Capital raisings draws the ire of ASA

The Australian Shareholders Association (ASA) has today indicated that it will increase its focus on the treatment of retail investors in capital raisings.

That follows the Virgin Australia (ASX: VAH) capital raising that saw retail investors diluted from holding 19.7% of the company to 15.8%. 75% of retail investors declined to participate in the recent capital raising, but were not compensated for the dilution. The ASA lodged an application with the Takeovers Panel, objecting to the fact that Virgin’s three major shareholders, Etihad, Singapore Airlines and Air New Zealand (ASX: AIZ) increased their stake in airline, at the expense of retail investors.

ASA chairman Ian Curry said, “The Virgin Australia board should have given priority to Australian retail investors rather than foreign government shareholders.”

“Retail investors were diluted out of billions of dollars’ worth of shares in the aftermath of the GFC and the system needs to be reformed,” Mr Curry said. “The key question boards and politicians should ask themselves is: ‘how are we protecting the most vulnerable small investors who choose not to participate in an in-the-money capital raising’?”

Here at the Motley Fool, we would also like to see all shareholders treated equally, but the current systems companies can use to raise capital on the ASX discriminate against smaller shareholders. Despite the ASXBookBuild facility being available, just two small companies have used the facility so far and retail investors can still be excluded.

And as Stephen Mayne from the ASA says, “Investment banks, underwriters and institutional investors benefit hugely from the non-participation of retail investors in capital raisings, especially through institutional placements, so we need issuers to acknowledge the systematic dilution of retail investors that continues to occur and work proactively to reform the capital raising system.”

We’ve highlighted several cases including Ansell (ASX: ANN), Sirius Resources (ASX: SIR) and Retail Food Group (ASX: RFG), where companies have raised capital through placements to institutional shareholders. In some cases companies are even offering shares to non-existing shareholders at a discount, rather than giving current, loyal shareholders the first bite of the cherry.

The fairest way for companies to raise capital in ours and the ASA’s view is through a pro-rata, renounceable rights issue, which compensates existing shareholders should they decline to participate in a capital raising, as well as treating all shareholders fairly. That is standard practice on much larger exchanges such as the London Stock Exchange. It does have some drawbacks for smaller companies, such as cost and the time to implement, but for larger companies, there should be no real reason why they can’t use a renounceable rights issue to raise capital.

Company directors will use the argument that placements allow companies to raise capital in a very fast manner, but then you have to wonder how those companies are run, if they can’t access capital fast, without raising equity.

Foolish takeaway

We support the ASA’s moves to highlight this issue to company boards and governments, and reiterate that we want to see a level playing field for all shareholders.

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Motley Fool writer/analyst Mike King owns shares in Sirius Resources. You can follow Mike on Twitter @TMFKinga

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