Shareholders’ rights on the way out

ONE of the reasons the Australian stock market has been defying gravity of late is the abrupt halt to the billions of dollars worth of share placements being made by companies to institutional investors.

This has dried up a major flow of new stock. The big boys have had to go out and buy shares like the rest of us, instead of loafing in their leather armchairs waiting to be spoon fed.

ASX figures show that $9.9 billion was knocked out in placings in the first half of this year, a figure that had swollen to around $12 billion before the global markets went pear shaped. Meanwhile the total for “rights” issues, which are offered to all shareholders, was a derisory $185 million.

That appalling imbalance has occurred almost by stealth. Former cadet journalist at The West Australian, Andrew Main, now a luminary at the Australian Financial Review, has done a spot of research on the subject. He found that, back in 1987, while we were having a decent-sized crash, shareholders were able to put their hands up for $7.9 billion worth of rights issues, mostly at a mouthwatering discount to the market price. They had the choice of handing over the cash the company sought, or selling their rights in the market. That same year there were only $4.1 billion in placements

“The rights issue, once the central plank of the share market’s capital-raising system, may now go the way of the dodo,” wrote Main. “That is bad news for retail investors.”

Who cares? Well, Ted Rofe, chairman of the 7,000-strong Australian Shareholders Association does.

“Our position is that companies should as far as possible issue shares on a pro rata basis to their own shareholders,” Mr Rofe says.

The ASA was disappointed when companies were allowed to raise by 10 to 15 per cent the annual proportion of their issued capital they are able to flog off without reference to ordinary holders.

Mr Rofe concedes there is a cost factor for companies, who obviously find it cheaper and quicker to conduct lightning placings, without the delay and expense of issuing a prospectus. However, he argues: “We do not see, in these days of continuous disclosure, why companies should not be allowed to put out financial information in the shape of an abridged prospectus rather then the telephone book sized documents that few private investors would read. Nor are we impressed by the delay argument. Companies pretty well know their funding requirements well ahead.”

To qualify for large lumps of private placings of stock you have to be on the list of the investment banking outfits handling the issue. That means institutional investors only. There is one other way. You can join the party if you are one of the 75,000 people in the country who have registered as “sophisticated” investors. All you have to do is show net earnings of $250,000 a year, and $2 million in investable capital, to demonstrate that you are sophisticated enough to say “yes” when you are offered shares at a discount. There is no limit to how long you must hold them – five minutes has not been unusual in some placements.

The rest of us are stuck with the few rights issue that come along these days. Worse, they tend to come from companies unable to raise the wind any other way. Holding shares in local miner Western Metals has been about as pleasant as root canal work, with the company finding new and better ways of losing a fortune on its hedge book.

The recent $24 million “rights” call from the company at 6 cents a share was not stampeded by shareholders, sophisticated or otherwise.

Is there no mean of giving the little man a fair go? Yes. Both Foster’s and Westfield took advantage of a provision in the corporations law to offer up to $3000 worth of stock to small shareholders on the same terms granted to institutions. That is the upper limit, which has been laid down since the early 1990s. Ted Rode wants that raised to $10,000. So do all his members.

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