Proposed ASX rule changes for small companies come under fire

Shareholder activists have criticised the Australian Stock Exchange’s proposal to increase capital raising limits for small and mid-cap companies from 15% to 25%, saying it ignores small investors.

The Australian Shareholders’ Association told SmartCompany the resulting discounting and dilution will decimate the value of small shareholders’ stocks.

We don’t criticise the intent of the changes, we recognise that small companies need to have the ability to raise capital, especially the miners,” says ASA chief executive Vas Kolesnikoff.

“But existing investors don’t have any pre-emptive rights, so the proposal by the ASX just means companies can go to a few select institutional investors that were not involved in the deal in the first place.

“They will bypass small shareholders completely and self-managed superannuation funds, who probably took the risk in the first place.”

Kolesnikoff says the ASA is lobbying for a change to the Corporations Act and the ASX should wait for a change before increasing the capital raising limits.

“The issue is the Corporations Act, which means that to issue to small investors you have to issue a prospectus,” he says.

“We are looking to that to be amended so that small investors have pre-emptive rights.

“Companies do big dilutionary placements to institutional investors, because you can make placements to institutional investors under the Corporations Act in an accelerated timetable.

“It is a really extended an timetable for small investors, which means they continue to be diluted.”

Kolesnikoff says the ASA supports the ASX in encouraging capital raising, but under the current rules there is a risk existing small investors will be left out.

“It is ignoring the small investor, who is probably in the majority the greater risk taker, and opening the door for institutions who have missed out on that first.”

Matthew Gibbs, spokesperson for the ASX, defended the stock exchange’s proposal to SmartCompany although says he recognises there are “a range of views” on the proposals.

“We’re seeking all stakeholder assessments to help us to shape new rules that strike a balance between shareholder protections and the need of companies to access capital to fund their growth, which is ultimately for the benefit of shareholders,” says Gibbs.

“All matters raised in the submissions ASX receives will be considered.”

Gibbs says shareholders are protected under the proposed rules as shareholder approval is required in advance for the additional 10%, the discount-to-market price for the additional 10% is capped at 25% and additional disclosure is required both when the 12-month mandate is sought and at the end of the 12 months.

“The concerns about the use of placements disadvantaging existing shareholders during the global financial crisis were focused mainly on the use of placements by companies in the S&P/ASX 300 index,” says Gibbs.

“The current proposals are aimed at the small to mid-cap segment where there is greater interest in capital growth and expanding the shareholder base.”