Derek Pain: Democracy in action is such a refreshing thing, even if it isn't fair to all

No Pain, No Gain
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The Independent Online

I have often condemned private share placings as inequable exercises that disadvantage small shareholders and shame the City. Invariably, only a privileged few, including directors, are invited to buy the new shares, often well below the then ruling stock market price.

It can be a highly lucrative exercise for those who take part. But the vast majority of shareholders are left out in the cold, merely envious onlookers.

So I applaud the recent move by little Manx Financial, running Conister, the Isle of Man's independent bank, which celebrates its 75th anniversary this year. The company needed to raise £1.9m. It was unable to conduct a private placing and decided to launch a one-for-three open offer at 9p a share. Small shareholders, deemed as those with less than 0.5 per cent of the capital, were given priority. The issue was comfortably oversubscribed. And the whole exercise – in effect a rights issue – cost about £90,000, demolishing claims that such cash raising excursions are too expensive.

Although the Manx exercise was not expensive, it did take longer to complete than most placings. The whole operation lasted more than eight weeks, although a mix up at the company's registrars prolonged the offer by some two weeks. Defenders of placings say they are the cheapest and quickest method of raising cash. Manx, headed by the entrepreneur Jim Mellon, is one company prepared to consider small shareholders and has struck a blow for their welfare. Its experience underlines that only businesses in a desperate rush to raise extra cash can justify adopting the placing method rather than open-to-all rights issues or open offers.

It could be argued that placings allow companies to reduce the size of their shareholder bases and consequently save cash. I recall some directors taking such a dislike to modest investments that they attempted to block or buy them out on the pretence that they increased the bill for maintaining share registers. But the stock market is supposed to be a democracy with equal rights for all. I realise that is not strictly true; the machinations in the City and the influence of major investors make a nonsense of any suggestion of equality. Still, placings are a blatant example of ingrained favouritism.

My imagination could be running riot but I get the impression that nowadays we are witnessing much sharper share movements, with no immediately apparent explanations. Maybe it is a reflection of the tense atmosphere that appears to exist in the stock market. It could also indicate that insider trading is more prevalent than ever. Unexplained swings are particularly frequent among small caps. Yet the fringe Plus Quoted market does not often feature wild gyrations. It enjoys something of a comatose reputation. I have discussed the problems facing the owner, Plus Markets Group, on a number of occasions. Possibilities that must be considered are that a sale of the Plus Quoted market occurs; or, calamitously, that it is discontinued.

I gather vague talks between PMG shareholders – and other interested parties – have taken place about the future of Plus Quoted. Quite unintentionally, the London Stock Exchange has provided an escape route for any disillusioned constituent. Under pressure from Brussels, the LSE has been forced to introduce more relaxed requirements for fully-listed companies. Already one Plus member, Aviation, is contemplating taking advantage of the new rules. Its shares have been on Plus for nearly four years and are one of the market's success stories, more than doubling to 58p in the past year. The company, which leases aircraft to airlines, is capitalised at £14.5m.

The LSE's junior market – the Alternative Investment Market (AIM) – has attracted three Plus shares in past weeks and could well win more converts. Another possible refuge for Plus constituents is the Channel Islands Stock Exchange, which handles approaching 200 securities. And there is also the JP Jenkins market for unquoted shares. It contains more than 30 constituents, ranging from Convivial London Pubs, with eight outlets, to Sheffield United Football Club. The Jenkins exercise has benefited from Aim delistings.

I don't think Plus Quoted will disappear. Despite heavy losses, PMG is not short of cash with, at the last count, £10.7m in the bank. It is striving – I think successfully – to recapture its old exuberance but its low share price of about 2p indicates City scepticism.

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