Through no fault of its own, the Commonwealth Bank has continued the unfortunate tradition of retail shareholders doing worse than big institutions in capital raisings. And the foreign investment banks which under-wrote the record $5-billion raising, UBS and Morgan Stanley, also managed to make a last-minute timing change that worsened the outcome but set a precedent for an important reform. Worried about a dive on Wall Street on Friday night, UBS and Morgan Stanley persuaded the CBA board to suspend trading and agree to a fast sale of the $1.5 billion retail shortfall on Friday, rather than today as had been previously announced. The statement claimed this was due to “market conditions”. CBA today announced it had cleared the $1.5 billion shortfall at $73.50, a $2 premium to the $71.50 entitlement offer price, and a 2.17% discount to Thursday night’s closing price of $75.13. Despite the rush, this was a marginally better outcome than the 2.23% discount NAB achieved when it sold a $900 million parcel of shares from its retail shortfall in June. The Dow Jones Industrial Average ended up jumping 102.69 points, or 0.63%, to close at 16,433 on Friday night, which partly explains why CBA shares settled marginally higher in morning trade. CBA shares are now trading down 1% for the day (as at midday): minus 88 cents to $74.25. CBA used the fairest form of capital raising (a PAITREO structure) and was, to some extent, mugged by market volatility as it was priced at a skinny 10% discount to market, and then got hit by an 8% drop in the market during the offer period. Bringing forward the retail auction highlights, at one level, how little interest under-writing investment banks have in the financial affairs of retail investors. They don’t care that more than 500,000 CBA retail shareholders shunned the 1-for-23 offer at $71.50 and will only receive $2 for their rights on September 22. It doesn’t change their $67 million in fees, and they have no incentive to try to maximise the compensation to retail investors. Non-participating institutional investors have already received their much better $6.50 per share in compensation, which was paid on August 25. News Corp columnist Terry McCrann has been covering the capital raisings story more aggressively and comprehensively than anyone in recent times. He ripped into the ANZ and CBA boards in The Weekend Australian, although it was a little unfair to both banks. For starters, ANZ copped a bollocking for doing a placement, but in hindsight this worked out better for retail investors because those circa 70,000 shareholders who participated in the uncapped $720 million share purchase plan (SPP) paid just $26.50, a handy 14% discount to the $30.95 paid by institutions in the earlier $2.5 billion placement. McCrann is right that non-participating ANZ retail investors have been diluted, but that’s fine if someone wants to come along and pay a premium for new shares, which is what hindsight now tells us the participants in the ANZ placement have done. It might have been easier for the CBA board to follow the lead of Westpac and ride out the APRA demands for higher capital reserves. Alternatively, the board could also have just taken a one-off dividend holiday rather than paying out $3.6 billion, as was suggested in this Crikey piece back in August. In what is an unprecedented capital merry-go-round, the biggest dividend in Australian history will be paid on October 1, just seven days after institutions have given the bank $1.5 billion from the biggest retail shortfall offer in history. Given that the majority of entitlement offers, including the preferred PAITREO model, are tending to lead to inferior outcomes for retail investors, we need one final tweak to the system. If market conditions are buoyant, which they normally are when a capital raising is launched, why not pre-sell some of the anticipated retail shortfall into the institutional shortfall auction, which is typically only about 5% of the available shares? For instance, if CBA had sold an extra $500 million worth of shares into its $230 million institutional shortfall offer, the compensation figure would have held very close to $6.50 and then the final shortfall auction would have been for $1 billion shares rather than $1.5 billion and the payout would have been $3.33 rather than $2. If, by some fluke, an issuer pre-sold more shares than were left unsubscribed by retail investors, these could just be treated like any other institutional placement that is twinned with an entitlement offer. The biggest problem here is that no one has an incentive to look after retail investors. Investment banks are paid to get market timing issues right. I’d happily let boards pay them a 5% commission on the retail bookbuild premium, whilst also giving them flexibility to determine the timing of when these shares are sold. CBA deserves credit for allowing 12 days of market trading for the retail rights for the monster $2.9 billion issue. Turnover equated to 15.5% of the available rights and these cleared at an average $4.85. Those who got out on market did better than those who waited until the end, but at least everyone was given that option.