If the boards of ASX-listed companies want to know how to raise capital without mistreating smaller retailers, Corporate Travel Management Ltd (ASX: CTD) has just demonstrated how.
The shame file of companies raising capital unfairly through institutional placements is long and varied. Retail Food Group Limited (ASX: RFG), Cash Converters International Ltd (ASX: CCV), Challenger Ltd (ASX: CGF) and Select Harvests Limited (ASX: SHV) were among some of the players raising capital via institutional placements this year.
Even tacking on a share purchase plan (SPP) afterwards tends to treat smaller shareholders unfairly. As an example, a shareholder holding just one share could apply for the maximum of $15,000 worth of shares under a SPP – the same maximum amount another retail shareholder holding say $100,000 worth of shares could also apply for.
The only fair way in our opinion is through a pro-rata renounceable rights issue, which gives every shareholder the option of adding in more capital, or at least are compensated for it, by being able to sell their rights to another investor.
Most companies will argue that an institutional placement is quicker than a rights issue, and has other advantages, but that's a feeble excuse more often than not.
There's nothing worse than seeing smaller shareholders being diluted by companies offering discounted shares to favoured clients of their broking firm. Especially when those institutional investors did not hold a stake in the company beforehand, and yet they get to buy discounted shares, while retail shareholders are generally excluded.
Now management will often crow about new investors coming on board after an institutional placement – but they seem to forget they already had investors.
But that could be all about to change. Several submissions to the Financial System Inquiry have highlighted the unfairness of institutional placements and non-renounceable rights issues. Two suggestions to resolve the issue include:
- Requiring all existing shareholders be invited to participate in any on-market equity issue, or
- Requiring by law that all issues of new equity by issuers be conducted fairly, transparently and efficiently – unless shareholders approve the issue, despite not satisfying that criteria.
Company boards, you have been put on notice.
