This article first appeared in The Edge Malaysia Weekly on June 12, 2017 - June 18, 2017

UNDER the new Companies Act 2016, which is now in force, a new regime has been introduced for share capital to be issued without par value.

The nominal value of shares, or “par value”, is the minimum price at which shares can be issued.

Now, the share premium will be dispensed with, and a 24-month transition period given to companies to utilise their outstanding credit in their share premium account.

The transition to a no-par-value regime is in line with international trends. Advanced countries such as Australia, New Zealand, Singapore and Hong Kong have abolished the par value of shares.

It is generally accepted that par value does not serve its original purpose of protecting creditors and shareholders, and may even be misleading because it does not necessarily reflect the true value of a company’s shares.

Before the new law was passed, much had been said about how the no-par-value regime would change the landscape of capital markets.

First, with the abolition of par value, a “share premium” no longer exists. Hence, shareholders of listed companies would expect to get a windfall as companies would have to capitalise, or rather, clear up their share premium account by issuing bonus shares.

Secondly, by retiring the concept of par value, companies will have greater flexibility in structuring their share capital. Previously, it was an ironclad rule that shares could not be issued at anything less than their par value — that is, they could not be issued at a discount.

So, is everything all good under the new regime? Well, the answer is generally “yes” from the market observers The Edge spoke to. However, it is not so for those from the old school of thought.

Bonus issues galore — really?

Under the old regime, the excess of a share’s issue price over its par value is designated as “share premium”.

Today, under the no-par-value regime, a company’s share premium account will be amalgamated with its share capital. There is a transitional period of 24 months for companies to utilise their balances in the share premium account, and one way to do this is to issue bonus shares.

However, investment columnist and fund manager Tan Kim Khuat points out that there is a misconception that the no-par-value regime would lead to more bonus issues.

“To me, this is a myth. The share premium account is only one part of a company’s balance sheet.  Just because we are shifting to the no-par-value regime, companies are not going to fully capitalise their share premium.” he tells The Edge.

While much has been said about how companies will utilise their share premium accounts to issue bonus shares, Tan says most people have yet to realise that the share premium will not “disappear” even if the companies do nothing.

“If you just leave it there, the share premium will be merged into share capital — it is only an accounting treatment,” he explains.

Companies that rush to undertake bonus issue exercises because they want to capitalise their share premium accounts once and for all are actually being busy for nothing, he adds.

“If you had intended to undertake a bonus issue exercise to boost the liquidity of your shares, then it is fine. But if you want to do this just because of the no-par-value regime, it is pointless because the share premium will not evaporate.

“Yes, some investors might feel that they have received something [from the bonus issue]. But if we think about it, if the companies do this exercise 24 months later, the outcome is still the same.”

A veteran corporate observer, who only wants to be known as Liew, doubts whether the no-par-value regime will lead to more bonus issues.

“I think the mentality of companies will remain the same. If they didn’t do it before, they won’t do it now. Yes, the platform is available, but it remains to be seen how many companies will actually do it,” he says.

He notes that a bonus issue exercise will increase a company’s paid-up capital as its share premium will be capitalised.

“If a company does not want to expand its capital base, it won’t do [a bonus issue]. It doesn’t want the pressure. That’s because when your capital base increases, investors would expect you to deliver stronger performance.”

In that regard, Liew expects more companies to undertake share split exercises in the future, which do not increase the paid-up capital of a company as nothing is capitalised.

“Share split exercises only increase the number of shares, but do not affect a company’s capital base. So, with the no-par-value regime, companies have no excuse not to create share liquidity,” he says.

Going back to bonus issues, Tan acknowledges that some companies might still take the opportunity to stir some interest on the market as most retail investors have the perception that a bonus issue offers more good than bad.

“We have this mindset ... when companies are reluctant to pay dividends, at least give us bonus shares then we can sell them on the open market and take the proceeds as if they were dividends. However, one should not neglect the expenses incurred,” he says.

A quick survey reveals that a bonus issue exercise is estimated to cost between RM50,000 and RM300,000.

“You may say this is only a small amount, but bear in mind that the cost is incurred by a company you invested in. Most investors only think from their own perspective, never from the company’s perspective, and I think this is the wrong mentality,” Tan says.

More flexibility to raise capital — good or bad?

As the no-par-value regime comes into effect, the concept of par value no longer applies. That means issuing new shares at a discount to its par value is no longer an issue. Instead, the directors now have the discretion and the duty to determine an appropriate value for the shares when they are issued.

Hong Leong Investment Bank Bhd dealer representative Frank Lin, who considers himself as someone from the old school, thinks no par value is “a little bit peculiar”.

“To me, par value is an indication of the value of the company’s shares. Our market still has a lot of penny stocks and weak companies. With the removal of par value, I think there will be more fly-by-night activities,” he warns.

Lin advises investors to be extra careful, because no par value would make it easier for stock market manipulators to operate.

“Previously, companies were not allowed to issue shares below par value. Now, companies are not restricted in issuing new shares because all they have to do is tell a good story. I’m not for it,” he says. Investors, he adds, will now have to spend more time in sorting out the good from the bad.

Liew, however, views positively the greater flexibility that companies will have to raise capital.

“I think we should not deny any company’s chance of undertaking restructuring exercises by issuing new shares, even so-called bad companies. That’s the objective of the capital market — you allow companies to issue shares and raise fresh capital, especially when they need it the most,” he says.

At the end of the day, says Liew, it is up to the investors, not the regulators, to decide whether or not a company’s shares are worth subscribing for.

Lin begs to differ. “In the past, when a company became very weak, it could restructure via the conventional method — share consolidation. There was a way to issue new shares when your shares were trading below par value, but that way should not be too easy,” he says.

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