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Firms issue shares under face value

Update: January, 14/2012 - 09:06

 

A worker at Duc Giang Chemicals Co operates machinery on a phosphate production line. Issuing shares below face value is not prohibited by law, but the practice is difficult for small firms to compete against. — VNA/VNS Photo Hoang Hung
HA NOI — If a small company wishes to raise more capital, it can issue additional shares below a face value of VND10,000 (US$0.47). However, this may not be feasible for these Vietnamese companies, according to Nguyen Thi Phuong Chi, FPT Securities Co's deputy head of corporate finance consulting division.

Speaking to the newspaper Dau tu chung khoan (Securities Investment), Chi said while issuing shares under their face value was not prohibited by law, it was difficult for enterprises to do.

Chi warned that companies planning to issue shares under their face value would need shareholder approval for the move, and getting this approval was difficult.

"In addition, a company's share prices will decline due to stock dilution," said Chi.

The director of a firm who asked to remain anonymous, said that for stocks traded at around VND8,000 per share, shares under face value could only be sold if prices fell to VND4,000-5,000. At this price range, companies would not be able to raise much money, and the pressure on the return on equity ratio would become great, he said.

Chi said shareholders looked at the future prospects as well as the business effectiveness of a company when it came to investment decisions.

"As companies issuing shares at below face value are considered as being in trouble, issuing these types of shares will discourage new shareholders," said Chi.

It also often took about two months to execute plans on issuing shares below face value, a period that is likely to see a sharp fall in the company's share prices. Although companies might benefit in terms of raising funds in the short term, small investors would be affected by stock dilution, said Chi.

"The danger is, when prices drop too much, the companies can become the target of take-overs," he said.

In 2008, beverage firm Tribeco (TRI) became the first listed company to issue 20 million shares at VND7,520, and move it survived as the firm's equity was at only VND5.3 billion ($252,400). Since then, no more companies have filed to sell shares lower than face value, according to an official from the State Securities Commission.

According to a semi-annual report from HCM City-based ceramic tile producer Vitaly, the firm's liability last year exceeded its total assets by VND31.3 billion ($1.5 million). Meanwhile, Vitaly is currently trading on the unofficial UPCoM market at only VND1,200 a share. Issuing shares below face value could be seen as a solution for Vitaly.

Although this plan encounters many challenges, it can still be a life buoy for businesses that are on the edge of bankruptcy. If securities authorities ensure clear guidance on issuing shares below face value, troubled enterprises can be saved. — VNS

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