Raising share cap 'is unfair on investors'

The plan remains divisive within the community. A PLAN to raise the cap on how many shares small and mid-cap companies can issue each year has been criticised by wealth management companies, which say the move threatens investors' rights. In an attempt to help smaller listed companies access capital, the ASX last month released a proposal to raise the limit on how much capital companies worth less than $300 million could raise by issuing new shares.

By InvestSMART · 23 May 2012

By InvestSMART ·
23 May 2012

Comments

A PLAN to raise the cap on how many shares small and mid-cap companies can issue each year has been criticised by wealth management companies, which say the move threatens investors' rights.

In an attempt to help smaller listed companies access capital, the ASX last month released a proposal to raise the limit on how much capital companies worth less than $300 million could raise by issuing new shares.

Small and medium companies can today issue 15 per cent of their shares without investor approval.

Under the ASX proposal, companies would be able to raise an extra 10 per cent of their issued shares if shareholders had agreed in advance, most likely at an annual meeting.

In a submission lodged this week, the Financial Services Council said the plan would lead to "inequitable outcomes through dilution" and it would damage the nation's hopes of becoming a financial services hub.

Raising the cap for mid-size companies would remove an important form of protection that ensured investors had a say in how their companies were run, it said. The lobby group, which represents wealth managers who invest $1.8 trillion in retirement savings, said the proposal should be set aside.

"We do not believe that removing shareholder protection should be outweighed by the desire for increased flexibility," the submission said.

"A race to bottom which erodes investor protections will not assist Australia in growing our reputation as a financial centre."

The ASX plan, which has attracted 150 submissions during consultation, remains divisive within the investment community. The Australian Shareholders' Association has said the $300 million cap is too high and should be cut to $100 million to $200 million.

However, the Association of Mining and Exploration Companies says the proposal will give junior miners better access to equity capital. The ASX concedes the proposal may dilute shareholders' power but says its research has found shareholders in companies worth less than $300 million put a high priority on capital growth.

Go to Google News, then click "Follow" button to add us.

Share this article and show your support

Frequently Asked Questions about this Article…

What is the ASX proposal to raise the share issue cap for small and mid‑cap companies?

The ASX has proposed allowing companies worth less than $300 million to issue more shares each year. Currently small and medium companies can issue up to 15% of their shares without investor approval. Under the proposal they could raise an extra 10% (bringing it to 25%) if shareholders give advance approval, most likely at an annual meeting.

Which companies would be affected by the proposed $300 million cap change?

The proposal targets smaller listed companies — those with a market value under $300 million. It is aimed at small and mid‑cap firms, including junior miners, that often need better access to equity capital.

How would shareholder approval for the extra 10% share issue work?

The extra 10% would require shareholders to agree in advance, most likely through a vote at an annual general meeting. That pre‑approval would permit the company to issue the additional shares during the year without seeking fresh approval for each placement.

Why are wealth managers and the Financial Services Council critical of raising the cap?

The Financial Services Council and many wealth managers argue the change could lead to 'inequitable outcomes through dilution' and would weaken investor protections. They say removing that safeguard risks eroding shareholders' ability to have a meaningful say in how companies are run and could harm Australia’s reputation as a financial centre.

What concerns do shareholder groups like the Australian Shareholders' Association raise about the proposal?

The Australian Shareholders' Association has said the $300 million threshold is too high and recommends lowering it to between $100 million and $200 million. Their concern is that a higher cap would expose more companies’ shareholders to dilution and reduced protections.

Are there any groups supporting the ASX plan and why?

Yes. The Association of Mining and Exploration Companies supports the proposal, arguing it will give junior miners and other small resource companies better access to equity capital, which can be critical for exploration and development.

How might the change affect everyday investors in terms of dilution and voting power?

If a company issues more shares, existing shareholders can experience dilution — a smaller percentage ownership and potentially reduced voting power. The ASX acknowledges the proposal may dilute shareholder power, while its research found shareholders in sub‑$300 million companies often prioritise capital growth, which the ASX says the change would help facilitate.

What should everyday investors watch for next regarding the ASX share cap proposal?

Investors should watch the ASX consultation outcomes (the proposal attracted about 150 submissions), any final rule changes, company notices about AGM agenda items seeking advance approval, and proxy materials. Consider how a change might affect dilution risk versus potential benefits from faster capital raising for growth.