Additional Issuance via Auction Reaches an Impasse

Last week was an interesting week for Viet Nam’s stock market. Besides the price “dance”, news on the revising of listed enterprises’ issuing plans caused worries to domestic and foreign investors.

While listed companies were, from the beginning of the year to the end of May, continuously issuing additional shares to pay dividend or issuing rights of buying shares with preferred price for existing shareholders, there was recently a trend to “auction” the additional shares.

It is easy to realize that when the market surges, success for additional issues will be almost guaranteed by the market. These issues are also boosting the bulling trend. However, once the market slides, additional issues come into stalemate.

Stock prices in "dance" but additional issuances via auction reaches headache. (Photo: T.C)

Additional issuing via auction: Too much headache

Some believe that auction is the most valuable issuing method for companies as it prefers highest bidders. When the market is bullish, this is true to some extent, if the “diluting” effect of an additional issue and impact of the floor price for the auction is not taken into account .

For instance, when the Chau Thoi Concrete Corporation No. 620 (BT6) sold state-own stake in late 2005, the company’s share price fell to VND 32,000/share from VND 36,000/share upon the announcement of the floor price of the issuance (VND 30,000/share). At the auction, investors all placed their bid at the minimum price allowed. The result was no difference from share sale at fixed price, making investors wondering if auction was needed.

As in the case of the Sai Gon Thuong Tin Commercial Joint-stock Bank (Sacombank), the bank intended to choose the average price in the latest five trading sessions prior to the announcement of the auction to be the floor price. That motivated investors to drive down the bank’s stock. STB price slid and caused Sacombank to alter its plan many times, and eventually delayed. Many upcoming shares sale of Khahomex (the Khanh Hoi Import Export Joint-stock Company) and Lafooco (the Long An Food Processing Export Joint-stock Company) might make the same mistake again.

As for the listed companies, bringing the companies’ shares to “auction” is not the best solution as there is always the difference between price from auction and price matched on the official trading floor. One of the two prices, the matching price and the auction price, will not truthfully reflect the supply – demand relation, or in other words, one of the two prices is not “fair”, failing to meet the top principle for any securities trading system.

Investors always ponder with high paying for the stock prices. (Photo: T.C)

Additional issuances always benefit shareholders?

Two kinds of additional issues should be made clear here: additional issues for restructuring shareholders’ equity or additional issues for the need of raising capital.

In the first kind, the company’s operation is basically the same. The issue is just a technical action which turns some components of shareholder’s equity (capital surplus, retained earnings, funds…) to equity capital via bonus shares and dividend paid with shares. At that time, per-share book value will decrease as the number of shares increases while the shareholders’ equity remains unchanged. In case the company does not make sufficient profits to pay dividend as before, investors need to think twice before paying for the stock at a higher price after the issuance.

As for the second kind, the company initially should have a plan to utilize the funds raised and the parties who can be buyers (existing shareholders, strategic shareholders, employees, the public). That will help investors to decide whether to participate in the issue or not.

Recently, many listed companies have conducted share sale for strategic investors successfully, bringing significant capital surplus (the difference between actual price and par value price of stocks) to existing shareholders. However, strategic investors are often elite ones or international institutions who have the buy-and-hold strategy and want to take part in the daily operation of the company as big shareholders. They can pay high price for big buying volume, which still saves time and money rather than its transactions in the market, so the price is not necessarily synonymous with individual investors demand.

Viet Nam's investors still have confusion and "herd instinct" effect easily. (Photo: T.C)

Reluctant plan alteration

“Adversity brings wisdom”, after VF1 (the Viet Nam Securities Investment Fund) got a nod from the State Securities Commission (SSC) to revise its issuing price, many other endangered companies also followed to adjust prices and reset the last registering day. For the time being, CII (the Ho Chi Minh City Infrastructure Investment Joint-stock Company) and Sacom (the Cables and Telecom Materials Joint-stock Company) have announced the change of plans.

These actions of Vietnamese companies are so unprofessional and will affect investors, those who have the rights of shareholders and those who don’t.

Actually, the price after the rights registering deadline has been adjusted according to the issuing price for existing shareholders and the additional volume issued. Therefore, whatever the revision is, investors are always at a loss.

These all above have a formed a pretty complicated and sensitive picture about the additional share sale of Viet Nam’s listed companies. The Viet Nam’s stock market is currently in its initial developing period; investors still have confusion and misunderstanding. Market regulators, issuing institutions, and brokerage firms should provide clear information and instruct investors in detail so that they can make good decisions, avoid unsubstantiated rallies or impulsive sell-offs and “herd instinct” to stock changes.

Related Articles:
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VF1 to Adjust Issuing Price
PRUBF1 Fund Certificates Soon To Float
Sacombank to Delay Share Sale In 2006
Foreign Investment Funds Boost Demand of Stock Market
Viet Nam Stocks Leave Low-times behind
New Investment Opportunities with More Listings and Share Sales

By Tuong Chau

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