SEC to circulate draft paper on private placements

By Dinali Goonewardene

The Securities and Exchange Commission is to circulate a discussion paper on private placements of shares of listed companies. The discussion paper is a result of pricing issues related to private placements, selling the shares within a short period in the market at higher price etc. A private placement is an issue of shares to a pre-identified investor or group of investors. It does not include a rights issue or a general offer to the public for subscription.

Among the ideas being mooted for discussion is the issue of a definitive pricing formula to be used when pricing a private placement.

This suggestion has been mooted because listed companies allot shares at prices below the existing market price. If an investor acquires a large portion of shares in a private company which lacks a strong financial status he carries a risk for which he is compensated by the discounted price. However the discount should not be more than the additional risk that the investor has to bear by accepting the private placement, the SEC said in its discussion paper.

Another characteristic of a private placement the SEC said was that within a short period of time the investor in the private placement sells the shares at a higher price in the market making an undue profit over other investors.

 It is recommended that shares be locked in for a period of 18 months. This practice is adopted by Bursa Malaysia.

A company has to pass a special resolution in a General Meeting to get the approval of the shareholder for the private placement as it affects the pre emptive rights of existing shareholders.

Unlike in developed markets a majority of listed companies are closely held family companies where the main shareholder or connected persons hold 75% of the voting shares of the company enabling a special resolution to be passed easily.

If the share allotment is to existing shareholders or his connected persons the rights of minority shareholders will not be protected if the interested shareholder is allowed to vote at a meeting for the private placement. It is recommended to prohibit the interested shareholder from voting for the resolution. This practice is adopted by Bursa Malaysia.

In India the issue of shares on a preferential basis is made at a price not less than the higher of: the average weekly high and low of the closing prices of related shares quoted during the six months preceding the relevant date or the average weekly high and low of closing prices quoted during the two weeks preceding the relevant date where the relevant date is a day 30 days before a meeting is held to decide the issue.

In India specified securities allotted on a preferential basis are locked in for three years from the date of allotment.

In Malaysia shares are not priced at more than 10% discount to the weighted average market price for the five market days immediately before the date of fixing the price. Shares are locked in for 12 months.

The SEC recommended revising Section 5.4 of the CSE Listings Rules which relates to the issue of shares by private placement. It recommends that in a private placement shares should not be priced at more than 10% discount on the weighted average market price of all the shares transaction of the company executed through the exchange for the 90 market days immediately before the date of fixing the price.

The percentage of shares to be issued should not exceed 20% of the shares in issue immediately after the issue. This rule may be waived by the SEC under exceptional circumstances. The shares allotted through a private placement should be locked-in for a period of one year from the date of allotment.

The entity shall not issue shares through a private placement or allot shares by way of a capitalisation of reserves during the 24 month period immediately following the issue of shares. The application of this Rule may be waived by the SEC under exceptional circumstances.

The company should obtain shareholder approval through a special resolution for the issue of shares through a private placement or at a general meeting where: the allotment is in favour of a director, major shareholder, or chief executive and or the allotment is in favour of an interested person connected with a director, major shareholder or chief executive, the director, major shareholder or chief executive must not vote on the resolution to approve the allotment. An interested director, interested major shareholder or interested chief executive must ensure that persons connected with him abstain from voting on the resolution to approve the allotment.

At present the CSE listing rules stipulate that a private placement is an issue of shares to an identified investor or category of investors other than by way of a Rights Issue offered pro-rata to existing shareholders or a general offer to the public for subscription.

The percentage of shares to be issued by a Listed Entity through a Private Placement shall not exceed 20% of the shares in issue, immediately subsequent to such issue of shares through the Private Placement. The application of this rule may be waived by the SEC under exceptional circumstances.

The entity shall not issue shares through a private placement during the 24 month period immediately following the issue of shares.

 The application of this Rule may be waived by the SEC under exceptional circumstances. The company must obtain shareholder approval through a special resolution for the issue of shares through a private placement at a general meeting.