Everything You Need to Know About Private Placement

Have you ever been relaxing while scrolling through your stock portfolio, when suddenly a notification pops up on the Bursa app: "Proposed Private Placement of up to 10% of the total number of issued shares"?

At that moment, your heart starts racing. "Oh no, is my stock getting diluted? Is the price going to crash or rally?"

Stay calm. Private placement is not something you should blindly fear. If you understand how it works, it is actually an important signal about where the company is heading.

Let us break down this topic thoroughly.

What Exactly Is a Private Placement?

In short, a Private Placement is a method for companies listed on Bursa Malaysia to raise capital by selling new shares to selected investors.

The keyword here is "Selected". Unlike a Public Issue or Rights Issue (where everyone can buy), a Private Placement is like an invitation to an exclusive event. Only institutional investors, government agencies, or VVIP individuals with "deep pockets" (sophisticated investors) are typically invited.

Why Don''t Companies Just Borrow From the Bank?

You might be thinking, "Why go through the trouble of issuing new shares? Just get a bank loan."

In the corporate world, borrowing from banks means the company has to pay interest. When the economy is uncertain or interest rates are high, bank debt can become a burden. With a Private Placement, the company receives capital without having to repay it and without any monthly interest commitments.

Why Do Companies Choose the "Private Placement" Route?

There are several key reasons why company management prefers this method, especially in a fast-moving market like this year:

1. Speed to Market: Conducting a Rights Issue takes months because it requires preparing a prospectus and getting approvals from multiple parties. A Private Placement can be completed in just a few weeks.

2. Lower Costs: No need to hire expensive underwriters or print prospectus books as thick as a dictionary.

3. Attracting Strategic Investors: Sometimes, companies are not just after money. They want "prestige". For example, a technology company successfully attracts interest from a major overseas fund. The presence of such large investors boosts the company''s credibility in the market.

Regulations You Need to Know (Bursa & SC)

In Malaysia, we have strict regulations to prevent companies from freely "printing" new shares to the detriment of small investors.

• General Mandate: Typically, at every Annual General Meeting (AGM), shareholders grant a mandate to directors to issue up to 10% of new shares without needing further approval. (Note: Bursa sometimes allows up to 20% for a specific period as an economic recovery measure).

• Who Are These Investors?: According to the Capital Markets and Services Act 2007 (CMSA), they must fall under the category of Sophisticated Investors. These are not ordinary individuals — typically people with net assets exceeding RM3 million or a certain annual income threshold.

• Price Discount: Placement shares are usually sold at a discount, but the discount cannot exceed 10% of the 5-day volume-weighted average price (5-day VWAP).

Difference: Private Placement vs. Rights Issue

Many retail investors confuse these two. Let us look at the key differences:

The Retail Investor''s Dilemma: Good News or Bad News?

This is the most important section for you. When you see a Private Placement announcement, do not immediately hit the sell button. Analyse the impact first.

1. Negative Effects (The Bad)

• Share Dilution: Imagine you have a pizza cut into 8 slices. Now, the company cuts a pizza of the same size into 10 slices. Your portion becomes smaller, right? This is dilution. Your ownership percentage decreases.

• Earnings Per Share (EPS) Drops: Because the total number of shares has increased, the company''s profits must be divided among more shares. This can make the stock appear "expensive" on a fundamental basis.

2. Positive Effects (The Good)

• Opportunity for Company Expansion: If the company uses the funds to purchase new machinery, enter new markets, or conduct R&D for a game-changing product, this is very positive news for the long term.

• Vote of Confidence: If the incoming investor is a reputable institution, it signals that the "smart money" believes in the company''s future. Typically, the share price will rally towards the price paid by these large investors.

If you would like to learn more details about other corporate exercises such as bonus issues, share splits, share consolidations and more, read on:
Complete Guide to Corporate Exercises on Bursa Malaysia: What Investors Need to Know

Checklist: How to Evaluate a "Healthy" Private Placement

Before you make a decision, ask these 3 questions:

1. What will the money be used for? Read the Utilization of Proceeds section. If it is solely for "Working Capital", that is rather uninspiring. But if it is for an "Acquisition" or "Capital Expenditure (CAPEX)", that is exciting!

2. Who is the investor? If the announcement does not mention a name, it is usually a local investor. But if a big name appears, brace yourself for a rally.

3. What is the price? If the placement price is very close to the market price (small discount), it means the new investor is highly confident. If they take the full 10% discount, they may simply be looking for a quick gain.

Conclusion

Private Placement is a neutral financial tool. It is not necessarily harmful, and not necessarily beneficial. What makes the difference is the company''s intention and who the investor behind it is.

As a savvy retail investor, our job is not to complain about dilution, but to assess whether the new capital will make the company''s "pizza" much bigger in the future.

Why not start learning and investing in stocks on Bursa Malaysia yourself? If you are still a complete beginner and do not know how to start, you can begin by opening a CDS account under Mahersaham. Tuan Maher is a registered dealer''s representative (remisier) under broker Mplus.

If you are interested in opening a CDS account, click here: OPEN A CDS ACCOUNT