Shun Tak Holdings' rights issue has highlighted the loophole that allows holders of odd-lot shares to benefit from highly discounted issues. Odd lots are those that have less than the number of shares in a normal lot.
Holders of odd lots have long operated in the market. Nicknamed the 'odd-lot gang', they hold just one or five shares in a company to take advantage of a discounted offering.
Brokers have called for a rule change to plug the loophole to ensure market fairness but a regulatory source said companies could simply change the practice.
In January, Shun Tak announced an issue of three rights shares for every eight held at HK$2.02 each, representing a discount of 35.7 per cent to the stock's price before the offer.
As per market practice, odd-lot shareholders can subscribe for an equivalent number of shares as those who hold a normal lot. This means a shareholder who has one lot of 2,000 shares and those with odd lots of one share or five shares can subscribe for 750 new shares for each lot held.
The odd-lot investors usually split up their one lot of 2,000 shares into odd lots of one or five shares each to enable them to submit multiple applications for rights shares.
Therefore if one lot of 2,000 shares is split into 400 odd-lots of five shares each, the holder can apply for a total of 300,000 right shares instead of only 750 if the original 2,000 shares are held as one lot. Similarly, one can apply for 1.5 million shares if the normal lot is split into 2,000 odd-lots of one share each.
After the rights issue announcement, the number of Shun Tak shareholders soared to 13,000 from fewer than 1,500.
Shun Tak's rights issue was oversubscribed by 18 times to more than HK$30 billion. Most applications were from odd-lot holders, who subscribed for 14.67 billion shares worth HK$29.63 billion. Some investors submitted hundreds of applications.
Brokers said the scheme would allow the odd-lot gang to get more discounted shares and more profits when the shares were sold on the market.
However, such hopes were dashed after Shun Tak last Thursday said it 'noted unusual patterns of excess applications' and believed that certain applications intended to 'abuse the mechanism' for the topping up of odd-lot shareholders.
It said it would allocate the rights shares on 'a fair and equitable basis' and had accepted only 696 odd-lot investors' applications. The remaining 13.92 million applications from odd-lot investors would be allotted 0.07 to 1.85 per cent of the amount of shares applied.
'The Securities and Futures Commission should change the rule to ban multiple application of rights issues from the same investor,' said Kenny Lee Yiu-sun, the chief executive of First China Securities. 'In initial public offerings, if one submits multiple applications, he will face criminal prosecution and even jail.
'The same approach should be imposed on rights issue to ensure a fair market.'