SOMETIMES it makes sense to stay away from certain rights offerings even if they are essentially legal or regulated in that manner – unless of course, the investor is well-versed with the risk factors involved.
A case in point is how many public listed companies (PLCs) – in particular penny stocks – have been swiftly capitalising on the relaxation and flexibility of the Enhanced Rights Issue Mandate which was introduced in November last year.
The mandate which may be utilised by an eligible listed issuer to issue new rights share till Dec 31 this year is part of a temporary relief measure to tide over the difficulties encountered by PLCs in raising working capital and repaying bank borrowings in view of economic devastation inflicted by the COVID-19 pandemic.
Towards this end, the Securities Commission Malaysia (SC) and Bursa Malaysia have allowed PLCs to proceed with their proposed rights issue once the controlling shareholders have given their irrevocable undertaking to subscribe for their full entitlement.
The new rights shares issued is allowed up to 50% of the total number of issued shares and not priced at more than 30% discount to the theoretical ex-rights price.
To entice investors to participate in their rights issue exercises, it has become a common practice for PLCs to throw in sweeteners like warrants, resulting in some of these companies seeing their share base ballooning rather quickly and by few-fold in a short time.
One of the penny stocks that had recently taken advantage of the Enhanced Rights Issue Mandate is Pasukhas Group Bhd which on Sept 18 last year had completed a private placement exercise involving the issuance of 81.44 million new shares (or 10% of its then existing total number of issued shares).
Less than three months later (Dec 4, 2020), Pasukhas completed yet another private placement which involved issuance of 268.76 million new shares (or 30% of its then existing total number of issued shares).
Besides the two private placements, another 991.99 million new shares were issued pursuant to a rights issue with warrants within a short period of three months. These were listed on July 21 – a mere seven months after the last private placement.
Details of valid acceptances and excess applications received for the rights issues exercise are as follows:
Commenting on the total valid acceptance level which stood at only 18.80%, Minority Shareholders Watch Group’s (MSWG) CEO Devanesan Evanson said this could mean that many of the entitled shareholders did not subscribe to the rights allocated to them despite the discounted price.
“The bulk of the shareholders may have thought that they would not be ‘in the money’ by subscribing to the rights issue and thus chose not to take up their rights entitlements,” he commented in the group’s latest newsletter.
‘As for the PLC, it should analyse and ask itself why so many shareholders did not take up their rights entitlements. The high valid excess application could mean that besides the undertaking shareholders, other parties could have scooped up the rights shares and free warrants.”
Beware of pitfalls
Although investors may be tempted by the prospect of buying discounted shares through a rights issue – especially if there are some warrants thrown-in as sweeteners – Devanesan cautioned that there is no certainty that they can expect a bargain.
“When it comes to certain PLCs, you may need to think twice before parting with your hard-earned money by subscribing for the rights issue,” he reminded. “This applies to both small and big PLCs.”
Below are some tell-tale signs of the PLCs that minority shareholders should pay heed to:
- They have huge share base with no decent earnings.
- They undertake frequent fund-raising exercises, such as private placement or rights issue.
- They issue lots of shares under an employee share option scheme (ESOS) or under a private placement, thus diluting minority shareholdings.
- They undertake huge rights issue exercise to raise fund from shareholders for working capital.
- They have significant financial instruments that would have a shareholding-dilution effect in the future, such as warrants, irredeemable convertible unsecured loan stock (ICULS) or irredeemable convertible preference shares (ICPS).
- They frequently announce numerous memorandums of understanding (MOUs) or collaborative agreements. Most of these either fizzle-off or are terminated or take an unreasonably long time for completion.
- They frequently churn out articles, reports and announcements of business ventures, joint ventures (JVs) to create interest and excitement. Good companies will not do this – they produce good results without hyping-up interest and excitement.
- They show losses quarter after quarter, year after year, and these losses are due to management incompetence – external uncontrollable factors are understandable.
- They use large portions of company’s funds to acquire non-core assets, invest in dubious JVs and investments.
- They use company fund to invest/speculate in listed stocks.
“In general, the more the tell-tale signs, the higher the risk. As always, minority shareholders should delve deeper into a PLC before parting with their hard-earned money through a rights issue,” added Devanesan – Aug 10, 2021
