ASX must be a priority for ASIC, Chalmers and the business community
The ASX risks being marginalised on the world stage, but ASIC’s Joe Longo doesn’t need a committee to fix key issues. He can start with telling Jim Chalmers how bad the tax on unrealised capital gains will be for the market.
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The Australian Securities Exchange is in serious, long-term trouble and unless the deep problems are addressed it will be marginalised on the global stage.
To his credit, ASIC chair Joe Longo has called an inquiry to look into the regulations that are adversely affecting the ASX, and he is also looking at a listing express process.
This is an overdue step, and he should start by scrapping the attempt by the ASX to impose gender diversity obligations on Australian boards. Its job is to run a marketplace.
But Longo’s plan only tackles half the problem. The second half is to attract investors not just to leading companies, but to the wide range of entrepreneurs and up and comers on the ASX list.
The domination of Australian equity capital by industry and retail superannuation funds means the vast bulk of community money goes to the large companies. Given the structure of the ASX list, some 50 to 60 per cent of ASX listed companies are too small to get support from big institutions. They rely on small investors led by self-managed superannuation funds.
Accordingly, Longo’s first step should be to spend time with Jim Chalmers and explain why a tax on unrealised capital gains would slash this vital source of entrepreneurial capital and would be a disaster not only for Australia but also the ASX.
Longo should have taken this step before the election because it looks like Chalmers has been enticed by the Greens and has made up his mind.
Chalmers thinks that opposition to the tax is a media conspiracy. Nevertheless, stopping the tax is so vital for Australian productivity and prosperity – plus the ASX – that Longo should make the attempt.
The second step to attract more capital to smaller, listed enterprises is to remove the blatant discrimination against smaller investors on the ASX created by bad government regulations.
For almost every trading day of the year, anyone can buy shares on the ASX in any quantity they like provided they have the cash.
But there is an exception. When a company makes a new issue of shares, only “wholesale” investors are allowed to participate in the full extent unless a complex, expensive and time-consuming prospectus is prepared. Companies don’t do it, so ordinary investors have restricted entitlements.
Instead, companies place a lot of shares with new shareholders who are only after a quick dollar, and they usually sell the shares in a few months, causing the price to fall.
The long-term supporters of the company not only miss out on getting new shares but see their existing shares smashed as the price falls. Longo doesn’t need a committee to fix that.
The large superannuation funds don’t find it rewarding to have a significant portfolio of smaller companies, so the vast majority of their Australian listed investments are in larger companies. Once again, smaller shareholders are discriminated against because the big institutions get “insider briefings” that are not available to smaller investors.
To comply with the letter of the law, analysts file their profit and other estimates to the company, which tells them if their calculations are around the average of all analysts or above or below that average.
And with extra work, the analyst knows what the company expects to achieve in the coming trading period. It can be wrong, and the shares are then hammered or boosted, but the small investor is not armed with that inside information.
It will be hard for Longo to change the status quo, but InvestorHub has gone part of the way towards fixing the problem in smaller investments by facilitating a chief executives’ communication with smaller investors and allowing those investors to email questions.
That process needs to be extended to larger enterprises, and perhaps analyst averaged estimates should be published in a special website.
Meanwhile, InvestorHub should look at a service that enables smaller investors to view presentations other than their own company so extra investment opportunities are revealed.
And finally, brokers float a smaller company and then after a year or two forget all about it.
It is unfair to their clients and the company.
Maybe if brokers want a role in IPOs, they need to commit to providing material about the company for the next five to 10 years. They are forced to do that with large companies, but not for small companies.
On Tuesday, I explained how investors were taking options on US stocks. And the people who are doing this are up-and-coming ‘executives’ whose funds in a few years will be exactly what is needed in our capital markets.
If the above measures are undertaken and the system is shifted from a clear and blatant discrimination against smaller investors to one where they know there is fairness and where they are properly briefed, they may be enticed to invest locally.
Once Longo has established a fair market for companies and investors, then people will be encouraged to both list and invest.
Originally published as ASX must be a priority for ASIC, Chalmers and the business community
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