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Thursday, 7 June 2018
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Cartel Accusations Pt.1

I am not one to campaign but I have been watching the “Criminal Cartel” accusations against the ANZ and wondering why they were targeting the ANZ when the ANZ would almost certainly have assumed, understandably, that the advice they were being given by the lead brokers on how to raise capital was kosher. The AFR carries an article today that suggests the investigation’s focus is turning more to the lead brokers who handled ANZ’s capital raising back in 2015, rather than the ANZ, who almost certainly didn’t profit out of the lead brokers taking 25.5 million shares at a discount and (presumably – I do not know) tipping them out into the market again for a profit.

The accusations, if true, explain a number of things that were confusing a lot of us at the time. Two in particular:

Why did the investment banks invent the accelerated rights issue? I remember Peter Warnes writing in the Morningstar Your Money Weekly about accelerated rights issues some years ago in an article called "ASX Abandons retail investor" - CLICK HERE or on article on right. It is a wholly inequitable structure to be offering shares to major institutions (non-shareholders) at a discount and allowing them to immediately sell and crystallise a profit. Because that profit is simply a transfer of value from the existing shareholders to the institutions that took the stock at a discount. For the shareholder who is not a wholesale client and is not able to participate in the issue, the first they know, if the stock is at 100c and the “rights issue” is at 90c, is that their stock goes into a trading halt at 100c and re-lists at 91c as all the “flippers” (which may now incredulously include the lead brokers under the guise of underwriting) sell at a an immediate profit.  I always wondered why they started this new structure, a structure that perverted the meaning of the words “Rights issue”. Under this structure lead managers were able to offer non-shareholders (which appears to have included themselves) to profit from the offer of discounted stock at the expense of existing shareholders. Hence the “accelerated” rights issue, or, more honestly, the “we can give it to whoever we want including ourselves” rights issue.

Why did the discounts blow out from the usual 2-3% for a rights issue to 10-20%? Now it makes sense. Because there was more profit for the flippers. With a big discount the broker is effectively “handing out cash”. That’s a very powerful commodity when trying to endear yourself to commission paying institutions. And if the lead brokers were taking stock themselves, it is in their interests to negotiate as big a discount as possible because it means a bigger profit for them on the stock they take themselves. So maybe we shouldn’t blame the ANZ, because they didn’t engineer these structures or profit from them. The ANZ would have assumed it was “normal practice”. I don’t imagine the ANZ took discounted stock in their own accelerated rights issue.

Next step: If lead brokers really have been participating in these capital raisings for any other reason that being a “required underwriter” when demand was poor, then, for the sake of all the shareholders that were rooted at the expense of the favoured institutions and possibly the lead brokers themselves, someone should put a list together of all the accelerated rights issues since they began, whether the lead brokers (any brokers) took stock, whether they needed to, and what profit or loss they made from that on top of their fees. Lets put it out there.

If this taking and selling of stock under the guise of underwriting has been habitual, if taking underwritten stock was not required, then it is shameful. As the AFR says today… “This looms as a giant test not only of the criminal cartel laws in Australia, but also of the processes that have long underpinned capital raisings”.

The solution to this rorting process is simple, go back to renounceable rights issues and stop ‘rushing’ capital raisings. Is ‘fast’ really necessary if it obscures ‘fair’. Surely a company would want to prioritise the interests of all its shareholders first, institutional and retail, but especially retail, on the same timetable on the same basis, as it always used to be, with ‘others’ invited to take up the shortfall when the shareholders don’t want it.

Accelerated rights issues offer newly issued discounted stock to institutions, many of whom don’t even own the company, before it is offered to the existing shareholders. This mechanism allows institutions, whether they are a shareholder or not, to get offered stock ahead of retail investors and then tip that stock straight out again into the market again for an immediate profit whilst the loyal retail shareholder has to take the price fall on the nose and is only allowed to apply for $5,000 worth of the discounted stock, if that, in a delayed share purchase plan by which time the price has been savaged by the institutional ‘flippers’ and the discount eroded.

The privileged status of the institutional investor versus the retail investor has always been there but like many cultural inequities it will inevitably, without question, be eroded to nothing over time. So why not get there now?

(And that’s before we look at who got all the other non-accelerated rights issue placements at a discount. Every discount, if not offered to existing shareholders, simply sucks value from them – but let’s leave that for another day).

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