Opening statement for the Senate Select Committee on Financial Technology and Regulatory Technology – Committee session 12 February 2021 – SMSF Association
The SMSF Association is the peak body for the self managed super fund (SMSF) sector and comprises around 3000 professional members, most of whom are accountants or financial advisers, together with lawyers, auditors, actuaries and other professionals. We also represent the 600,000 self managed super funds via our community of SMSF investors and the ecosystem of businesses and professionals which support self managed super funds. The SMSF sector holds over $700 billion in total assets, including over $200 billion in ASX listed companies, and hence is a major source of capital for existing and new Australian businesses.
We made a joint submission, with the Stockbrokers and Financial Advisers Association because of our concerns about the unfair treatment that SMSF investors and other retail shareholders received during many capital raisings last year. That unfairness was driven by the regulatory relief provided by ASIC and the Australian Securities Exchange (ASX) to allow increased capital raisings during that period without shareholder approval.
To read the joint submission, please click here.
As Judith Fox has explained, this is not the first time that retail shareholders and SMSF investors have faced the dual issue of dilution of the holdings and limited opportunity to participate in capital raisings compared to institutional shareholders. Technology has developed rapidly since the global financial crisis. We believe it is now feasible for boards and their advisers to more carefully consider the position of retail shareholders and SMSF investors when they embark on capital raisings.
We strongly encourage the Committee to examine the full report from the firm mentioned by Judith, Vesparum Capital, as it provides a very valuable insight into the dynamics of capital raising during 2020 and the negative impact this had on retail shareholders.
In addition to the points raised by Judith, I will add two further points. Vesparum Capital found that while retail investors showed strong on market support around capital raisings during the COVID-19 period, institutional investors were typically net sellers in the period after the capital raising. The second point is that short selling activity by hedge funds around capital raisings was more prevalent during the COVID-19 period and this contributed to an increase in the indirect costs of raising capital.
The average capital raising during the COVID-19 period provided a 17% increase in portfolio value compared to the last traded price. Missing out on such an increase is a significant penalty for SMSF investors and other retail shareholders. While we understand the need to raise capital quickly, most companies have mainly relied on share placements to institutional funds rather than allowing a greater proportion of allocation of new shares to retail shareholders. The issue that seems to have been overlooked is that modern technology can be used to speed up the process so that any discrimination against retail shareholders and SMSF investors can be reduced or eliminated.
Ideally capital raising should deliver a win for all shareholders. Companies can increase their capital and shareholders should be able to get equal access to new shares at discounted prices.
The steps we advocate to reduce discrimination would be:
- ASX 200 listed companies should structure offers to maximise access for retail investors to a proportionate offer.
- This includes setting aside a certain proportionate allocation for retail-focused brokers and firms to utilise their current modern technologies to provide offers quickly to SMSFs and retail clients
- If a company does not offer retail investors the chance to participate, they should publicly explain why not.
- Companies should disclose post-allocation to their investors the percentage of retail, SMSF and institutional offer allocations.
We also believe that developing a single digital platform that builds on the advances in financial technology is the next crucial step. The purpose of this platform would be to create a more efficient mechanism for fundraising from SMSFs and other retail investors. Participants could register on the platform, helping facilitate an even quicker process for companies and brokers to access all retail shareholders. Not only would this be effective for capital raisings, it may be useful for large-scale infrastructure investments from which SMSFs are typically excluded.
We encourage the Committee to explore these recommendations for a more efficient process which would link companies raising capital with retail shareholders and SMSF investors.
Opening statement from John Maroney, CEO, SMSF Association