Monday, 1 August 2011

Private Placements: abolish them or limit them

I read the comments of "Where Is Ze Moola":

I like to focus on Private Placements (PP's) with which I completely agree. The issues at hand:
  • There is no transparency at all whom the parties are that buy the shares.
  • The discount is actually more than it looks due to the time it takes to execute the PP. When the share price goes up after the announcement, the PP will go through (discount is now even larger), while if the share price goes down, the PP is often aborted.
  • Through PP's money is injected in the company, but often I have seen the same company paying dividends of about the same amount. The net effect is zero, but twice expenses have occurred, and minority shareholders have been diluted by issuing shares at below market price.
  • For larger amounts of money Rights Issues are much fairer, giving all shareholders the same opportunity to invest money.
Here are some articles of David Webb, a well known CG activist in Hong Kong, he started project "Vampire" to limit these instruments:

A mandate for not more than 5% of the outstanding shares, and a discount not exceeding 5% (this excludes normal rights issues and the total mandate, including non-cash issues, such as shares issued to a vendor in an acquisition, can remain up to 20%).

My recommendations:
  1. To abolish Private Placements all together.
  2. If however they are not, then: 
  • Limit Private Placements according to the Vampire guidelines of David Webb.
  • Provide total transparency in who is buying the shares at what price and what are their relations to the majority shareholders and directors.

1 comment:

  1. U better tell mr Khoo don't be the next vampire.....he always sit in the front row in the church????oh dear....when the vampire meet God...