As the Financial Services Minister Chris Bowen said, Australia is the only major Western nation to have avoided a recession in the worldwide slump. Even though Australia had close financial relationships with Asian countries, it seems that Australia’s economy has not been affected by other crisis countries. Thanks to the nation’s well developed capital market and the unique financial regulation system, investors still feel confident to Australia’s equity market which is the eighth largest in the world. This report contains two tasks. The first task of this report was to investigate the method National Australia Bank (NAB) used in raising funds, advantages and disadvantages of other alternatives will also be commented. Moreover, the report presents the reason of a company preferring to raise equity other than debt. The other task of the report was focused on the role of four corporate regulators in Australia: Australian Competition and Consumer Commission (ACCC), Australian Securities and Investments Commission (ASIC), Australian Prudential Regulation Authority (APRA) and Reserve Bank of Australia (RBA). Finally, a recent event – ACCC opposed NAB’s proposed acquisition of AXA Asia Pacific Holdings (AXA) – provided an example in which the regulator intervened a company’s inappropriate action. Task 1 – NAB’s Capital Raise 6
Since January 2009, National Australia Bank (NAB), which is one of the biggest bank in Australia and listed public company on ASX, raised $2.75 billion equity to strengthen its balance sheet as bad debt continue to rise (NeilMc, 2009). For strengthen the balance sheet, NAB had increased the provision for doubtful debt, as can be seen that in the 2009 financial report increased from $2246 million to $3471 million (NAB 2009).
Equity refers to ordinary shares issued by a company which represent an ownership position for the shareholder and the shareholder has an entitlement to receive a share of any distribution of profits, which calls dividends. In the stock market, NAB raise the equity by using Initial Public Offering (IPO), which is the first round of equity that a company issues on a stock exchange. As the result of IPO, shareholders gain part ownership in an entity and the company can raise money. Here, the NAB raise equity with the method of placement, which means NAB funding through securities sold without an IPO and not sell to the public, instead, directly to individuals and small groups of investors. Such offerings do not need to be registered with the Securities and Exchange Commission (SEC) and are exempt from the usual reporting requirements. Private placements are generally considered a cost-effective way capital without “going public” through an initial public offering. A private placement of equity or debt has been a quicker, less expensive way to raise a limited amount of capital from a limited number of investors. A private placement has been appropriate when a company still lacks the financial strength or reputation to appeal to a broad base of investors and cannot afford the expense of a public offering. Especially in situation of affecting by the global financial crisis, reputation of the bank in public has been affected. Therefore, using placement to raise equity has its own advantage. However, there are some disadvantages to use the placement method to raise equity. For example, placements are often sold at a deep discount below their market value, “NAB says it plans to raise at least $2 billion by way of a fully underwritten institutional equity placement at a 10 per cent discount to its last traded price of $23.58” (NeilMc, 2009). Furthermore, the investors may want compensation for taking high risk securities especially in that situation after the global financial crisis.
In addition, other main methods of raising equity includes: a right issue, takeover issues and dividend reinvestment schemes. Right issue refers to an offer made to existing shareholders to purchase additional ordinary share in the corporation (2007 Viney). And also , right issue is a pro-rata offer , which means a proportional offer to buy further securities based on the investor’s current share holding, for example-1:10 offer gives the shareholders the right to purchase one new share for every 10 shares held. Furthermore, if the company wants to raise as much as funds, maybe deep discount on the price of share is required. Right issue has its own advantages, for example, a trouble company can use right issue to pay down the debt, especially when they unable to borrow more money. However, the shortcoming of the right issue is that more lengthy process and does not provide NAB or shareholders with the same degree of flexibility in volatile market situations. Furthermore , not all the shareholder are willing to purchase the additional share in the recession economic period despite of that can purchase in a discount price. Also, the value of each share will be diluted as a result of the increased number of shares issued. Therefore, NAB may not successfully in collecting funds initially required. Including a Share Purchase Plan for retail investors was considered the best combination to successfully raise capital and recognise the interests of retail shareholders to participate while minimising the risk for NAB in successfully completing a capital raising.
The other method to raise capital is debt finance instruments, which represent a contractual claim against an issuer to make specified payments, such as periodic interest payments and principal repayments over a defined period (Viney 2007). There are various advantages to use debt instrument .for example, the lender is entitled only to repayment of the principal of the loan plus interest, has no direct claim on future profits of the business, therefore the greater portion of reward than selling stock to investor. Furthermore, interest on the debt can be deducted on the company’s tax return, which can lower the actual cost of the loan to the company. Despite of this, NAB still had chosen to raise capital by equity instrument instead of debt instrument. In the recession period, no one dare to say their company must be success in next stage, increase debt means increase the debt-equty ratio or leverage, the larger a company’s debt-equity ratio or leverage, the more risky the company is considered by lenders and investors. Task 2 – Discuss Role Of Company Regulators 6
There are some of regulators in Australia such as ASIC, ACCC, APRA, RBA, ASX etc. This is the six mainly mission includes monitoring the market; which is monitor a range of sources to detect unsafe goods such as injury and death information, overseas trends, products in the market, product analysis, and consumer complaints. Secondly it can reflect on Encouraging safe practices; which is negotiating product removal, removingA unsafe goods, Promoting good product safety management, making consumers aware of product hazards. Thirdly, working out ways to address hazards can be expressed in product analysis, working with technical experts, working with suppliers and industry associations, educating suppliers and consumers about product safety, issuing warning notices, creating regulations where necessary.
Enforcing regulations, which is respond to breaches of product safety bans and standards through a range of enforcement tools, including civil and criminal legal action and monetary penalties. The last, working with other regulators, Australian and overseas regulators of general consumer products and specific products often work together to share intelligence, monitor issues and resolve product safety issues. However, there is some recognition when the regulators are closer looked. Australian regulatory structure:
Australian Competition and Consumer Commission’s the main purpose of regulate competition policy; promotes competition and fair trade in the market place to benefit consumers, business and the community. It also regulates national infrastructure industries. Its primary responsibility is to ensure that individuals and businesses comply with the Commonwealth’s competition, fair trading and consumer protection laws.
Reserve Bank of Australia, it is aim to System stability and payments system; it conducts monetary policy, works to maintain a strong financial system and issues the nation’s currency. As well as being a policy-making body, the Reserve Bank provides selected banking and registry services to a range of Australian government agencies and to a number of overseas central banks and official institutions. It also manages Australia’s gold and foreign exchange reserves.
Australian Prudential Regulation Authority influence on prudential regulation and supervision of deposit-taking institutions; APRA play a critical role in protecting the financial well-being of the Australian community: as a result, high standards are required in everything we do. In our work and in our interactions with others, we value and seek to demonstrate
Australian Securities and Investments Commission’s regulation impact market integrity and consumer protection; ASIC regulate Australian companies, financial markets, financial services organisations and professionals who deal and advise in investments, superannuation, insurance, deposit taking and credit.
These corporate regulators might intervene in certain circumstances if a company acted inappropriate. This report provided a recent instance: ACCC intervened NAB’s takeover offer on AXA Asia Pacific Holdings (AXA). After four month’s extensively investigation on proposals on AXA, which included wide range of public opinions through market consultation, ACCC opposed NAB’s proposed $14 billion acquisition of AXA on 19th April 2010. However, ACCC permits the other buyer AMP Ltd. put its offer back to schedule. This result is surprising, because many people thought NAB’s takeover on AXA is on the condition of selling some of its assets, actually NAB already reached an agreement on selling assets. The ACCC chairman Graeme Samuel provided the reason: considering the retail investment platforms increasing important nowadays, a substantial lessening of competition in the retail investment platforms market with complex investment needs would be caused by a merger between NAB and AXA. Moreover, outside competitors would find it hard to compete in the market as the company’s customer data increasing. On the other side, ACCC did not worry about AMP’s takeover offer on AXA, as AMP would not gain unfair competition superiority on the merger, because AMP does not own its own wrap platform which restricts its ability to compete aggressively. Meanwhile, NAB has its own platforms MLC and Navigator, and AXA owns AXA North platform. Furthermore, some people thought ACCC worried about the market dominant position of large-scale bank like NAB, thus it tended to reject most integrated trades the big four banks involves. Nevertheless, Samuel denied this view in his interview with Dow Jones Newswires. He pointed out that ACCC’s action on this affair was based on rules of section 50 in Trades Practices Act. Section 50 lists prohibitions of acquisitions that would result in a substantial lessening of competition. On 1st June, AXA APH and its French parent company AXA SA agreed on extended the takeover deadline to January of 2012, as a result NAB has more time to alter its takeover offer. Up to now, ACCC is still considering NAB’s revised offer in which it plans to sell AXA APH’s North platform to IOOFA in order to alleviate its competition concerns. ACCC will announce the decision on 9th September 2012. Conclusion 0.25 National Australia Bank (NAB) raised $2.75 billion equity and its debt increased from $2246 million to $3471 million since 2009. The capital raise method NAB used is Initial Public Offering (IPO). In addition, other main methods of raising equity includes: a right issue, takeover issues and dividend reinvestment schemes. NAB preferred to raise capital by equity instrument rather than debt is based on risk concern. There are some of regulators in Australia such as ASIC, ACCC, APRA, RBA, ASX etc. Different corporate regulators have different roles, they function integrated to provide effectiveness and efficiency to the financial market. These corporate regulators intervene in certain circumstances if a company acted inappropriate, for example: ACCC intervened NAB’s takeover offer on AXA Asia Pacific Holdings (AXA) in April 2010. Appendices 0.25
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