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The listing rules of the Australian Securities Exchange don’t get a lot of attention from share investors. Yet when they get a shake-up, it has real impacts for the companies they follow.
In April, the ASX released a paper outlining proposals for changes in the rules on capital raisings; these have since gone through a public consultation process. The main proposal is to allow companies with a market capitalisation of less than $300 million to raise through placements up to 25 per cent of their capital base each year, without the need for shareholder approval. The current limit is $15 million.
The ASX is also looking at new models for rights issues. Under current rules, companies are forced to take them slowly, to comply with regulations designed before the age of electronic communication, and opportunities requiring quick action can be missed while working through the required process for raising capital.
The exchange is examining the possibility of rapid electronic capital raisings, although safeguards would have to be put in place to allow for shareholders who are incommunicado for whatever reason and miss the electronic notifications being proposed.
However it is the increased scope for capital raisings that have the market talking. Currently, listing rule 7.1 permits companies to issue 15 per cent of issued capital in a 12-month period without shareholder approval. The proposed new listing rule 7.1a allows an additional 10 per cent to be raised at up to a 25 per cent discount to the prevailing share price. Shareholder approval must be sought to allow an additional raising over a 12-month period.
The proposal is a response to the big increase in small to medium-sized companies, particularly resources and biotechnology stocks, raising capital to fund growth projects, ASX spokesman Matthew Gibbs says.
“Raising capital can be an expensive and time-consuming exercise,” he says. “These changes reflect the current limitations the rules put on smaller companies in a growth stage that often have yet to achieve a revenue stream.”
The ASX conducted a survey of 244 general meetings (including AGMs) held in 2011 by 200 mid to small caps seeking capital-raising approval. Of these 244 meetings, based on information provided to the market only one resolution was rejected. “Where security holder approval of placements is routinely obtained by mid to small caps,” Gibbs says, “ASX listing rules may be imposing an unnecessary regulatory burden, reducing flexibility and adding to the costs of capital raising.”
But the proposed changes will also help the ASX keep up with its global peers. As Rio Tinto boss Tom Albanese said after the mining giant’s AGM this month: “Capital goes where it’s wanted.”
In Canada companies can issue up to 25 per cent of their capital base for each transaction they undertake. So if a miner wants to buy three new exploration bases during a year, it can place shares to raise the capital for each deal.
In Britain, companies on the main board are restricted to raising 20 per cent of their capital base at a time, but on the AIM board, which caters for smaller companies, there is no restriction and companies can raise as much as investors are willing to put in. In Hong Kong, the 12-month capital issue percentage limit is 20 per cent.
It’s clear that the ASX’s relatively restrictive capital raising regime has put it behind the game. Between 2007 and 2011, resources companies globally raised $US220 billion. Of that, only 14 per cent was raised through the ASX; 24 per cent was through London’s main board and AIM market and 35 per cent was raised on the Toronto stock exchange.
The reason Toronto attracted so much is that it also has a flow-through share scheme that allows smaller companies to place losses in the hands of investors for tax deductions. The ASX has for years been trying to install a similar system in Australia, but despite successive governments having nodded approvingly at the scheme, none have actually legislated it.
The proposed capital raising rules aren’t really aimed at large companies, as share dilution through placements can be a problem for large institutional shareholders that want to maintain their share of profit distribution.
“In smaller companies that’s rarely an issue,” says Macquarie Group senior equities adviser Sean Conlan. “They’re chasing growth and the investor has bought into the company to share in that growth potential.”
Some of that potential is squandered by the capital raising rules, says Perth broker-turned-funds manager Tony Locantro.
“If you invest in an exploration company then you want it to be out drilling holes,” he says. “It’s wasteful if it has to keep going back to shareholders to raise capital for each new drill hole and spend money and time on calling extraordinary general meetings to approve new capital.
“Competition for capital will still be an issue but (the proposed higher capital raising limits) are a sensible move that’ll give management more flexibility.”
The competition of which he speaks is real. There are 186 ASX-listed resources companies active in Africa alone, and they are competing globally for access to exploration and production rights, funding and growth opportunities.
In the biotechnology sphere, companies often turn to the United States for funding as raising funds for clinical trials of drugs and new medicines is often difficult in Australia. The new rules will provide flexibility for small up-and-coming companies here, too – so long as they are not too small.
The exchange is also proposing that to maintain a listing, companies must have net tangible assets valued at more than $4 million, compared with $2 million currently (although a market cap above $10 million will also suffice).