Why the Jump in Private Placements?

There has been a sharp increase in private place­ment activities on Bursa Malaysia lately.  Companies are taking advantage of ample liquid­ity in the market to raise cash by selling shares to pre-identified investors. Given its faster execution process, it is not surprising that private placement is the preferred choice. On the downside are earnings dilution and minority shareholders not knowing to whom the shares are placed.

Of the 79 private placements an­nounced between Jan 1 and Sept 3 this year, 57 of them or 72.15% were an­nounced from May onwards — when it was clear that the pandemic and the Move­ment Control Order would cause business disruptions.

On April 16, Bursa Malaysia also upped the private placement general man­date to 20% of a company’s issued share capital, from 10% previously. This is still lower than other countries like Hong Kong or Singapore.

Few companies actually cited cash flow issues as the reason behind the placements — only 13 of the placements or 16.46% were to pay off debts. Some 27 placements or 34.18% merely cited working capital and “future business expansion that has yet to be identified” as rationale for the fund-raising.

On the flip side, 39 of them or 49.37% clearly earmarked how the proceeds would be used, like to fund specific projects or to acquire certain machineries. Interest­ingly, eight companies in this category placed their shares twice this year, which would mean further earnings dilution for minorities.

This was puzzling, given the fact that 18 or 78.26% of these 23 companies have been loss-making in the last 12 months, and that existing minority shareholders will lose out from the dilution.

While ambiguity in placements can put counters at risk of speculative play, there is some rationale behind the non-disclo­sure of the placees, said Equitiestracker Holdings Bhd head of research Peter Lim.

Other than regulators who may assist in the said area, minority shareholders need to understand the companies they invest in and rely on the integrity of independent directors. It is always a balance of shareholders’ rights and listed issuers interests.

Reference:

The intriguing jump in private placements, Adam Aziz, TheEdge CEO Morning Brief, September 8, 2020