George Long, a Hong Kong-based fund manager, says he won't accept the government's invitation to invest without restriction in Taiwan's US$340 billion stock market until regulators stop sales of securities that favor local investors.
EVA Airways Corp (長榮航空) and Optimax Technology Corp (力特光電) were among companies that sold more than NT$10 billion (US$291 million) of bonds this year that can be swapped for shares at discounts of as much as 43 per-cent. The securities weren't offered overseas and were in some cases sold to company employees.
Such sales may hinder government's plan to use the lifting of a US$3 billion cap on investments by each overseas fund to revive the economy, effective yesterday.
"These issues are grossly mis-priced, destroy shareholder value and are not distributed fairly," said Long, managing director of Long Investment Management Ltd.
"We can't get allocation of domestic issues. Taiwanese companies show a total disregard for their shareholders," he said.
Optimax, which makes components for liquid-crystal displays, sold NT$1.5 billion of bonds in July. The securities don't pay interest and can be converted into the company's shares at NT34.7 each, a 43 percent discount to the stock's July 8 closing price.
Optimax shares rose 5.6 percent to NT$103.5, giving bondholders a potential profit of almost NT$69 a share.
"All of our staff participated" in the sale, said Scott Chuang (莊盛榮), a spokesman for Optimax.
"About 5 percent of the offer was bought by the underwriters and the rest was bought by outside investors and insiders," Chuang said.
It's this participation by company insiders that has some overseas investors crying foul.
"It's an open secret that major shareholders in Taiwan are often investors in their own issues," said Peter Kurz, who has worked in Taiwan's securities industry for 15 years and is chief executive of Insight Pacific Investment Research (
"Getting Taiwanese companies to focus on what's best for the company and not a linked individual remains important and dif-ficult," Kurz said.
Regulators say the process of selling securities rather than mis-pricing is to blame for the large discounts.
"It can take weeks for a company to meet all the regulations between pricing the bonds and selling them, so it leaves room for the shares to rise and the discount to increase," said Sam Chen, a section chief at the Securities and Futures Commission.
"We are concerned about dis-counts that are too big. Our goal is reduce the time between pricing and selling to one day," he said.
Commission Vice Chairman Wu Tang-Chieh (吳當傑) acknowledged that some shareholders are being placed at a disadvantage.
"We are reviewing the regulations with a view to streamlining them," he said.
Kurz said mispricing by investment banks that arrange the convertible bond sales, not bureaucracy, is to blame. The banks are required by regulators to participate in the sale and so profit from any discounts.
"Being a hybrid product, it's very easy to misprice," Kurz said. "Who is to say what the right price is. It's accepted practice in Taiwan, so not only have you got corrupted management but also corrupted investment banks."
The domestic sales are in contrast to overseas offerings by Taiwanese companies, which are typically priced at a premium to the share price.
Chi Mei Optoelectronics Corp (
"Companies here have one rule for overseas shareholders and another for domestic share-holders," Kurz said. "The regulations needed to level the playing field are not enforced."
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