It seems that the ASX and ASIC really do listen to criticism with the regulators acting together to modify the rules applying to capital raisings due the COVID-19 pandemic and associated recession.
Small shareholders were once again being set up to have their shareholdings in companies diluted significantly after the Australian Securities Exchange decided to allow companies to make placements of up to 25% of their shares on issue during the pandemic, rather than the old limit of 15%.
During the GFC era, small shareholder allocations were frequently too small or not available to prevent shareholdings being diluted and by raising the placement level to 25%, the potential was always there to expand that rip-off to an even greater extent.
Complaints led to new placement disclosure
Following on from a welter of complaints by small shareholders and advocacy groups including proxy advisers, the ASX and ASIC have now insisted that they be provided with an electronic copy of every company’s placement details, including in detail how the shares are allocated.
They will also be forced to reveal which investors received stock, which will disclose the extent of the rip-off of small shareholders – often to the advantage of incoming shareholders.
Companies will also have to prove they made the best efforts to allocate shares on a pro-rata basis, which prevents existing shareholders from being diluted.
Companies will need to provide a spreadsheet showing exactly which investors got shares to both the ASX and the ASIC within five days.
Details will still remain secret
Interestingly, these details will not be made public – although the very fact that they need to be supplied to the regulators to be checked may have a sobering effect on some of the more egregious capital raisings.
Predictably, the changes have been welcomed by many investor groups but most proxy advisers have said that they do not go far enough and should be made public so that investors can hold directors to account about why some parties have been preferred by the capital raisings.
They claim that investors should be informed of the proportion of a placement granted to new versus existing shareholders and also the proportion of the placement allocated below a pro-rata entitlement.
ASX and ASIC will be able to use the data to respond to investor complaints and it is possible that they could investigate whether directors have breached their duties in the way shares have been allocated.
ASX has raised $8 billion in a hurry
The refined rules are extremely timely because the ASX has once again proved to be one of the fastest exchanges in the world to allow for capital raisings during an emergency event such as COVID-19.
Already since 1 March, the ASX has blitzed many much bigger world exchanges – including the UK, US and Hong Kong – by announcing capital raisings by more than 70 listed companies worth more than $8 billion.
This is still well short of the GFC crisis when the ASX raised an amazing $92 billion but the COVID-19 crisis is a long way from over yet and there is still plenty of scope for the amount raised to grow, although the financial leverage around is not as extreme as during the HGFC.
These big placements are enormously popular at times of financial stress because they let the issuing company get their hands on cash quickly and relatively easily to bolster the balance sheet.
Flight Centre saved from a dire position
A good example of this was travel giant Flight Centre (ASX: FLT) which understandably was in a dire position after most international travel was stopped due to the pandemic.
It raised around $679 million which will help it survive as it dramatically reshapes its business, standing down around 6,000 staff and closing around half of its travel shops internationally.
Interestingly, even the founding shareholders Geoff and Susan Harris, Graham and Jude Turner and Bill James suffered some dilution of their stakes despite contributing $20.8 million to the capital raising, showing the difficulty even wealthy and well-connected shareholders face during such exercises.
Companies saved but dilution can be severe
Small shareholders in many of the companies that have raised capital will have seen their stakes diluted much more dramatically – in some instances because they simply don’t have the cash to put into the offer or because their entitlements were not large enough to avoid dilution.
The flip side of this problem is that some companies that may not have survived without the ability to raise capital quickly will probably now come out the other side of the pandemic in a reasonable shape – with some examples being Webjet (ASX: WEB), Flight Centre (ASX: FLT) and Southern Cross Media (ASX: SXL).
It is an unfolding situation but in the case of Virgin shareholders, they are most likely to be wiped out now that the company is in administration after the major shareholders declined to take part in raising any fresh capital.
Companies can be fair or unfair – it is up to them
As is usual in these situations, some companies have raised capital in a way that is scrupulously fair to their shareholders both large and small while others have simply let rip and treated their loyal small shareholders with disdain by applying massive discounts in the capital raisings and issuing enormous numbers of new shares to new shareholders which increases the dilution.
Plumbing chain Reece (ASX: REH) was one that specifically offered small shareholders a pro-rata issue on the same terms as institutions and a share purchase plan (SPP) so that they could specifically buy the right number of shares to avoid dilution of their stake – if that is what they wanted.
The variation between capital raising of different companies can be a difficult situation for small shareholders to navigate as they need to do the numbers and work out their level of dilution or otherwise when deciding what to apply for.
Once approach for small shareholders in such situations to invest through large listed investment companies such as Australian Foundation (ASX: AFI) and Argo (ASX: ARG), which can be relied on to usually make the right decisions during placements.
Listed small cap fund managers are also useful if you prefer investing in small companies.