PORTFOLIO POINT: The discount was not deep on ANZ's capital raising, and shareholders were limited in the parcel they could take. The bank should have chosen a fairer system.

ANZ's recent capital raising should have loyal shareholders up in arms. By restricting shareholder participation in the discounted issue ANZ denied them the opportunity access to what might turn out to be considerable upside.

The issue at $14.40 share raised an impressive $4.7 billion - $2.5 billion from institutions and $2.2 billion from retail investors - a huge success in anyone's language. And yet by restricting individuals to parcels of just $15,000 each, long-time shareholders have a right to feel miffed.

A few weeks ago, in Rights issues a tougher choice than it seems, I talked about the "corporate entrapment" that can happen when companies offered shareholders a deeply discounted issue. Shareholders can either choose to subscribe to the issue and maintain their stake in the company and therefore their share of the profits, or they can see their ownership diluted by those who did purchase the deeply discounted shares.

In a statement to the ASX announcing the success of the share purchase plan, the ANZ noted that about 178,000 investors, or about 40% of the shareholder base, took up the offer. The majority chose not to participate in the share purchase plan.

Those who did not participate now own about 10% less of ANZ that they did previously. ANZ's market capitalisation is about $42 billion, so $4.7 billion of additional shares mean they now have a (roughly) 10% smaller stake in the bank's ownership and earnings.

What's more ANZ shareholders should know that the discount that shareholders received on the ANZ shares was much less than the discount that has applied to many other share issues. About the time of the announcement of the share purchase plan, ANZ shares were trading for about $15.50, so the $14.40 offer price represented a $1.10 discount to this, or less than a 10% discount overall.

A small discount is preferable for a shareholder who did not participate in the offer; sure, their ownership has been diluted, but they are now part-owner of a company (ANZ) that has $4.7 billion of capital to pay down debt, make acquisitions, increase the bank's capital base - whatever the board and management see fit.

Another issue is that every shareholder was entitled to apply for $15,000 of additional shares. Whether they owned $500 or $5 million of shares, they were limited to applying for a further $15,000 of shares, this is hardly democratic.

The other approach, and one that seems to be more common, is that each shareholder is able to apply for new shares in a set ratio. For example, they may be able to apply for one new share for every two shares currently held.

The problem with the ANZ approach and its $15,000 cap seems to be one of fairness. Why should a shareholder with $5 million worth of shares only be able to apply for the same amount of discounted additional shares as a shareholder with a $500 parcel? The rules around rights issues appear to allow companies huge latitude: they can tailor raisings in many different ways and not all of them are fair. It's time the regulators looked at this issue and the ANZ raising might be a very good place to start.

Conclusion

The global financial crisis has caused severe dislocation in world borrowing markets and meant that many companies have turned to their shareholders to raise capital. A key problem of this is that these share offers are often deeply discounted, and disadvantage non-participating shareholders by diluting their stake in the company.

In the ANZ case, the discount was comparatively modest, but the choice to offer all shareholders the chance to bid for up to $15,000 of new shares (with all offers for shares ending up being accepted by ANZ) meant that a shareholder with $500 or $5 million of shares would receive the same ability to benefit from the offer, even though the $5 million shareholder owned a much larger proportion of the company.

This is not always how offers are structured (the level of participation is usually dependent on the size of a shareholding), and raises the question about whether this approach is equitable for larger shareholders.