues: prcd "1. Will the transfer of the greater bulk of the Bank's assets, .functions, and personnel to a subsidiary for privatization not circumvent its charter? "2. Is it legally feasible, under the Bank's Charter to have the wholesale bank own a much larger and bigger retail subsidiary? "3. Does the privatization scheme proposed by the World Bank require amendment of the DBP Charter by Congress?" You further state that "to enable [you] to identify the legal parameters of [your] privatization process", you wish opinion on the following questions: "1. When a government corporation, like the DBP. which is operating under a Charter, creates a subsidiary under the Corporation Code, what is the nature of the subsidiary? Will the subsidiary still be subject to Civil Service rules and regulations, to COA Audit, to the salary standardization law, etc., or not? "2. What liabilities of office will pertain to the officers/staff who will serve in the subsidiary? "3. Can there be private equity in the subsidiary? and "4. Will the "conflict of interest" provision in the Charter and in the anti-graft law still apply to the subsidiary?" At the outset, we were initially inclined to decline opinion herein because under its Revised Charter, the DBP is enjoined to "avail of the legal services of any government legal office authorized to render such services to government-owned or controlled corporations" (Sec. 12), namely, the Office of the Government Corporate Counsel, which is the principal law office of government-owned or controlled corporations (Sec. 1, R.A. 2327, as amended and P.D. 1415). However, inasmuch as the instant case relates to the government's privatization program, in connection with which the Secretary of Justice is the ex-officio legal adviser to the two agencies primarily tasked with its implementation (Secs. 8 and 21, Proc. 50), we find sufficient basis for rendition of an opinion herein. We shall discuss together the first set of the above-enumerated queries since they are interrelated. The second paragraph of Section 2 of the DBP Revised Charter reads: "The primary purposes of the Bank shall be to provide banking services principally to service the medium and long term needs of agricultural and industrial enterprises, particularly in the countryside and preferably for small and medium scale enterprises ; Provided, however, that the pursuit of these objectives shall be undertaken within the context of a financially viable and stable banking institution; Provided, further, that the Bank shall continue to be classified as a development Bank, and Provided, finally, that unless otherwise provided herein, the Bank may perform all other functions of a thrift bank ." (Emphasis supplied) Consistent therewith, Section 3 of said charter specifies the following powers of DBP, inter alia , to wit: "(a) To accept such deposits as are allowed thrift banks under existing law and Central Bank regulations, including, but not limited to demand, savings, and time deposits; "(b) To grant loans for the establishment, development or expansion of any agricultural or industrial enterprise;" and "(c) To accept and manage trust funds and properties and carry on the business of a trust corporation". It is evident from the foregoing provisions of law that DBP was intended to engage mainly in the retail banking business, as differentiated from wholesale banking activities which, we understand, cater to other banking institutions and non-bank financial intermediaries. Thus, it was primarily established "to service the medium and long term needs of agricultural and industrial enterprises, particularly in the countryside and preferably for small and medium scale enterprises" and it is empowered to "perform all other functions of a thrift bank". In addition, it is authorized to accept deposits, grant loans to agricultural and industrial end-users and engage in the trust business. prcd Moreover, Section 7 of E.O. No. 81 reads: "SEC. 7. Authorized Capital Stock Par value . The capital stock of the Bank shall be Five Billion pesos to be divided into Fifty Million common shares with par value of P100 per share. These shares are available for subscription by the National Government . Upon the effectivity of this Charter, the National Government shall subscribe to Twenty-Five Million common shares of stock worth Two Billion Five Hundred Million which shall be deemed paid for by the Government with the net asset values of the Bank remaining after the transfer of assets and liabilities as provided in Section 30 hereof." (Emphasis supplied) It is our belief that the foregoing legal provision mandates that the DBP should be wholly-owned by the government and that it implicitly prohibits the dilution of such ownership. This impression is reinforced by the expressed legislative policy about "a clear role for direct government participation in the banking system through a government development bank" and to organize the DBP as "the government financing institution charged with providing . . . credit facilities for agriculture, industry, export development and the government sector" (2nd and 3rd preambular clauses, E.O. No. 81). Indeed, had the lawmaking authority designed the DBP to allow entry thereto of private investors, it could have easily provided so, as in the case of the Revised Charter of the Philippine National Bank, which explicitly allows its shares to be sold to the private sector (Sector 5, E.O. No. 80). Accordingly, it is our considered opinion that the privatization of DBP in the manner suggested by the World Bank will contravene its existing charter, and therefore, such privatization is legally feasible only upon appropriate amendments of the said charter. This is not to say, however, that DBP's privatization will, in every case, require congressional intervention. It is noted that Section 6 of its current charter empowers DBP to "make equity investments in private development banks and other privately owned banks in the thrift bank category, as well as rural bank, if such investment is in connection with the privatization of certain branches of the Bank". (First proviso, Section 6, E.O. No. 81). This provision constitutes existing authority for the bank to privatize its provincial branches. As regards the second set of queries, we find them anticipatory and premature since the mode of privatization, if not all, of DBP has yet to be finalized. Accordingly, we decline to render opinion thereon in line with settled precedents of this Department which enjoins it to refrain from ruling on questions which are hypothetical and anticipatory (Secretary of Justice Opns. No. 68, s. 1971; No. 57, s. 1975; and No. 54, s. 1986). Very truly yours, (SGD.) FRANKLIN M. DRILON Secretary