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R Sivanithy
03 April 2014
Under section 806 of the Singapore Exchange’s Listing Manual, shareholders can grant a general mandate to their managements to raise capital via shares or convertibles provided the number of shares eventually handed out does not exceed 50 per cent of issued shares excluding treasury shares.
Whenever this fund-raising avenue is tapped, there is a consequent dilution of existing shareholdings, so the assumption has to be that it was done with the company’s best interests in mind. This is a fair assumption since the intent of this section is clearly to allow managements the flexibility to raise money quickly to capitalise on promising business opportunities that might suddenly present themselves. This is also to avoid the time-consuming route of calling for a full-fledged rights issue since this requires shareholder approval at a general meeting.
Of course, not all business ventures that appear attractive at the start actually turn out to be that way. But it would be reasonable to expect managements that have been given a general mandate by their shareholders to provide clear details of the use of funds when that mandate is actually employed - after all, if shareholders are going to have their holdings diluted, they should at least be told why.
So far, so good. But what if the general mandate is used to raise money for non-specific or, on the face of it, general, non-urgent uses?
Stated differently, if companies are unable to provide clear uses of funds, then shouldn’t the Singapore Exchange (SGX) either a) require better disclosure, and/or b) be given discretionary powers to impose a moratorium on the sale of the instruments that are issued before approving the listing of those instruments?
These were issues raised a year ago in this column (“SGX needs discretionary power for moratorium on placements” - March 15, 2013) but so far, they have not been addressed by regulators. Since then, there have been dozens of placements that needed some form of regulatory intervention to protect shareholder interests, yet have been allowed to pass.
Consider, for example, the case of Albedo Ltd, which is currently embroiled in a high profile deal with Malaysian firm Infinite Rewards involving the injection of major Johor land assets into Albedo.
The party who introduced Albedo to Infinite Rewards was Choo Yeow Ming, a former substantial shareholder of Albedo and currently executive chairman of funeral parlour operators Asia-Pacific Strategic Investments, which like Albedo is listed on Catalist.
On Dec 13 last year, Albedo proposed placing out 260 million non-listed, non-transferable warrants under its general mandate to Dr Choo and existing shareholder Terry Leong at 0.1 cent each, split into 90 million for Dr Choo and 170 million for Mr Leong.
The figure of 260 million was just about the maximum allowed since the company said the limit beyond which the general mandate could not be employed was 262.2 million. The exercise price of each warrant was set at 4.338 cents, a 10 per cent discount to Albedo’s market price at the time.
Also in its Dec 13 announcement, Albedo said the net proceeds of $160,000 raised ($260,000 less $100,000 expenses) from the issue and the $11.3 million that it would receive if all the warrants were converted would be used for “working capital which includes, inter alia, the repayment of trade payables and borrowings in the ordinary course of business”.
Both men were said to be subscribing to the placement for “personal investment purposes” and the company said its existing working capital was enough to meet present requirements.
The placement was concluded on Jan 24 this year, at which time it was announced that Mr Leong exercised 60 million of the 170 million warrants he was granted. At that time, Albedo’s shares traded at about 6 cents and assuming the new shares were immediately sold, the profit from this portion is estimated to be just about $1 million.
Everything was done by the book, so there can be no complaints on this front. Moreover, Albedo has received cash totalling around $6.5 million from the two warrant holders, which would help boost its working capital and aid in its “repayment of trade payables and borrowings in the ordinary course of business”.
However, there is some room for justifiable shareholder unhappiness, not only because of dilution from the issue of millions of new shares but also because the Johor deal now hangs in the balance and the shares have crashed to around 2.8 cents.
Moreover, since the placement appears to have been for non-urgent, non-specific business ventures, some might quite legitimately ask whether SGX should have either requested more details on the use of the money, or imposed some restrictions on the exercise of the warrants, or both.
The bigger issue raised by the Albedo example is that there is scope for SGX to play a greater gatekeeping role in terms of looking after shareholder interests when companies exercise their general mandates to raise money, a role that assumes greater importance when there is no specific or urgent need for the money.
Since placees are usually described as being interested in investing in the issuing company, introducing a moratorium of, say, three to six months should not be too objectionable. The discretion for requiring this, of course, would rest with SGX and would only be on a case-by-case basis.