Putting it right on capital raisings

In recent years, but particularly since the onset of the financial crisis, there has been considerable and continuing controversy over the structures companies are using to raise new capital, some of which actively discriminate against smaller shareholders. The ASX is now trying to do something about that.

The ASX issued a discussion paper today on ‘'modernising'' the timetable for what once was the standard approach to equity raisings, the old-fashioned rights issue.

The rights issue has become almost an anachronism within the range of fund-raising structures post-crisis, largely because of the time – up to 26 business days – they take between announcement and completion.

In markets, particularly the kind of volatile markets we've experienced over the period since the crisis erupted, time equates to risk.

Companies don't want to expose themselves to the possibility that market upheavals might blow up a capital raising midway through the process and underwriters want to minimise the risks they are exposed to if they guarantee the capital will be raised.

Either they won't underwrite an issue that will leave them exposed for more than a month or they'll charge a big premium or insist the shares are issued at massive discounts before accepting the risk.

Hence we've seen companies increasingly using quicker, cheaper and more certain options for raising equity, like institutional placements that are sometimes combined with a sop to small shareholders through the addition of limited share purchase plans.

There have also been so-called ‘'accelerated'' rights issues, where the institutional timetable is truncated and is then followed by a retail offering. In some recent issues the retail entitlements have been tradeable.

There is an element of discrimination in most of the modern capital raising approaches, which favour institutions over retail shareholders because the institutions are able to hand over big lumps of capital very quickly.

The traditional rights issue, particularly the renounceable rights issue, is the fairest form of capital raising because all shareholders are treated equally. The ASX wants to try to ensure the continued viability of rights issues as a capital raising option.

Its approach is to try to reduce the timetable for such issues from the current maximum of 26 business days to a maximum of 16 business days by condensing the various stages within the current timetable. That might require some changes to, not just the ASX's systems and processes but potentially those of listed companies' brokers, custodians and share registries as well.

It will also seek feedback on the appetite for an even shorter timetable, perhaps less than a week, although that could require regulatory or legislative changes and a shift to electronic distribution of documentation and electronic payment of subscriptions. A really short timetable would make rights issues very competitive with the other mechanisms for raising capital.

ASX described this as an issue for the medium to longer term.

ASX's previous proposal for changes to the capital-raising regime – allowing companies with market capitalisations of less than $300 million to issue up to 25 per cent of their capital at discounts of up to 25 per cent – provoked storms of protests on the basis that they could be exploited to dilute retail shareholders and/or favour insiders. The final form of the proposal has yet to be released.

It is most unlikely that raising the prospect of a shorter timetable for traditional rights issues will attract the same kind of reaction.

Indeed, despite the considerable logistical issues, one would expect that the notion that a conventional rights issue could be completed within a week will generate almost as much interest and thought as the more prosaic option of lopping 10 business days off the current timetable.