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KUALA LUMPUR (September 8): There has been a notable increase in private placement activities in Bursa Malaysia lately, as companies take advantage of ample liquidity in the market to raise cash by selling shares to previously identified investors.
Given its faster execution process compared to other fundraising methods, it is not surprising that private placement is the method of choice.
On the other hand, earnings dilution awaits minority shareholders as they are not included in the fundraising process. There is also the risk of future speculation on the shares, and minority shareholders often do not know to whom the shares are placed.
Of the 79 private placements announced between January 1 and September 3 of this year, 57 of them or 72.15% were announced as of May, when it was clear that the pandemic and the Movement Control Order to the one that resulted would cause business disruption.
On April 16, Bursa Malaysia also increased the general private placement mandate to 20% of a company’s issued share capital, from 10% previously. This is still lower than in other countries like Hong Kong or Singapore, he said.
“The exchange recognizes the need for publicly traded issuers to resume operations and raise funds quickly and efficiently, as a means of financing their businesses and assisting their recovery during these difficult times,” he said, as it enabled the provisional measure until December 2021.
However, few companies cited cash flow problems as the reason behind the placements: only 13 of the placements or 16.46% were to pay off debt.
About 27 placements or 34.18% simply cited working capital and “future business expansion that has not yet been identified” as justification for the fundraising.
On the other hand, 39 of them or 49.37% clearly assigned how the income would be used, such as to finance specific projects or to acquire certain machinery. Interestingly, eight companies in this category placed their shares twice this year, which would mean further dilution of earnings for minorities.
But if the plan was ready and the prospects were clear, why not a question of rights that would give existing shareholders the option to participate and benefit more from such companies? In the same period, only six rights issues have been announced out of 79 private placements.
Another peculiar trend is the movements in the price of the shares of these companies that have announced placements of shares, of which 90% are penny shares. About half saw their share prices hit their highest this year, some hitting all-time highs, in the months after their respective placement was announced. For 23 of them, their share price has at least doubled.
This was puzzling, given the fact that 18 or 78.26% of these 23 companies have had losses in the last 12 months, and that existing minority shareholders will lose out on dilution.
In particular, the increase in placement activities, and subsequent increases in share prices, also occur at a time of increased retail interest in the market.
“In real business, it is really difficult to ask someone for money. How do these companies find a buyer for their shares? “an investor points out The edge.
Balance between the needs of the company and the interests of the shareholders
While ambiguity in locations can put accountants at risk of speculative gambling, there are a few reasons behind the locations being nondisclosed, said Peter Lim, research director at Equitiestracker Holdings Bhd.
“There are operators [that dwell in speculative plays] but the authorities must find a balance between being strict and killing the vitality of the market, “said Lim. The edge.
“There are investors who want to remain discreet and disclosing them means risking the investment,” Lim said.
“From the perspective of regulators, one option is to disclose the share of institutional and private investors, for the reference of future investors,” he added.
Vincent Lau, research vice president at Rakuten Trade Sdn Bhd, said, meanwhile, the need for a private placement among troubled companies. “These are small cap companies with losses that can need cash quickly. They may lack the track record to obtain adequate loans, so this is a good avenue for such purposes, “he said.
Existing measures are also in place to control speculation, such as suspending short selling and freezing the share price with a two-day limit on the rise / fall, he added.
“Bursa has stated that margin funding has not reached high levels,” Lim said. “The market is best described as dynamic at the moment, not overheated.”
Other guardians have to play their part
In addition to regulators, minority shareholders must also protect themselves by equipping themselves with the necessary knowledge about the company in which they are investing, said Lim of Equitiestracker.
“Buyers should be careful,” he said, reminding minority shareholders to vote against the placement if there are concerns.
There is also another guardian in this whole process.
“Listed issuers should disclose the views of their board of directors that the general mandate of 20% is best for the listed issuer and its shareholders, as well as the basis for such views,” said Bursa Malaysia, in response to questions from The edge.
In this sense, the shareholders who have given the general mandate for such corporate activities depend on the integrity of the independent directors to protect their interests.
“We believe that protecting the rights of shareholders must be balanced with protecting the interests of publicly traded issuers, especially in these exceptional and difficult times,” Bursa said.
“Improving business efficiency through faster time to market for listed issuers to raise funds is critical to ensuring long-term sustainability and the interest of both listed issuers and their shareholders,” he added.
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