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Beware corporates stealing your money

Corporate Australia has received some stick today, for taking hundreds of millions of dollars from ordinary shareholders and handing it to favoured investors and investment banks.

Writing in the Herald Sun, Terry McCrann says listed companies are still issuing new equity via discriminatory placements to selected investors, bypassing small retail investors and costing them millions. In the face of the Global Financial Crisis, corporates stole billions of dollars from shareholders through equity placements and via non-renouncable pro-rata issues (NRPRI).

According to analysis by Ownership Matters, a governance advisory service, companies in the ASX 300 Index (Index: ^XKO) (ASX: XKO), raised a whopping $33 billion in equity in 2010 to 2012, well down on the $100 billion that was raised by the ASX 200 (Index: ^XJO) (ASX: XJO) companies between 2008 and 2009.

Ah well, at least it isn’t as bad as it was a few years ago, right?

Well sort of.

Of the $33 billion, $12.7 billion was raised via placements, with non-participating shareholders suffering a 14.1% dilution of their shares. Additionally, $391 million was paid to investment banks to ‘manage’ the placements – in other words, to hand out cheap shares to their favoured clients (or those who pay the most in broker commissions).

In some cases, discounted shares were given to investors who weren’t even shareholders before the placement, with minority shareholders treated like second-class citizens. And so far the efforts of the regulators, ASX Limited (ASX: ASX) which runs the Australian Stock Exchange and the Australian Securities and Investments Commission (ASIC), to protect smaller shareholders could be described as a slap to the face of Corporate Australia with a wet lettuce.

ASX needs a fairer system

On many exchanges around the world including the London Stock Exchange, all issues are required to be pro-rata and renounceable, meaning all shareholders have the option to take up new equity, or can be compensated for not doing so. Why the ASX can’t adapt a similar system seems odd to me. Instead the only real option for retail shareholders is to avoid investing in companies that regularly issue new equity to institutional shareholders and bypass smaller shareholders.

Companies that have done selective and unfair placements in the past include Bank of Queensland (ASX: BOQ) and Santos Limited (ASX: STO) – in 2012 and 2011 respectively, but they are by no means the only two.

Foolish takeaway

Let’s hope the regulators take notice of Mr McCrann’s article as well as the views of the Australian Shareholders Association (ASA) and possibly this article. A fairer system for all shareholders is needed.

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Motley Fool writer/analyst Mike King owns shares in Santos.

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