ONE of the reasons for a company to be listed on the stock exchange is to tap the capital market for future expansion of its business.

       This can be in the form of the issuance of new shares as a consideration in a transaction.

       In essence, the issuance of new shares reflects the use of shares as a currency of exchange when acquiring a stake in a company via a merger, or in an acquisition deal of a company or an asset.

       This will result in vendors in the transaction emerging as shareholders of the company that have acquired their asset(s) and/or shares.

       Companies also use the issuance of new shares to raise capital via a rights issue exercise to enable the company to raise funding needs for potential acquisitions or working capital purposes or even to pare down borrowings.

       Bonus issues as a reward

       Some companies use a share issuance to “reward” shareholders in the form of bonus issues, while others used it to entice their employees via various share issuance schemes (SIS) or employee share option schemes (Esos).

       Some companies use the issuance of new shares via private placements to raise funds for a specific intended purpose, which among others, could again be for an acquisition, to pare down bank borrowings, and to meet a company’s working capital needs.

       Any company that is undertaking share issuance schemes will require regulatory green light and shareholders’ approval at a general meeting to be conducted.

       Since the pandemic started and as we are aware, the regulators too have been rather lenient in some of the previous guidelines with respect to share issuance, as they have allowed more leeway in terms of a higher proportion of private placement exercises.

       This is explained by Bursa Malaysia in its guidelines dated April 16, 2020.

       Share issuance galore

       Hence, as this column has highlighted before, a slew of companies have taken advantage of this by issuing shares in all forms and sizes.

       This has been in the form of not only private placement exercises but increasingly SIS and Esos.

       One listed company has seen, over the last few years, an avalanche of share issuance to the extent that its current share base is more than seven-fold from the level it was at the end of its financial year 2018 (FY18), of which, slightly more than 80% was issued in the last 17 months alone.

       This company has used all sorts of share issuance schemes.

       Prior to the end of FY18, the company had issued irredeemable convertible preference shares (ICPS) and since these were convertible instruments, the company saw the issuance of 231 million shares as a result of the conversion of the ICPS from the end of FY19 onwards.

       Other than that, the company also issued 806 million shares under SIS and another 930 million shares under Esos.

       Another RM115mil was raised via a rights issue exercise involving the issuance of 1.43 billion shares.

       In addition, it also had issued 364 million shares under its first private placement exercise, which was carried out at the end of FY21.

       Apt ESOS/SIS size vital

       A look at its annual report for FY20 shows that the company’s wages and salaries were just about RM1.35mil (2019: RM1.14mil), and assuming if the average salary is not more than RM4,000 per month, this company would barely have more than 30 employees.

       Assuming that the company has just 30 employees, how is it possible for the employees to take up their SIS/Esos entitlement to the tune of 1.736 billion shares in the last two years alone, which translates to almost 58 million shares per employee?

       Of the 1.736 billion shares, 930 million were for Esos, which had been all issued since May 2021.

       The total amount that has been raised by the company from this Esos exercise alone is about RM30.5mil in the last five months.

       Even without annualising the data, assuming that these 930 million shares are issued to the assumed 30 employees that the company has, each staff has taken up at least RM1mil worth of shares each and is holding 31 million shares each.

       That is of course on the assumption that the shares that have been exercised have not been sold and the proceeds used to subscribe to new Esos entitlements over and over again.

       Approval of new placements

       Having raised almost RM240mil over the last 17 months, the company now intends to raise another RM19.2mil via the issuance of 855 million new shares via a private placement to partially fund the construction of a factory building.

       The 855 million shares represent 20% of the current issued share capital of the company and is well within the definition of Bursa’s Listing Requirement, and was recently approved by the exchange.

       Although the company has explained its rationale for this fresh share issuance scheme, a look at its latest balance sheet shows the company is flush with cash.

       In addition, has a sizeable value of investment securities too. As at March 31, 2021, the company’s net cash position stood at RM125mil, inclusive of RM32mil in investment securities that were defined as current assets.

       In addition, the company also had more than RM1bil worth of investment securities classified under non-current assets.

       From previous capital-raising exercises, in which the company had raised almost RM115mil, some RM78mil remained unutilised but earmarked for capital expenditure.

       Fund sufficiency

       Hence, the company has easily almost RM50mil and has at its disposal enough funds for the construction of the factory building without the need for another private placement exercise.

       The question is, with the information that the company has disclosed publicly, there is no reason for authorities to approve private placements that are just flooding the market and the company too ought to be more prudent in issuing new shares.

       The company’s Esos/SIS schemes, which have also resulted in its employees exercising almost 40% of its current shares in issue, and perhaps by a mere 30 employees, are another mind-boggling issue.

       Perhaps, the relevant authorities need to be more detailed in approving some of these schemes carried out by listed companies.

       There must be justification for share issuance schemes and not used as mere currency to inflate the share base of a company.

       Pankaj C Kumar is a long-time investment analyst. The views expressed here are his own.