Investment professionals call for tighter rules on share mandates in Singapore

To improve protection of minority shareowners.

A new report by CFA Institute, the global association of investment professionals, finds that regulations in Asia are relatively permissive in allowing listed companies to conduct non-preemptive share placements that lead to dilution of minority shareowners’ interests.

Compared to those in the UK, market practices allow a far larger dilution of minority shareowners rights.

In Hong Kong, Malaysia, Singapore and Thailand, there is no cumulative cap on non-preemptive share issuance over any period. In the UK, non-preemptive share issuances are capped at no more than 7.5 percent of a company’s share capital over a rolling three-year period. 

The report Non-Preemptive Share Issues in Asia sheds light on the relevant regulation as well as market practices whereby existing shareowners are asked to give up their rights to subscribe to new shares issued by the company.

These rights are known as pre-emptive rights. Companies typically seek approval or a mandate from shareowners at annual general meetings (AGM) to waive these pre-emptive rights as a quick and alternate option to raise capital.

When granted, such mandates allow companies to issue shares to handpicked investors, and such new shares – known as non-preemptive shares – are usually issued at a discount to market price.

Investors, particularly minority shareowners, typically grant these mandates without fully understanding the consequences of their action.

“We urge minority shareowners to carefully note when companies seek approval to waive shareowners’ preemptive rights at AGMs. This is not a trivial issue; multiple non-preemptive share issues lead to a greater dilution of their share ownership and rights.

Before approving such mandates, shareowners should review the issues behind the proposed placings including the strength of the business case, the level of dilution of the monetary value of their shares and their control in the company, the level of transparency in the process and alternate options for companies to raise funds,” says Padma Venkat, CFA, director of Capital Markets Policy in Asia Pacific, CFA Institute and author of the report.