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Are there lasting benefits from changes to capital raising regulations?

with Dr. Chloe Ho, Dr. Hue Hwa Au Yong, and Dr. Chander Shekhar.

As part of our research on capital raising by public companies in Australia, we've investigated how the regulators changed the rules during the COVID-19 pandemic, and how this affected company behaviour. A key concern of securities regulators should be the protection of small and minority shareholders against loss in voting power and dilution of wealth when companies issue new equity. Reflecting this, public companies in Australia have normally been restricted to raising no more than the 15% of their existing capital base, unless shareholders approve the issue.

In addition, in recent years the Australian Securities and Investments Commission (ASIC) has emphasised the ‘equal opportunity principle’, which aims to give retail shareholders access to, otherwise dilutionary, discounted offers to institutional shareholders.

The changes to capital raising during COVID

In response to the 2020 onset of the COVID-19 pandemic, the Australian Securities Exchange (ASX) and ASIC made changes to capital raising regulations through waivers to existing Listing Rules. In particular, they lifted the cap on capital raising (without shareholder approval) from 15% to 25% of existing capital but required that such issues incorporated either an entitlements (rights) offer or Share Purchase Plan for retail shareholders, resulting in a ‘packaged’ offer, that at least partly protected small shareholders from dilution.

The changes were temporary, initially applying until end June 2020, with subsequent extensions until 30 November 2020. Were they needed? Were the outcomes desirable? Should such a regulatory change be considered in the event of a future, similar, shock to the economy? Did such regulatory changes have a continuing effect on company behaviour?

How companies responded to the temporary regulations

Managers of Australian companies like private placements (PPs) to institutional investors because of the speed and certainty of amount raised. But the discounted price generally involved imposes a dilution cost on non-participants such as retail shareholders. In contrast, pro-rata rights offers (ROs) are the most equitable means of raising equity capital, but take time and can involve uncertainty over the amount ultimately raised. The third method, share purchase plans (SPPs) are not pro-rata. With each shareholder permitted to purchase shares up to a fixed dollar amount (currently $30,000), an SPP sits in the middle of the three methods in terms of equitable outcomes for shareholders.

The figure below shows the amount raised from each type of issue over the years 2000 to 2021, where the total amount raised in a ‘packaged offer’ (such as a PP combined with a RO) is allocated according to the size of its components. A consistent pattern can be seen. PPs dominate each year in terms of total funds raised, followed in turn by ROs and SPPs. In total, over the period, PPs raised approximately $244 billion, ROs $196 billion and SPPs $30 billion.

Not surprisingly, in the years 2009 (the financial crisis) and 2020 (the onset of the COVID pandemic), the largest total yearly dollar amounts ($58.9 billion and $57.6 billion respectively) were raised. The increase in 2020 resulted both from the need for capital and the new higher regulatory limits.

Source: Authors’ calculations

The 2020 regulatory change required issues over 15% (up to the new cap of 25%) to follow a PP with an SPP or RO, thus addressing some of the dilution to small shareholders arising from the private placement. For issues less than 15%, combining a RO or SPP with a PP was optional.

We find in our research that in the pandemic year 2020, around 26% of total funds raised were by companies using a PP followed by an SPP with the new higher cap of 25% of existing shares. In the accompanying figure, this is reflected in the spike in PP funding in 2020 and the jump in funding sourced through SPPs from 2019 ($2.6 billion) to 2020 ($5.2 billion).

It is evident that for companies raising above the previous cap of 15%, the response to the mandate from the regulator was to choose a PP followed by an SPP. Very few capital raisings in 2020 using the new higher cap were via a PP followed by an RO. ROs (which are the fairest in terms of equitable outcomes for small shareholders) suffered a drop in relative contribution to equity capital raising in 2020, which was taken up by the issuance of a PP followed by an SPP, reflecting the direct impact of the regulation changes. Nevertheless, it is also clear from the figure that ROs remain an important source of capital.

With the challenging market conditions in early 2020, companies reacted quickly to the new higher capital raising limits, the original intention of which was to help companies survive the pandemic. A few opportunistic companies flouted this intention and launched placements up to the new 25% cap largely unrelated to the pandemic.

However, and on the positive side, our research finds that during 2020, even companies issuing less than 15% of existing capital, had a significantly higher propensity to follow the PP with an SPP, even though they were not required to do so under the regulations. The important contribution of our research is to show that the changes to regulations in response to the onset of the COVID pandemic, had both a direct and an indirect effect on company choice of capital raising method, which both worked towards reducing the dilution of small shareholders.

Changes to company behaviour have proven sticky

Shedding an even more positive light on the impact of changes to the regulations, this modification in company behaviour continued into 2021. In the pre-COVID years 2000-2019, around 18.5% of total funds raised over the period was via a PP followed by an SPP. In 2020, this figure was 44.3%, reflecting the new higher capital limits for this method during the pandemic.

However, in 2021 when the cap on capital raising had reverted to normal, companies continued to favour the PP followed by an SPP, with the method raising 45% of total funds for 2021. The increased importance of a PP followed by SPP suggests that company behaviour adjusted (at least in the short term) with potential benefits for smaller shareholders, who have the opportunity to invest in discounted capital raisings.

In conclusion, changes to the capital raising regulations at the onset of the COVID-19 pandemic, provided companies easier access to needed capital and at the same time, went some way to protecting small shareholders from dilution.


Christine Brown is Emeritus Professor, Banking & Finance at Monash University.
Dr Chloe Ho is a Lecturer, UWA Business School at The University of Western Australia.
Dr Hue Hwa Au Yong is a Senior Lecturer, Banking & Finance at Monash University.
Dr Chander Shekhar is a Senior Lecturer, Finance at The University of Melbourne.

The full research paper can be accessed here: Brown, C. and C. Ho. Raising Equity Capital during the COVID-19 Pandemic in Australia: The Efficacy of Regulatory Interventions, The Company and Securities Law Journal, 39, 4-18 (2022).


November 05, 2022

I weep for the badly treated institutions! (Not)
Requiring the company to offer a renounceable rights issue at the institutions’ price is clearly the most equitable.
The small shareholder does not get the opportunity to increase their percentage of the company (it is minuscule, I know) and the medium sized shareholder is not diluted.
If the company is so stretched that it cannot wait for the outcome of the rights issue to see if it has enough cash, there are bigger problems.
The problem of a company being deluged with too much cash because more shareholders took up the rights issue than was anticipated would reflect on the size of the discount offered. It must have been too big. However, mistakes can be made. It is cured by an on market buyback later.

November 05, 2022

While I agree that renounceable rights is the way to go the small shareholder has every chance to increase their shareholding.They can buy on market

Macbank had an issue at $191,I bought the full$30K.Tomorrow the small shareholder can buy at less than that,will they buy,I think not .I think macbank goes XD tomorrow,look for a fall on opening.Will the small shareholder buy?
CSL had a raising,$253 a share,I was scaled back. As I said at the time they get down to around $240 I buy more. $242 I had to make a decision and bought.The capital raising and the fall I got more shares for the same amount of money.

Good article CSL has very few retail shareholders.

November 06, 2022

If a company is going to raise money via a renounceable rights issue to the small sharesholders (and potentially institutions as well?) they could get certainty by having it underwritten. I would suspect though that this offers further cost, complexity, and uncertainty to doing so vs a share purchase plan, although it is more equitable in some sense.

November 02, 2022

It's interesting that although a private placement followed by a share purchase plan made up 45% of all capital raisings, the actual amount raised via the share purchase plans was a very small fraction of the total amounts raised. I would speculate that the corporates doing the fund raising are getting all of the money they need for whatever purpose from the private placement and locking in that certain funding in an hour or two, and then spending the next month or two raising a much smaller amount from retail shareholders. Whether that is the most productive use of their time and money is a question that might be worth asking.

Christine Brown (author)
November 02, 2022

Whether the time and effort spent raising the smaller funds (by $) is worth it from the company perspective is a question worth asking. Particularly, as you say, companies can raise the funds quickly via a Private Placement (PP) in a matter of hours. However, to access capital during the pandemic via a PP to the new higher capital limit of 25% of existing shares, companies were required to follow the placement with either a rights offer or a share purchase plan (SPP). Most companies used SPPs. The intention of the regulator was to encourage companies to give small shareholders access to these discounted offers. Looking after the small shareholders by reducing the dilution they would otherwise suffer, is most likely viewed by those small shareholders who do participate as a valuable exercise? During the Global Financial Crisis, companies were roundly criticised in the financial press for hurried capital raising via private placements that excluded smaller shareholders.

November 03, 2022

I'm sure the small shareholders who get access to these discounted offerings think it's a valuable exercise, it can be free money for them. You own $2,000 of shares, get offered up to $30,000 at a discount and subject to the discount to the theoretical ex purchase price being large enough you can then immediately sell all the shares for a few thousand dollars profit.

But if you're a large institution and combined with other large institutions you own the vast majority of the stock, perhaps you might want to ask company management why it is that they're handing out free money to a bunch of smaller shareholders rather than investing it in the company.


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