I was very excited for the entire market when news filtered out that SC/Bursa was close to adopting the no par value regime. However, till now, there has not been a date set, no more rumblings of changes or amendments to corporate laws which are needed to push through the changes. What is holding them back? I do not see any LOGICAL reason for staying on par value regime. It boggles the mind.
What is par value, it is the minimum paid up per share when you are considering to list on Bursa. Bursa is about the last of the active developed/emerging markets to adopt no par value. What kind of finance/investing masterplan we have if we do not include this as a top priority?
There are two main reasons:
1) What is even more galling is the ACE market, which is supposed to be encouraging growth companies, but there is still the par value regime which locks out many applicants. Why do you think so many smaller growth companies have been going to AIMS and Taiwan to list their companies, while you can count the number of new ACE companies listed over the last 12 months on one hand. Let me tell you that the very poor performance of the last few listed ACE companies is probably due to the paid up capital issue - these are companies, by hook or crook boost up their paid up with bricks and mortars but no solid business, so you end with small manufacturing plants and unconvincing old school products.
The very basis of encouraging growth companies is GROWTH PROSPECTS, THE SUSTAINABILITY & LEVERAGE/SCALABILITY of the business model, and NOT par value. It is very important because as current rules stands, even Facebook could not have listed 5 years back on ACE because their paid up was too low. Even when Facebook listed recently, their par value (which still exists, but there are no rules as to how low you can go) was something like 0.0006 cents per share, and IPO price was nearly $30.00.
When you hold to the current regime, any company considering to list on ACE must at least have a minimum of RM7m - RM10m, even that will considered as low to our regulators. We all should be aware that in the evolution of business model, invested capital is a poor judge and poor guide for evaluating any company.
If you are making a few million ringgit, with a scalable business model, why do you need to have RM10m in paid up? The new economy would indicate emphatically that the internet, new business processes/delivery of services and new marketing platforms (MLMs, network marketing, franchising) are playing critical roles in new business models. Most of these require a LOT LESS INVESTED CAPITAL, but what they do provide is more VALUE ADD SERVICES and PRODUCTS delivered in a smarter and more creative way.
The longer Bursa/SC stays inactive with the par value regime, the more we are pushing away great smaller companies. As it stands in ACE, with a minimum of RM7m-RM10m "unwritten rule" as paid up, YOU ARE ENCOURAGING THE ENTIRE ECONOMY TO STAY WITH SUNSET INDUSTRIES, YOU ARE ENCOURAGING COMPANIES TO STAY OLD SCHOOL IN THINKING, YOU ARE STRONGLY DISCOURAGING INNOVATION - all that has a strong trickle down effect, how do you think private equity investors or angel investors will feel, they will further shy away from innovative companies and rather fund companies with bricks and mortar assets or in manufacturing. The cycle is devastating, when early seed funders do not get good exit options, smaller companies get little or no funding.
If a company is making RM2m-3m profit early in its life with a paid up of less than RM500,000 ... why stop them from listing on ACE? These are the very companies you need to encourage and foster. When they can do that with minimal capital, it show their business model is SCALABLE ... which is to say if you provide further capital by allowing them to tap the ACE market, say another RM5m-10m, they have a good chance to churn out 3x, 4x, maybe more profits.
And you know smaller companies will always find funding very difficult in their early days, banks... fergedaboudit, with minimal exit options, angel investors and private equity would be hesitant as well.
Let me give you a real example, a company that makes RM3m a year with a paid up of RM500,000 in its 3rd year of existence. No way can they list on ACE. They have to put in another RM7m-10m cash into the company as the minimum par value is 10 sen. So, if you have RM10m PUC, you can have 100m shares listed, and then issue another 25m shares to the public to raise funds.
In a no par value regime, the company can capitalise their profits and bring it up to say RM3m in PUC, and issue 100m shares with a par value of 0.3 sen a share. You price IPO shares no on par value, you price based on earnings potential, ...historical and forward. Say for the same company making RM3m a year, you may even attribute a 15x PER as growth is paramount for sustainable growth companies = a market cap of RM45m, or an IPO price per share @ 45 sen. (If you force these companies to put in RM10m cash to get listed on ACE, what is the point ... if they have RM10m, they need not tap ACE for funds).
When you move to a no par value regime, you will be able to greenlight more exciting companies with scalable and creative business platforms - isn't that the very aim of ACE, isn't that the best way to encourage entrepreneurs, innovation, maintaining competitiveness and assimilation into the new economy?
Bursa/SC/EPU/Finance Ministry ... please consider how the current regime is holding us back. We were early adopters of the new economy, of the internet, of the MSC ... all great thrusts ... and yet we have an archaic system holding a large bulk of entrepreneurs back. Something needs to change and very quickly too.
2) Do you realise how many listed companies on Bursa are trading below their par value? We only have just over a thousand listed companies and I can safely say that there are between 250-400 companies, my estimates based on a brief perusal of a couple of sectors.
What happens when you trade below your par value? You get there usually because of accumulated losses over the years. Say your par value is RM1.00 and your share is RM0.70 sen now, there is no way you can issue new shares below par value to raise funds or to use new shares to buy some other businesses.
In a no par value regime, par value doe not count, the value of your shares is the last traded price. Hence even when you are at RM0.70, you can issue new shares around RM0.70 to existing shareholders (rights issue) to raise funds for new ventures, or you can issue new shares at around RM0.70 to take over some business which you thing will add value to your current platform or help to reinvent/recharge your business model.
In the current regime, these companies no longer have those options. Plus, for 99% of them, they would probably have MAXED out their available banking facilities as well ALREADY. So what is left for them to do?
With limited options, and a deteriorating business model, no access to funds, you can do zilch. Hence for many of them, they resort to speculative price "management" or what some of us refer to as rampings by syndicates, to bring forth some "profits" for themselves or stakeholders - I mean, they have to try to make money somehow.
They cannot even consider a RTO by a profitable and bigger company. In the cited example, no company will want to take new shares issued at RM1.00 for a company with a market price of RM0.70. Hence the only way left is to do a capital reduction. That is a fair path since the company has not been doing well, and shareholders are supposed to benefit and be punished alongside with company's fortunes. However, many are not taking up that option because they can very well make good pocket money by appointing syndicates to ramp up their shares once or twice a year. By limiting the options to these companies, Bursa/SC are indirectly condoning/encouraging these speculative share ramoings. (Especially when there IS ALREADY a viable, prove, global best practice that the authorities can adopt IMMEDIATELY ... ist not that their hands are tied or there are no options for Bursa/SC to take).
When the no par value regime is enacted, you will also energise the market enormously, which will have tremendous trickle down benefits. These companies below par value will be more active in scouring for good companies to buy to reinvent their business models (to help them get out of the slump). They could also do rights issues, and maybe even sweeten them with free warrants (which they could not do in a current regime).
The end result is they need not turn to syndicates to ramp their shares to make money, they can turn their attention to more genuine plans. It will reinvigorate investors as well as they can see some light at the end of the tunnel. Its like a patient with a terminal disease slowing rotting away, suddenly turning into a patient with new drug cures possibility.
Change it already ...
Friday, June 13, 2014
a) Grab Food - I don't know about you but Uber Eats was fantastic. I don't know why that even after 4 weeks of Grab taking over...
Nobody is spooking anyone by revealing the level of debt the country is facing. Before we can properly address the debt, we have to be hone...
(Farah Ann Abdul Hadi) There are tons of financial newsletters but the only one I read religiously is Maudlin Economics. ...