ASX and ASIC have given the green light for merchant bankers to repeat their rip-offs of retail investors and self-managed super funds, writes Terry McCrann.
ASX and ASIC have given the green light for merchant bankers to repeat their rip-offs of retail investors and self-managed super funds, writes Terry McCrann.

Why ASX is handing billions to greedy insiders

During the Global Financial Crisis listed companies joined with investment bankers to rip off billions of dollars from retail investors and self-managed super funds, and poured quite literally tens of billions of dollars into the pockets of those investment bankers, institutional investors and investment managers.

Now the ASX and ASIC - the supposed protectors of investors and good if not necessarily ethical market practices - have given the green light for them to do it all again.

Even more incredibly they have given the green light for a bigger rip-off this time around, as the ASX in particular elevates stupidity to a level you would not have thought possible.

As a "good" - or should that be, a middling clever and very greedy (is there any other sort?) - investment banker might say: why waste a global health disaster and a government-mandated recession/depression, when you can get rich, sorry richer, along the way?

The rip-off is very crude and very simple but very effective and very, very profitable. In essence it works by a listed company paying an investment bank to hand out "free" share profits to selected investors.

These profits are paid for by devaluing the shares of all those shareholders not in on the rort; and it is a rort through and through, and it is a disgrace but all too embraced by both so-called regulators and the entire professional investment community.

I guess they are all believers in the wisdom of John Singleton, who famously said: a rort's only a rort when you are not in on it; and by golly, the entire financial and professional investment community is in on it. Up to their greedy, greedy necks.

The rort works mostly through share placements, but also even better - something ASX, not surprisingly, is completely incapable of understanding - through non-renounceable pro-rata share issues.

Here's a simple example. A company called Idiocy Ltd has 100 million shares on issue and they are selling for $2 each. The company is worth $200 million, shareholders have $200 million worth of shares.

The directors place 15 million shares at 50c with selected investors who are not shareholders.

The value of the company rises to $207.5 million (the original $200 million plus the $7.5 million). But the shares are now worth only $1.80 each (that $207.5 million divided by the now 115 million shares).

So the original shareholders have had their holdings cut from $200 million to just $180 million. The new shareholders have paid only $7.5 million for shares worth $27 million.

And look at the investment bankers: they would have been paid by the company to hand out that free $19.5 million to favoured investors.

Companies are reverting to their tricks from the GFC.
Companies are reverting to their tricks from the GFC.

It can be even better with a (investment bank underwritten) non-renounceable issue. Idiocy Ltd has a one-for-two issue at, say $1. Only half the shareholders take up their shares; the investment bankers get to distribute the other half.

After the issue, Idiocy Ltd now has 150 million shares on issue and the shares are now worth $1.67 each (the original $200 million company value plus the $50 million raised, divided by the 150 million shares).

The half of the original shareholders who did not subscribe have had their holdings cut in value from $100 million to $83 million.

Those who took up the underwriting paid a total of $25 million for shares now worth just under $42 million. Shareholders who subscribed have broken even. Now I have used an exaggerated example in a static situation for clarity. In the crisis reality like today, share values are falling and uncertain: it doesn't translate exactly the way I described.

But in that reality, investment bankers cover by demanding even bigger discounts; and the bottom line reality remains of a significant transfer of value - even when, especially when, companies are raising capital in times of stress like now or through the GFC.

Investment bankers make damn sure of two things.

They take virtually no risk for very significant rewards. And they do so by ensuring they are handing out free profits to the big end of town. Retail investors and SMSFs get screwed.

So what have ASIC and ASX done?

It's more ASX. It's now allowing companies to makes placements of up to 25 per cent of their shares on issue, up from the previous 15 per cent limit I used in my example. It has almost doubled the size of the available rort.

ASIC's contribution is to essentially tick it through.

ASX seems to think it is protecting retail shareholders and SMSFs who don't get in on the rort, by demanding a company that uses this higher placement limit follows with either an SPP or a pro-rata issue at the same or lower price.

Both sit somewhere between a joke and supercharging the rip-off.

An SPP can be for a piddling sum in comparison with the placement. It's not pro-rata so bigger retail holders still get ripped off.

And it increases the rip-off of those shareholders who don't or can't subscribe.

The pro-rata alternative would be even worse. ASX does not require that it has to be renounceable, so Idiocy Ltd and its greedy investment bankers can do a version of what I described above on top of the original placement rip-off!

So those retail/SMSF investors who don't or can't subscribe get ripped off double. The ones who can subscribe are lucky: they only get ripped off once.

While the chosen institutional investors get two bites at the lush rip-off cherry; and so do the investment bankers.

In the wake of the GFC investment bankers pocketed billions of dollars transferring tens of billions of dollars to investment mates.

How many billions will it be this time: all courtesy of the ASX and ASIC?

Originally published as Why ASX is handing billions to greedy insiders