The Regulation and Impact of Non Traditional Rights Issues and Placements in Australia - E139
The ASX has relaxed one of its Listing Rules, allowing small cap companies to increase the amount of share capital they can issue at a discount. Historically, the ASX rules allowed all listed companies to make non-pro-rata issues of up to 15 per cent of their shares at a price discount of up to 15 per cent. Since August 2012, companies with a market capitalisation of less than $300 million have been able to issue a further 10 per cent of their share capital at a discount of up to 25 per cent.
The objective of the project was to assess whether the current regulations facilitate the creation of shareholder wealth and adequately protect minority shareholders.
The first paper, Placements and Small Cap Firms - an Analysis of Changes to ASX Listing Rules, assesses the impact of the changes to the ASX Listing Rules for small cap companies. The study showed that, notwithstanding differences at the industry level, the overall response to issues made since the rule change has been broadly positive. Shareholder wealth has not been undermined, and it has provided small cap companies with a valuable source of additional funds.
The study indicated that if a company does issue the full 25% of capital allowed at the full discount allowed, it must earn a significant return on capital for the existing shareholders to remain unaffected. The difficulty of achieving a return of this magnitude will depend on the amount of capital raised and the company’s particular circumstances. The study found that smaller issues are more likely to achieve the required return, and less dilution of minority shareholders. Issues made to fund exploration, development or technology advances appear to generate strong returns, as do those that recapitalise a previously precarious balance sheet. The study also found that adequate safeguards are in place to help protect minority shareholders and prevent share placements leading to unintended changes of control.
The second paper, The Impact of Non-traditional Rights Issues in Australia, analyses the use and impact of accelerated rights offerings versus other types of capital raising, and the impact of the GFC on capital raisings. The research suggests that accelerating a rights offering does not impact the level of discount, however the market reacts more negatively to accelerated rights issues than standard rights issues. The GFC did not impact the discount and announcement returns for rights issues. The combination of a placement with a rights issue was found to result in a higher discount than stand-alone placements. Combination issues made during the GFC had a higher discount for both the placement and rights components, and a more negative market reaction to their announcement.