When dilution amounts to daylight robbery

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This was published 11 years ago

When dilution amounts to daylight robbery

Issuing shares at a discounted rate to favoured clients needs to be changed, writes David Potts.

By David Potts

SHAREHOLDERS are being mugged mercilessly but you won't see it on the nightly news.

The market isn't the culprit I have in mind either, not that it's covered itself in glory.

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Credit: Caroline Adaszynsk

This is about boards behaving badly - those handing over shares so discounted as to be free money to the favoured few, while short-changing all the other shareholders.

Those getting the short end of the stick, who may have been there through thick and thin, not only miss out on the bargain but their own shares will also be worth less.

This is known as dilution, too sanitised a word for what really happens, which anywhere else would be called highway robbery.

Granted, issuing more shares to raise capital is what the sharemarket is supposed to be all about but it's the way, or rather to whom, it's done that matters.

When all the shareholders are offered a stake proportionate to how many shares they own, no problem.

And in a renounceable rights issue you don't even have to cough up if you don't want to.

Instead you can sell your rights just like shares. Consider it compensation for subsequently being diluted since you'll get lower dividends and have a less valuable holding than if you hopped in.

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It's when some get a bigger slice, garnished with a hugely discounted price, that there's a problem, as happens with a placement.

The lucky recipient, who might not have owned a single share in the company up to that point, gets freshly minted shares at a huge - and so potentially very profitable - discount to the market.

The bigger the discount, the faster institutions can make a quick exit, which isn't exactly conducive to the future share price. Not that they care.

Usually there's a sop to the other shareholders by throwing a few scraps at them in a share purchase plan so they think they're getting a good deal.

They're not. What they gain with a disproportionately few extra bargain-priced shares today they lose tomorrow in watered down dividends and value.

The only fair way is a pro rata - so to each according to one's holding - renounceable rights issue to raise new equity as is the requirement on the London Stock Exchange.

How have Australian boards been allowed to take the equity out of equity issues?

Don't bother asking the Australian Securities and Investments Commission, which says it's "closely monitoring" this.

As it has been for two years, yet it doesn't have far to look since there have been two instances already this year.

The first was QBE, the victim of a succession of natural disasters, but that was no excuse to foist another on its shareholders.

Three-quarters of its $600-million capital raising was a placement to the big end of town, at a giveaway price of $10.70 for shares trading around $12 in the previous month.

For their part, small shareholders were allowed to buy a meagre 8 per cent of the value of their shareholding, almost an insult.

Even as we speak, Bank of Queensland is offering its best friends, or those of its advisers, stock at $6.05 that is worth $1 more, taking the extra shares into account.

There's also a rights issue that, naturally, isn't renounceable, and only half is reserved for its ordinary shareholders.

Considering the new shares amount to one-third of its capital, you can imagine the financial hit to loyal shareholders.

And just to rub salt in the wound, the blow-ins also receive the 26¢ a share dividend. That's another $6 million, plus lost franking credits, that ordinary shareholders will never see.

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