Raising share cap 'is unfair on investors'

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.

By InvestSMART · 23 May 2012

By InvestSMART ·
23 May 2012

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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 can 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.

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 would 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.

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Frequently Asked Questions about this Article…

What is the ASX proposal to raise the cap on how many shares small and mid‑cap companies can issue?

The ASX has proposed raising the limit for companies worth less than $300 million so they could issue more new shares. Today small and medium companies can issue 15% of their shares without investor approval; under the proposal they could raise an additional 10% if shareholders agreed in advance.

How could raising the share‑issuance cap affect everyday investors and shareholder rights?

Wealth managers and investor groups warn the change could dilute existing holdings and remove an important protection that gives investors a say in how companies are run. The Financial Services Council says this could lead to inequitable outcomes through dilution and weaken shareholder power.

Who is opposing the ASX plan and what are their main concerns?

The Financial Services Council has strongly criticised the plan, saying it should be set aside because it risks dilution and damages Australia's reputation as a financial services hub. The Australian Shareholders Association also opposes the $300 million cutoff and says it should be reduced to $100–$200 million.

Which groups support the proposal and why might it help small companies?

Industry bodies such as the Association of Mining and Exploration Companies support the proposal, arguing it would give junior miners and other smaller firms better access to equity capital, helping them raise the funds needed to grow.

What exactly would the extra 10% issuance mean for companies under $300 million?

It means companies with market value below $300 million could pre‑seek shareholder agreement to issue up to an extra 10% of their issued shares on top of the existing 15% allowance, increasing their ability to raise capital without separate approvals for each issue.

Has the ASX acknowledged any downsides to its proposal?

Yes. The ASX concedes the proposal may dilute shareholders' power, but it also notes its research found shareholders in companies worth less than $300 million often place a high priority on capital growth.

How contentious is the proposal among investors and advisers?

The proposal is divisive: the ASX received about 150 submissions during consultation, with strong views on both sides about the trade‑off between investor protections and greater capital‑raising flexibility.

If I'm an everyday investor, what should I watch for as this proposal develops?

Keep an eye on the final ASX decision and any changes to the $300 million threshold, as well as company notices about pre‑approved issuance programs. Consider how increased issuance could dilute holdings and affect voting power versus the potential for companies to access growth capital.