Thursday, October 6, 2011

Private placements violated shareholder rights-SEC

Presenting a consultation paper soliciting public opinion to revise the laws on private placement of shares by listed companies, Sri Lanka’s market regulator said most of the recent private placements by listed firms have violated shareholder rights. “While accepting the fact that all private placements are not detrimental either to the company or to existing shareholders, most of the recent private placements had diluted pre-emptive rights of the existing shareholders,” the Securities and Exchange Commission (SEC) said. The SEC further noted that the main characteristic of recent private placements have been the allotment of shares by listed companies to private parties at a price far below the existing market price. However the SEC admits that the offer price to private parties should be at a discount compared to the market price, as they have to bear higher risk than an ordinary shareholder.

“However this discount should not be more than the additional risk that the investor has to bear by accepting a private placement,” SEC said.

It was also pointed out that immediately after the private placement (within a short period of time), the investor who invested in it at a discount sells the shares at a higher price making undue profits over other investors.The SEC also noted the easy manner in which a special resolution is passed in General Meetings to get the approval of shareholders for private placement of shares, as most of the Sri Lankan firms are controlled by closely-knit families.

“In such circumstances, if the share allotment is done to an existing shareholder/s or his connected persons, by giving an interested shareholder a chance to vote at the said meeting in favour of the private placement, the rights of the minority shareholders will not be protected,” the SEC said.

Thus, pointing out loopholes in the CSE’s listing rules pertaining to private placement; the SEC has come up with recommendations to revise the Section 5.4 of CSE Listing Rules.

The first among the recommendation were, to prevent shares offered in private placement be priced with more than a 10 percent discount on the weighted average market price of the shares for 90 market days, after the date of fixing of the price.

The SEC also recommends imposing a locked-in period of one year from the date of allotment for the shares allotted through private placements.

Another recommendation the CSE has come up with was to prevent the director, CEO or the major shareholder of the company to vote in the Special Resolution for a private placement of shares, if it is executed to allot shares to either of them.

And also if the allotment is in favaour of an interested person connected to a director, CEO of major shareholder of the company, they should not vote on the resolution approving the share allotment.

source -

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