By Michael Evans
COMPANIES should be forced to disclose the big winners from capital raisings after a report found nearly half of the money raised in the aftermath of the financial crisis did not give existing shareholders the chance to take part.
A review of the near $100 billion in capital injections made in 2008-09 questioned the fairness and transparency of the process, finding existing shareholders suffered an extraordinary transfer of wealth to other investors picked by company management and their investment bank advisers.
Corporate governance advisory firm ISS Governance calculated that $45 billion of the $98.9 billion in funds raised by Australian companies as they sought to repair their debt-laden balance sheets during the global financial crisis were chosen by the company or their advisors in a process called a placement.
Existing shareholders, who are unable to take part in a placement, have their stake watered down.
By contrast, capital raisings where all investors were given the opportunity to maintain their ownership interest in the company via rights issues accounted for $46.2 billion.
The report criticises the market supervisor, the Australian Stock Exchange (ASX), for its ''informal'' regime and willingness to grant waivers to companies from the listing rule that limits the issue of shares via placement in a year to 15 per cent. The ISS report found placements diluted existing shareholders by an average 19 per cent and 38 placements failed to include additional measures to ease the dilutive impact of the placement.
Property giant Westfield was singled out as the worst offender, diluting equity by 14 per cent through a $2.9 billion placement to institutional investors, followed by Commonwealth Bank and Fortescue Metals. Investors who receive shares from a placement are under no obligation to disclose their stake or relationship to the company or advisory firm.
Placements typically do not require shareholder approval, making them faster to complete, while rights issues require the issuing of a prospectus and can take 45 days. They are also highly profitable for the investment banks, which earned $797 million conducting them. Investment banks pocketed $2 billion in fees from all forms of capital raisings in 2008-09. Existing institutional shareholders who miss out on a placement are forced to buy stock on market to avoid being diluted, providing a floor for shares when they resume trading. This raises the potential for conflicts of interests for the banks, ISS said.
''In the absence of transparency to the market around pricing and allocations under placements … such conflicts are potentially able to flourish and may even drive the choice of raising,'' ISS said.
''[Placements] provide a much better return to investment banks than entitlement offers.''
While companies and banks claim speed was crucial during the financial crisis, ISS also argued that Australia's continuous disclosure regime ensures all relevant information is already in the market, thereby making redundant the requirement for the issuing of a prospectus.
''The right of existing investors to maintain their ownership position in a company was abandoned in many cases as listed entities sought to raise funds speedily,'' ISS said. ''Capital raisings in 2008 and 2009 exposed a lack of transparency over who participates in capital raisings and how pricing is determined.'' ISS highlighted how ''substantial discounts'' were ''arrived at through unclear means''.
The report also details that nearly two-thirds of money raised during 2008-09, some $63.1 billion, was used to pay down debt, with the money flowing to banks that were in turn able to improve their own capital position.