Legislation is needed to ban placements
Terry McCrann
April 12, 2010
Herald Sun, Saturday, April 10, 2010
Corporate Australia is congenitally unable to clean up its act. The prime regulator is institutionally incapable of understanding the inherent corruption. So there is only one course: share placements must be banned by specific legislation.
At the moment we not only allow discretionary placements (they should more accurately be termed discriminatory as they steal money from retail shareholders) but everything in our corporate system actively encourages them. And I do mean everything. Boards of directors love them. It gives them immediate, painless access to new equity capital. Investment bankers don't just love them but positively wallow in them. It enables them to get paid millions of dollars for handing out free money, with some of the dollars coming from the very shareholders being plundered. And they are a godsend to institutional investors.
Placements below market prices (they are all below market) enable subscribers to record above-market gains, and so underwrite or boost the fees they charge their investors. In a sense, they're bilking retail investors twice over. Further, both the regulator, the Australian Securities & Investments Commission, and the underlying corporate legislation actually encourage them and discourage the fair, sensible alternative: renounceable pro-rata rights issues. All this makes an utter mockery of the claims that the legislation is aimed at ensuring all shareholders in public companies are treated equally, and that ASIC is there to protect investors.
Last year, corporate Australia embarked on an absolute orgy (there really is no other word for it) of placements and their barely more equitable sibling, institutional entitlement issues. They were the primary mechanism for raising well over $100 billion of new equity. That was easily the most raised for any country in the world in, if you'll pardon the irony, pro-rata terms. It was even in the top two or three in absolute dollar terms, although there was one extraordinary exception. Like Kevin and Ken's ``stimulus'', this orgy of raisings was hailed as a triumph. Stimuluses supposedly kept us out of recession. Never mind the cost. All that equity supposedly allowed corporate Australia to sail through the great deleveraging to the benefit of all their shareholders.
OK, so some institutional and investment banking snouts-in-the-trough benefited, Animal Farm-style, more than the other pigs. But that's the price small shareholders (sorry we all) had to pay. All boats were lifted, so to speak; it's just that some got lifted more. And if it kept the payments going on the holiday spread or boutique vineyard, well, that was even more to the good. The one great exception, rather than proving the rule, utterly destroyed this farrago of self-interested and ignorant nonsense. Rio Tinto raised almost $20bn with a terribly gouache pro-rata renounceable rights issue. And why did it go down such a terribly unfashionable route? Because it had to. Because the rules of the stock exchange mandated it. That's the London Stock Exchange, not the ASX. Rio showed precisely what was so wrong with the down under placements/entitlement issues.
In the fear and loathing of the global financial meltdown, they all had to be done at huge discounts to market. With Rio, and with Rio alone, it didn't matter how big the discount was because the cheap shares went to all shareholders proportionately. If they didn't want to take up their rights, they were sold and non-subscribers were fairly compensated for the dilution. The non-subscribing retail investors in all other down under placements got nothing to compensate for their dilution. And they were well and truly diluted. Real dollars were taken from their pockets and handed to institutions, even though share prices generally rose in the recovery.
Now it is reasonable to argue that directors were acting in the best interests of their companies and, as such, all their shareholders. Survival took precedence over equity. It would have been negligent not to raise equity in that manner. Except that such a rationalisation misses the point. The reason companies went down the placement/entitlement route is that the whole system has promoted those means of raising equity. And this institutional practice is actively encouraged by both the law and the regulator. This is done by making rights issues cumbersome and untimely and through the use of seductive, seemingly equity-creating follow-on SPPs (small shareholder ``share purchase plans'') to validate placements/entitlement issues. SPPs do nothing of the sort. They are a further, quite insidious turning of the inequity screw.
They are another layer of non pro-rata uncompensated dilution for many retail shareholders and they opened the door to unscrupulous main-chancers to join the very profitable wallowing.
Now the storm has passed, one might have hoped that companies would start treating shareholders fairly. Mirvac has swiftly put paid to that hope. It announced it had raised $350 million from a placement to ``existing and new'' institutional investors and would follow with a $150m SPP to retail shareholders.
Now, true, as the discount to market was relatively small at around 5 per cent to 7 per cent, the amount stolen from its retail holders wasn't large. But Merrill Lynch and UBS were still paid millions to hand out free money. Clearly, the saying ``physician heal thyself''' has no meaning in corporate Australia. Although true, it's a little harder to do in the legislative/regulatory environment. The ``healing'' has to be ``assisted'' by changing the law, making renounceable pro-rata rights issues mandatory and banning placements and institutional entitlement issues.
This also requires dumping the ludicrous and completely useless prospectus rules that make rights issues so clunky. Are we going to learn any lessons from the meltdown? Probably not. But this one is a no-brainer. If we had had the right, pardon the pun, system in place, we could have still raised that $100bn. But we'd have done it fairly, without stealing from retail investors and handing quite literally billions of dollars to institutional investors, investment bankers and assorted main-chancing flotsam and jetsam.
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