ASX sets fine example with renounceable entitlements
Now heading up market operator the Australian Securities Exchange (ASX), Funke Kupper knows that setting a good example is vital.
So the announcement that the ASX would raise $553 million of capital in the fairest way possible - through a renounceable entitlement offer - deserves credit.
Unfortunately, few listed companies meet this high standard. Here's how to recognise if you're being short-changed when a company comes calling for cash.
The good A renounceable entitlement offer - originally called a "rights issue" - is the fairest way to raise capital because it's pro rata; shareholders can acquire new shares in proportion to their existing holding. Using the ASX raising as an example, shareholders were offered two shares for every 19 they held, at a price of $30 each.
It's also fair because it is renounceable, so shareholders can sell their entitlement on the market.
In ASX's case, they traded for about $3: the difference between the ordinary share price of about $33 and the offer price of $30.
Few companies use renounceable entitlement offers because the law requires a prospectus for each offer, which is slow and expensive.
The bad A non-renounceable offer is the same as a renounceable offer except that shareholders cannot sell their entitlements. "Use them or lose them" is the catch cry here. If you're unable to take up your entitlement, or don't have the cash available, you'll end up being diluted - your shares will be worth less, with no compensation.
A share purchase plan (SPP) avoids the need to issue a prospectus. An SPP is an offer - at a discount - limited to no more than $15,000 of shares for each existing shareholder in a 12-month period. But while you might be comfortable with SPPs due to their familiarity, the fixed dollar limit makes them fundamentally unfair.
The ugly The worst option for most shareholders is a placement. This is an issue of shares to one or more large shareholders. As investment banks typically control which clients receive stock, it's the least transparent of all the capital-raising methods.
However, it is fast, which explains its popularity. Hundreds of millions of dollars can be raised in an afternoon - useful when making acquisitions or takeovers, or repaying debt you shouldn't have taken on in the first place. But placements cause dilution to small shareholders. Institutions get to buy new shares at a discount and small shareholders don't.
ASIC could improve the regime by removing the requirement to issue a prospectus. It's absurd to require prospectuses for entitlement offers and not for share purchase plans, particularly when investors buy shares on the market every day without them.
This article contains general investment advice only (under AFSL 282288).
Frequently Asked Questions about this Article…
A renounceable entitlement offer, often called a rights issue, lets existing shareholders buy new shares in proportion to their current holding (pro rata). It's considered fair because everyone gets the chance to maintain their ownership percentage, and because it's renounceable shareholders can sell their entitlement on the market if they don't want the new shares.
The ASX raised about $553 million using a renounceable entitlement offer. Shareholders were offered two new shares for every 19 they held at an offer price of $30 each. The entitlements traded at roughly $3, reflecting the difference between the ordinary share price of about $33 and the $30 offer price.
A non-renounceable offer is similar to a renounceable offer but shareholders cannot sell their entitlement. If you can't take up your entitlement or don't have the cash, you 'use them or lose them' — meaning your shareholding gets diluted (your percentage ownership and potential value falls) with no compensation.
An SPP allows existing shareholders to buy additional shares without a prospectus and typically at a discount. However, it is capped at a fixed dollar limit — no more than $15,000 of shares per shareholder in a 12-month period — which can be fundamentally unfair because larger investors can participate more heavily while small shareholders are limited.
A placement is an issue of shares to one or more large investors, arranged quickly by investment banks. It's the least transparent method because banks decide which clients receive stock. Placements are fast and useful for raising large sums, but they often dilute small shareholders since institutions buy new shares at a discount while small holders get no opportunity to participate.
Few companies use renounceable entitlement offers because the law requires a prospectus for each offer, which makes them slow and expensive to run. That regulatory burden often pushes companies toward faster methods like placements or SPPs.
Look for non-pro rata methods: placements that allocate discounted new shares to institutions, non-renounceable offers that you can’t sell, or SPPs with strict dollar caps that favour larger holders. These methods can cause dilution to small shareholders or deny them the chance to participate on equal terms.
The article suggests ASIC could help by removing the requirement to issue a prospectus for entitlement offers. That change would make renounceable offers less costly and more available, reducing the incentive for companies to use placements or other methods that disadvantage small shareholders.
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