First of all kudos to the team at Focus for highlighting the inevitable no par value regime. I like what Focus is doing, top notch corporate stories and good highlights on hot spots in the market. However, there are a few major glitches with the NPV story.
The headline was so wrong, its misleading and incorrect, and those two are terms you do not want to hear for a business article. The headline "RM100bn Windfall For Shareholders". It aggregates the share premium in top 33 listed companies, and assumes they can potentially be given as bonus shares in NPV regime. OK, lets assume not just bonus shares, but dividends and/or share buybacks as well.
That is SOOOOOOO incorrect. These 33 companies can JUST AS WELL distribute these bonuses in the present par value conditions. Tell meif I am wrong here. Nothing changes for these big companies as their share prices are so well beyond their respective par value.
Secondly, the article assumes bonus issues are beneficial or makes a significant difference to a share price upside. You can sit down in any accounting masterclass to note that it is basically a zero sum game. The perceived bullishness on bonus issues is falsehood. Earnings do not change one iota.
Liquidity - the so called improved liquidity is b.s. especially now when you can in 100 shares instead of 1,000. Why is Maybank expensive at RM9.94? They can do a 2 for 1 bonus issue from their share premium account, which means in the end you have 3,000 on an ex-basis by buying 1,000 shares now. The ex price will be divided by 3 = RM3.31. If it moves higher from there the PER will go up which makes it more expensive. Its silly. You can just as well buy 100 shares at 9.94 instead of 1,000 and consider in a 10 for 1 bonus and be happy about it. IF bonus issues were so gooood, look at Bershire Hathaway, only 860,000 shares but the share price is $174,500. Warren Buffett could have declared bonus shares galore over the years, and he would have IF he thinks it REALLY MAKES A DIFFERENCE.
NPV has already been implemented them even before 1900 in Belgium and Netherlands. USA and Canada adopted them in early 1900s. Germany and Austria followed later. In recent years, HK and Singapore have done the same. The entire EU should do so within a couple of years for standardisation. UK is surprisingly the slow as the accounting body there is very strong, archaic and a bit like Vatican city, they think traditional stuff is solid and best. Change is ruffling long held traditions.
The headline was so wrong, its misleading and incorrect, and those two are terms you do not want to hear for a business article. The headline "RM100bn Windfall For Shareholders". It aggregates the share premium in top 33 listed companies, and assumes they can potentially be given as bonus shares in NPV regime. OK, lets assume not just bonus shares, but dividends and/or share buybacks as well.
That is SOOOOOOO incorrect. These 33 companies can JUST AS WELL distribute these bonuses in the present par value conditions. Tell meif I am wrong here. Nothing changes for these big companies as their share prices are so well beyond their respective par value.
Secondly, the article assumes bonus issues are beneficial or makes a significant difference to a share price upside. You can sit down in any accounting masterclass to note that it is basically a zero sum game. The perceived bullishness on bonus issues is falsehood. Earnings do not change one iota.
Liquidity - the so called improved liquidity is b.s. especially now when you can in 100 shares instead of 1,000. Why is Maybank expensive at RM9.94? They can do a 2 for 1 bonus issue from their share premium account, which means in the end you have 3,000 on an ex-basis by buying 1,000 shares now. The ex price will be divided by 3 = RM3.31. If it moves higher from there the PER will go up which makes it more expensive. Its silly. You can just as well buy 100 shares at 9.94 instead of 1,000 and consider in a 10 for 1 bonus and be happy about it. IF bonus issues were so gooood, look at Bershire Hathaway, only 860,000 shares but the share price is $174,500. Warren Buffett could have declared bonus shares galore over the years, and he would have IF he thinks it REALLY MAKES A DIFFERENCE.
NPV has already been implemented them even before 1900 in Belgium and Netherlands. USA and Canada adopted them in early 1900s. Germany and Austria followed later. In recent years, HK and Singapore have done the same. The entire EU should do so within a couple of years for standardisation. UK is surprisingly the slow as the accounting body there is very strong, archaic and a bit like Vatican city, they think traditional stuff is solid and best. Change is ruffling long held traditions.
Advice to SC
a) do not make it optional, there is sufficient confusion already
b) there must be more clarifications with respect to fund raising for shares currently below their par value
c) there must be clarifications on minimum paid up capital or has that been disbanded in new regime (very critical) - does it mean that an attractive company with just RM10m in paid up can get listed?
Australia largely preserved the capital maintenance rules of the par value system by reclassifying as stated capital that which the par value system distinguished as share capital and premium. New Zealand, on the other hand implemented no-par without the concomitant concept of stated capital, legislating instead a solvency test for the protection of creditors.
In Hong Kong there is no requirement for a minimum par value of shares (as there is in some jurisdictions) and shares can be issued with very low par values thereby avoiding some of the restrictions associated with the requirement of maintaining par. In light of this, it has been questioned whether there is a real need for no-par value shares if the same (or substantially the same) effect can be achieved by issuing shares with a very small par value.
Introduction of no-par value shares entails other technical problems, some of
which are:
(i) the treatment of the concept of partly paid shares, and of the liability to pay any unpaid amount on shares in a no-par value system;
(ii) amendment of the accounting and tax requirements to take account of the absence of par values.
d) Distributions rules - There are at least two contrasting formulations for rules on capital distribution. The first is to carry the whole of the proceeds to a “stated capital account” which would take the place of the paid-up capital and share premium account, with distribution rules similar to that for share capital. This is applied in Canada and was the recommended approach by the Gedge Committee in the UK.
The second is a “solvency test” which New Zealand preferred and implemented. The New Zealand Law Commission when recommending the abolition of par value recommended against having a stated capital account. The Law Commission adopted a broad principle that the propriety of any distribution by a company to its shareholders, whether by way of share re-purchase or dividend, should be governed by a solvency test. All directors who vote in favour of a distribution must sign a certificate that in their opinion the company will, after the distribution, satisfy the solvency test. If reasonable grounds did not exist for the opinion set out in the certificate, those directors who signed the certificate would be personally liable to the company to restore the distribution, except in so far as it may be recoverable from shareholders. The solvency test is a “two-pronged one to ensure both ‘balance sheet’ solvency and ‘cash flow’ solvency.”
e) If the concepts of “par” and “authorised capital” are abolished other measures may need to be put in place to prevent directors from diluting shareholders’ interests in the company or bringing new members into the company without the consent of existing shareholders.
The listing rules already have minority shareholder protection measures in
place by preventing companies from issuing shares at a significant discount to
market value. Up to 20% new shares (in past 12 months and coming 12 months).
new shares no need shareholders' approval.
f) In a no-par value share regime the issuance of shares, bonus/placement of new shares ... should be accounted for by crediting to share capital the cash received; or in the case of shares issued other than for cash (bonus), the fair value of the consideration received or the fair value of the shares issued. Quoted market prices in active markets provide the best evidence of fair value and are often used as the basis for measurement.
e.g. Maybank, number of shares 8.7bn ... share premium 17.9bn ... can do a 2 for 1 bonus ... even now can do that. A similar move would be to split shares from 1.00 par to 30 sen par in the current par value regime. For these companies NPV is a non event except for accounting staffers.
BONUS ISSUES are zero sum games.
Company owners
a) you used to not be able to issue shares below par value, thus hurting you capacity to raise funds - defeating the purpose of getting listed
b) you also cannot issue free warrants if your shares traded below par value ... or even below RM1.00, and this will be the most significant activity following NPV regime because you don't have to knock it off retained earnings to do free warrants. Companies like London Biscuits which has a par of RM1.00 and share price at 70 sen can now do new shares placement or rights @ say 65 sen or even 60 sen with free warrants attached as sweetener
The legal effect of par value with respect to dividends, redemption of
stock and payments for stock is eliminated
As under a no par value system, bonus shares can be issued without the need to charge the value to either the share premium account or the profit and loss account we can see no strong reason to retain a voluntary share premium account. Indeed we can see a benefit of a no par value scheme that a company with less cash may offer shareholders the choice of a cash dividend or bonus shares where the bonus shares have a higher value than the dividend. This would depend on the articles of the company.
In NPV, share premium would then be treated as share capital.
c) Bonus shares as dividends instead - Tax treatment considerations but also share issuance cost considerations. In no par value regimes, however, it is common for there to be no accounting entry reflected within shareholders’ equity in the financial statements for such a transaction although appropriate disclosures are made for the bonus issue in the notes to the financial statements. Depending on transitional arrangements there is typically no longer a share premium reserve. Total equity is not changing; it is simply divisible by a larger
number of shares. The company has received no present cash value, and accordingly there is no need for an accounting entry recording a credit to equity. There is a requirement, however, for note disclosure of the number of shares on issue.
My Take: There is a real need to move to NPV asap as too many struggling companies are unable to tap capital markets to fund their business strategies. It defeats the purpose of being listed. It also causes many of these companies to engage in share price manipulation for "profits to controlling shareholders" - which is highly unhealthy. The par value will keep these struggling companies on the path to PN17 for sure as it is not likely they can reinvent their business model, restrategise ... without input of new capital. Doing rights issues at par when your share price is below par is very difficult. Its easier to do placements and/or to issue shares to buy businesses.
NPV = revive the prospects and interest of over 200 companies on Bursa, and it will be a big boom for Investment Banking activities. Let's see who is most well prepared to latch on.
kcchongnz
This article brings to the attention of two important things about investing:
1. Does bonus issues and share split etc add value to shareholders?
2. Two stocks A & B has different par value, A at 50 sen and B at RM1.00. They earn the same EPS of say 5 sen, and everything else assumed the same. Both the share price are at RM1.00. Does it mean that A is twice more expensive than B?
My response to question 1 is:
Waiter: Do you want to slice your pizza to 5 pieces or 10 pieces?
Me: No, 20 pieces please. I am very hungry.
Everyday formers here argue about how great is the bonus issue and share split and other things like cash payout. AncomLB going to pay a special dividend of how many 4 sen, and another say 8 sen. So 8 sen payout is so much better. Does it really matter that much that for example you have a small business and you find that the till has a lot of money and you make a withdrawal of say RM2000. And now you claim that your business is better than the same business of mine which earn the same profit and cash flow, but you make a withdrawal and I don’t?
My action:
I will make use of the psychology of investing, the cognitive bias of mental accounting of the masses; buy when there is a bonus issue or share split, preferably getting some insider information first, and sell later after the share price has been chased up.
My response to question 2 is there is no difference at all for an investor whether investing in A or B; except some accounting thingy which is not much of a concern. The value of a stock is all depending on its assets per share, earnings per share, cash flow per share, earnings yield (ebit/ev), future prospect etc; but nothing about par value. Par value is immaterial to investors. I think there is why SC is going to do away with the par value thingy as it has no effect except for some corporate exercise thingy.
My action:
Buy the cheaper PE, P/S, EV/Ebit of the two and short sell the expensive one and earn a riskless profit (if I can short sell). Market will eventually adjust the discrepancies and the market will follow the Law of One Price.
2014-01-08 13:44