,Companies also use the issuance of new shares to raise capital via a rights issue exercise to enable the company to raise funding needs for potential acquisitions or working capital purposes or even to pare down borrowings.
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ONE of the reasons for a company to be listed on the stock exchange is to tap the capital market for future expansion of its business.
This can be in the form of the issuance of new shares as a consideration in a transaction.
In essence, the issuance of new shares reflects the use of shares as a currency of exchange when acquiring a stake in a company via a merger, or in an acquisition deal of a company or an asset.
This will result in vendors in the transaction emerging as shareholders of the company that have acquired their asset(s) and/or shares.
Companies also use the issuance of new shares to raise capital via a rights issue exercise to enable the company to raise funding needs for potential acquisitions or working capital purposes or even to pare down borrowings.
Bonus issues as a reward
Some companies use a share issuance to “reward” shareholders in the form of bonus issues, while others used it to entice their employees via various share issuance schemes (SIS) or employee share option schemes (Esos).
Some companies use the issuance of new shares via private placements to raise funds for a specific intended purpose, which among others, could again be for an acquisition, to pare down bank borrowings, and to meet a company’s working capital needs.
Any company that is undertaking share issuance schemes will require regulatory green light and shareholders’ approval at a general meeting to be conducted.
Since the pandemic started and as we are aware, the regulators too have been rather lenient in some of the previous guidelines with respect to share issuance, as they have allowed more leeway in terms of a higher proportion of private placement exercises.
This is explained by Bursa Malaysia in its guidelines dated April 16, 2020.
Share issuance galore
Hence, as this column has highlighted before, a slew of companies have taken advantage of this by issuing shares in all forms and sizes.
This has been in the form of not only private placement exercises but increasingly SIS and Esos.
One listed company has seen, over the last few years, an avalanche of share issuance to the extent that its current share base is more than seven-fold from the level it was at the end of its financial year 2018 (FY18), of which, slightly more than 80% was issued in the last 17 months alone.
This company has used all sorts of share issuance schemes.
Prior to the end of FY18, the company had issued irredeemable convertible preference shares (ICPS) and since these were convertible instruments, the company saw the issuance of 231 million shares as a result of the conversion of the ICPS from the end of FY19 onwards.