Tuesday, May 30, 2006

Bursa, Mesdaq & Bonus Issues
Good Move By Bursa

Bursa Malaysia Securities Bhd has announced that public listed companies whose accumulated losses exceed their reserves are not allowed to undertake bonus issues. In a statement announcing amendments to its listing requirements and Mesdaq market listing requirements in relation to bonus issues, Bursa Securities said PLCs were disallowed from undertaking bonus issues “if their accumulated losses exceed the reserves to be capitalised for the bonus issue''. It said the amendments were made as part of Bursa Securities' continuous efforts to enhance investor protection under its regulatory framework and listing requirements. The amendments will take effect immediately for all applications for listing of securities arising from bonus issues submitted to Bursa Securities on or after yesterday. Bursa Securities is a wholly-owned subsidiary of Bursa Malaysia Bhd.

We have had a spate of proposals, mainly from Mesdaq counters, asking for bonus issues. The ruling with regards to accumulated losses / reserves is very astute. However, that is just one side of the equation. Many of the Mesdaq counters are basically shares with a par value of 10 sen or 20 sen, when compared to the Main Board or Second Board shares where their par value is usually RM1.00 or RM0.50 at least.

It is so obvious, the aim of management of those companies applying for bonus issues is to lower the average share price and nothing more. It makes it easier for them to farm shares out to syndicates for speculative play. For those not clued in:

a) a share that trades at RM0.25 will become RM0.125 with a 1 for 1 bonus, the share capital will double but in the eyes of most retail players its a doubling of their shares but they do not see it in terms of a doubling of share capital (I know its illogical)

b) management knows that players are more likely to hold onto a share if it trades at just RM0.10 or RM0.20 as it is close to zero and won't have much to fall (again the logic is financially naive and ill-informed but that's the yardstick for many unsophisticated retail players). Hence management thinks that there will be more "natural support" should the bottom fall out from the speculative plays

c) penny stocks image should be discarded wherever possible - most penny stocks are speculative counters with no real tangible assets or businesses, in most markets' perception. They do get support buyers as they are numerically cheap in absolute terms but to keep allowing these companies to do bonus issues (especially Mesdaq counters) is to allow for these shares to be kept near the 10 sen or 20 sen level. Don't need to have that, I am sure Bursa is smarter than that and the management of Mesdaq counters should really try and go and improve their real businesses than thinking of shallow ways to manipulate share prices

Bearing that in mind, Bursa needs to cover that loophole. A share that trades below RM1.00 should never be allowed to have bonus issues even though their reserves are adequate. If your shares are below RM1.00, you must have a pretty substantial number of shares floating out there already. Bearing in mind also that bonus issues are ZERO SUM GAMES, it does not add value at all. The basic premise is to reward shareholders and make shares more affordable, if you are below RM1.00, your shares are already very affordable. It only makes sense if a share has risen a few times over and management wants to make it "affordable", then it might be prudent to do a bonus issue.

The other thing which negates a bonus issue is that shares are now tradeable at 100 share lots and not 1,000 shares like before. The 100 share lot trading rule basically eliminates the need for bonus issues. Bursa has to be more vigilant as we do not want to see a large majority of shares trading near 10 sen or 20 sen in the forseeable future - then KLSE will be known really as a penny stock market. By the way, a good move by the Bursa - I would strongly recommend that there'd be an additional ruling in that shares below RM1.00 be prohibited from doing bonus issues.

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