ASX struggles to get the balance right for smaller companies: Bartholomeusz

Despite the protestations, ASX has pressed ahead with its controversial proposal to change its listing rules to make it easier for companies with market capitalisations of less than $300 million to raise capital via placements.

When the proposals were first unveiled in April they ignited a firestorm of criticism, largely on the basis that they would facilitate discrimination and dilution of existing shareholders and allow abusive issues of shares to related parties.

The proposals, and the new rules, increase the annual capital raising limit for companies with market capitalisations of less than $300 million from the current 15% to 25%, with a maximum discount to the pre-existing market price of 25%.

The ASX originally proposed that prior shareholder approval would be required to take advantage of the increased opportunity to issue capital on a non-pro rata basis, with the benchmark for approval an ordinary resolution or a simple majority of votes at a general meeting of shareholders.

After being inundated with critical feedback, it has made some modifications to the original plan.

The threshold for approval has now been raised to that of a special resolution, or 75% of votes in favour, and needs to be passed at an annual meeting rather than at any meeting of shareholders.

Companies that are allowed to take advantage of the new rule must also not only have a market capitalisation of less than $300 million but also be outside the S&P/ASX 300.

They will also now be required to disclose the intended allocation policy when seeking shareholder approval and, after some concerns had been expressed that using the closing prices of the stock concerned in the 15 days prior to the placement as the reference point for the discount would open the new rules to manipulation, the volume-weighted average price over that 15-day period will be used instead.

While the raising of the threshold for approval will be applauded, the concerns that the relaxation of the placement regime will open it to abuse and disadvantage existing shareholders will inevitably persist.

There is validity to the fear that the new regime could be used by the less-scrupulous to entrench control or to divert value to related parties, even though there are some safeguards in the Corporations Act against that occurring and the potential for the Takeovers Panel to be asked to intervene.

The need to state the allocation policy ahead of any placement may also provide the potential for disadvantaged shareholders or the regulators to seek recourse if they subsequently discover they have been misled.

The changes to the placement rules are among a number of proposals the ASX has raised that are directed at the smaller companies on its lists and which aim to make it easier for them to raise capital.

This week it started a $1 million trial funding of research on ASX-listed companies with market capitalisations of less than $1 billion – about 92% of all listed companies – as part of that ambition.

It has also started a consultation on proposals to reduce the standard timetables for rights issues to try to make it easier, less risky and therefore cheaper for companies to make non-discriminatory capital raisings and has also foreshadowed an enhanced disclosure regime for mining and oil and gas companies.

In other words, there is quite a significant new agenda being rolled out, much of it directed towards the smaller end of the market.

There is a degree of self-interest in what the ASX is doing. It is very aware that the trading platforms for equities are both consolidating, where allowed, and globalising. Whether it is London, Canada (where the Toronto exchange has a strong resource flavour) or Hong Kong, there is increasing competition for listings and in some of those markets less rigorous investor protections than exist in this market.

It is particularly concerned about the potential to lose some of the vast number of small and medium-sized resource companies operating out of Western Australia, for which an Asian listing and access to Asian capital could have some particular attractions.

That’s not just an issue for ASX and its future activity levels and profitability but, while it remains the dominant platform for equities trading and particularly for trading of companies outside the top 100, for the national interest. It is in the national interest that the primary market for securities trading and for raising capital be as large, deep, liquid and efficient as possible.

There is a balance between making it easier for smaller companies to raise capital while also protecting investors and the integrity of the market and there will be no doubt that on this issue there will still be those who, despite the ASX’s response to criticisms of the original proposal, will believe the ASX has got it wrong.

The ASX does face the conundrum, however, of having a ”one size fits all” approach to regulating activity in a market that is dominated by a handful of big banks and resource companies. It isn’t easy, nor is it uncontroversial, to try to address the challenges that creates.

Given that the ASX said the new rules, which will come into effect from August 1, have received regulatory clearance it is self-evident that the Australian Securities and Investments Commission has signed off on them and therefore presumably doesn’t share the same concerns of some market participants that they will be abused, or at least not to the same degree.

The new regime will be reviewed after two years, which will enable their performance to be debated and, if necessary, the rules to be amended if the fears of the critics are realised.

This article first appeared on Business Spectator.