Finally some good news for small- and mid-cap listed companies and their boards. After years of neglect, the Australian Securities Exchange (ASX) is taking big steps to help the small end of its market. The ASX’s proposed changes will make it easier for small companies to list, raise equity capital through placements, get covered by share-broking firms and improve liquidity in their shares.
Directors of companies capitalised at $300 million or less need to understand the proposals. Taken together, they are the most significant in years for smaller listed entities. The ASX paper, Strengthening Australia’s Equity Capital Markets, summarises the proposals. The board of every small listed company should discuss them.
I declare an interest: for the past five years I have edited ASX e-newsletters, notably the <i>ASX Investor Update</i>. I have written about small listed companies for mainstream publications for 20 years, edited magazines that specialised in this market, covered the IPO market closer than most and studied and lectured in entrepreneurship. Suffice to say, this column’s views are mine alone.
ASX has been slow to update aspects of its Listing Rules that disproportionately affect smaller companies. About 62 per cent of listed companies are capitalised at less than $50 million. ASX badly needs Listing Rules that ensure small companies are not disadvantaged compared with those in Hong Kong or Toronto, for example, while ensuring market integrity.
I was surprised by media criticism of ASX’s proposal to increase the equity capital-raising limit for companies capitalised at $300 million or less. It would allow these companies to issue an additional 10 per cent of their issued capital at a maximum 25 per cent discount to the market price within 12 months of shareholder approval, underpinned by additional disclosure.
Under current Listing Rules they can already issue up to 15 per cent of their issued capital without shareholder approval.
Critics suggest this change could lead to excessive dilution for shareholders as companies raise more capital through heavily discounted equity placements, favour institutional investors and entrench the position of directors.
There probably will be isolated cases where small companies unfairly dilute shareholders under the new 25 per cent rule, just as there are now under current Listing Rules. But changes to help small companies raise capital more efficiently will do far more collective good and are timely as banks provide less debt funding and equity capital markets remain tough.
The criticisms also ignore market reality. Small– and micro-cap listed companies, especially resource companies that dominate listings volumes, are in perpetual capital-raising mode. Without fresh capital, usually sourced through equity placements, they die. It makes sense to help these companies raise capital more efficiently, provided appropriate safeguards are in place, and ensure ASX is on par with other global exchanges.
Also, smaller listed companies (those outside the top 300) are mostly owned by retail rather than institutional investors. With speculative companies, retail investors want two things: the entity to survive and capital growth. Dilution debates are important, but so is the ability for entrepreneurial ventures to raise capital and grow, and create shareholder value. It’s a question of balance.
Another ASX initiative, a $1 million pilot trial to encourage more high-quality, independent share-broking research on ASX-listed entities capitalised at less than $1 billion, is a terrific idea and long overdue. The global financial crisis has led to more share-broking firms reducing coverage of smaller companies. Such research can support capital raisings, lift a company’s profile and improve its stock liquidity.
The other big Listing Rules initiative relates to improving reserves and resources reporting requirements for ASX-listed mining and oil and gas companies. This faced early industry resistance, but most changes relevant to the rules encompassed in the Joint Ore Reserves Committee (JORC) Code in Appendix 5A of ASX Listing Rules have received support. Developing a stronger reporting framework for resource companies, especially explorers, will improve market confidence.
Directors should consider how all various proposals for small companies fit together. Unfortunately, commentators seem to focus on only one change and one perspective, and overlook the significant industry consultation that precedes these proposals. And their starting point seems to be an assumption that directors of small companies are always eager to put their own interests before those of shareholders. They focus on "outlier" companies and extrapolate occasional poor governance to all companies of similar size. Most small companies I see work incredibly hard to raise capital and list, and even harder to get aftermarket support in a difficult market.
It’s time to consider the needs of multiple stakeholders, and debate whether the ASX’s proposals strike the right balance between market efficiency, investor protection and good governance.
In my opinion, boards of small listed companies should welcome and support the changes. Not all are perfect, but the package is a strong step in the right direction.
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