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Companies need capital for lots of reasons. They may want to make a big purchase. Perhaps they have ambitious plans to expand their business. Or they may just need cash to fund daily operations. Borrowing from banks or creditors can be one of the easiest ways to raise that money. But sometimes, the company may already be carrying around a pile of debt, to which management may not wish to add.
In that situation, many companies turn to equity, selling new shares into the market to raise the money they need. There are three popular strategies for equity raises: placement, top-up placement, and a rights issue.
Placements are more or less private activities. Listed companies reach out to certain investors and invite them to buy newly issued shares, using brokers or securities houses as intermediaries to handle the administrative issues. To make sure these new shareholders don’t have direct ties to the company, any placement made to fewer than six parties has to reveal those entities’ names and backgrounds. For more than six parties, only their general comments are needed. To attract more investors, companies usually price these placements at a discount to their most recent market price.
Top-up placements work similarly: Major shareholders sell some of their shares to independent parties, then purchase new shares for themselves.
In a rights issue, a company will invite original shareholders to apply for (and purchase) new shares at a predetermined ratio – 2 for 1, 3 for 1, even 10 for 1. Eligible shareholders can also apply to snap up extra new shares that other shareholders give up. In Hong Kong, if a rights issue will increase a company’s issued capital by more than 50%, shareholders need to vote to approve the issue before it can proceed. In these meetings, anyone with a controlling stake cannot vote, and a simple majority yes or no can decide the issue.
Unless otherwise specified, listed companies on the mainboard cannot conduct rights issue during the first 12 months after the IPO; for the GEM board, it’s six months.
What is your responsibility as a shareholder?
If the share is registered under your name, you will receive a prospectus and an application form stating how many shares you are entitled to buy. You will have no less than 10 working days to decide on whether to exercise the right.
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