Communication no. 0088305 of 5 October 2016

SUBJECT: Highly dilutive rights issues -Implementation of the rolling model

Over the last few years, various companies listed on the Mercato Telematico Azionario (MTA), a regulated market organised and managed by Borsa Italiana spa (“Borsa Italiana”), have carried out rights issues featuring the issue of a very high number of new shares compared to shares already issued with considerably discounted subscription prices compared to the market prices (so called highly dilutive rights issues). Examples of highly dilutive rights issues are, for instance, the operations launched by Saipem SPA in January 2016, by Banca MPS SPA in 2015 and 2014, by Fondiaria-Sai SPA in 2012, by Seat PG SPA and Tiscali SPA in 2009.

Highly dilutive rights issues feature high volatility in market prices of the shares involved, which typically show high upwards fluctuations at the start of the increase, followed by high downwards fluctuations at the end of the increase, thus affecting the normal price discovery process and generating price anomalies that can mislead investors. This is due to the scarcity of shares that is created during the period of offer of the new shares, which prevents the market dynamics from re-equilibrating the share price movements.

Consob has monitored this phenomenon since it first came to notice and has conducted two public consultations as well as other activity on the subject, and has been monitoring price trends for shares subject to highly dilutive rights issues.

On conclusion of the last consultation (see document: Esiti delle Consultazioni of 28 April 2016) and on the basis of the overriding requirements of market integrity and orderly and efficient conduct of trading, as well as investor protection, Consob decided to promote a technical solution known as the “rolling model”, which consists of making the newly issued shares stemming from the subscription rights available on each day of the rights issue period, from day three (T+2) on, instead of only at the end of the operation, as foreseen under the ordinary model.

This should resolve the problem of scarce availability of shares during the highly dilutive rights issues and should allow market forces and, especially, the work of the arbitrageurs, to re-equilibrate share movements and prevent the price anomalies referred to above.

Moreover, Consob has carried out a cost-benefit analysis, taking into account the value of the price anomalies of the highly dilutive rightsissues and the implementing costs of the rolling model (see the consultation paper published on 7 August 2014), from which results that the rolling model has a positive cost-benefit balance. 

On 27 April 2016 Consob then asked Borsa Italiana, pursuant to Article 73, paragraph 4, of the Legislative Decree (CLF[1]), to proceed with the introduction of the rolling model. Implementation required amendments to the Rules of the Markets organised and managed by Borsa Italiana and the related Instructions. The date for entry into force of the above-mentioned amendments, and therefore also of the rolling model, is expected no later than 15 December 2016.

Against this background, here below we give a summary of the main elements of the rolling model, including some recommendations aimed at intermediaries and issuers involved in managing highly dilutive rights issues, and some details are given for investors obliged to report their net short positions to Consob under the Short Selling Regulation[2].

As shown in the document: “Esiti della Consultazioni” of 28 April 2016, the rolling model is applicable only to highly dilutive rights issues, that is, rights issues featuring a conventional coefficient K[3] with a value, as calculated by Borsa Italiana, equal to or lower than a threshold of 0.3. Borsa Italiana will ensure the market is given prompt notice, with a precise Announcement, of the highly dilutive nature of a rights issue and the consequent application of the rolling model.

Other rights issues, not highly dilutive, will continue to be managed with the ordinary method, with the issue of the new shares done entirely at the end of the operation, since in these rights issues there are no treats to market integrity or to the orderly and efficient conduct of trading or to investor protection, which justify the application of the rolling model.

From a technical point of view, the rolling model makes it possible to exercise subscription rights and receive newly issued shares on each day of the rights issue, starting from day three (day T+2), in accordance with the procedures and within the time limits laid down in the Instructions for the CSD Service for Intermediaries and Issuers of Monte Titoli SPA, and with the contractual conditions agreed, case by case, with one’s intermediary.

In this way the rolling model makes it possible to carry out arbitrage activity[4] between shares and subscription rights from the starting day of the rights issue, as specified below:

1. purchase of subscription rights on the market on the starting day of the rights issue (day T);
2. sale, on the same day T, of a number of shares equal to that of the shares to be received by exercising the rights; such sales make it possible to limit any anomalous price increases that may happen on the market;
3. exercise, on T+2, of subscription rights purchased on day T and receipt of newly issued shares on the same day T+2;
4. use, on T+2, of the newly shares issued in T+2 to satisfy obligations to deliver generated by the sales of shares concluded during day T.

The possibility to carry out arbitrage between shares and subscription rights means it is no longer necessary to suspend the right to early exercise of options negotiated on the IDEM derivatives regulated market for the whole period of the highly dilutive rights issue. This suspension, introduced in January 2016 in order to minimize the price anomalies of highly dilutive rights issue, is therefore deleted from the Rules of the Markets organised and managed by Borsa Italiana.

In cases of highly dilutive rights issues the investor, at the moment of exercising the subscription rights, may ask his intermediary to receive the new shares in the first possible delivery window, instead of waiting for the delivery at the end of the rights issue. By way of example, if the investor exercises a subscription right on day T+6, he may ask for the delivery of the newly issued shares immediately (that is on day T+6 or T+7 depending on the exact time the instructions to exercise are given) or at the end of the rights issue.

On this point, it has to be pointed out, as already widely dealt with in the document: Esiti della Consultazioni of 28 April 2016, that delivery of the new shares before the end of the rights issue may mean the investor losing the right to revoke the subscription under Article 95-bis, paragraph 2, of the CLF.

Consequently, the intermediary, before delivering the newly issued shares, must warn the investor of the consequences regarding loss of the right to revoke that early delivery may lead to; it is also recommended, where early delivery of new shares is chosen, to obtain from non-professional clients a hard copy of acceptance of waiving the right to revoke.

Therefore, in order to avoid the investor inadvertently losing this right to revoke, intermediaries are recommended to provide for delivery of the new shares to the investor at the end of the rights issue, unless expressly requested by the investor to make use of early delivery.

With regard to the Prospectus, it must clearly state the circumstances that the right to revoke, under art. 95-bis, paragraph 2, of the CLF will not be admissible where an event leading to publication of a Supplement to the Prospectus occurs after delivery of the new shares to the investor; particularly, such a circumstance must be placed in evidence in the relevant parts of the Prospectus itself (i.e. Summary Notes, Risk Factors and Informative Notes on financial instruments) and in the Warnings, where they are included.

With regard to the Supplement to the Prospectus, it has to: (i) show the date of the event that led to publication of this Supplement to the Prospectus; (ii) place in evidence the circumstance that the right to revoke under art. 95-bis, paragraph 2, of the CLF will not be admissible for anyone who received shares prior to the above-mentioned event; (iii) as a consequence, show the first settlement date after which the right to revoke is granted, until publication of the said Supplement.

Furthermore, regarding issuers whose share capital increases will be submitted to the rolling model, it is advisable to point out that this model may lead to a day to day variation of the number of shares in circulation, from day three of the capital increase (T+2) onwards until the end of the operation.

In this respect, the Italian Ministry for Economic Development, called on by Consob, with its Opinion no. 222196 of 3 November 2015 and with Circular no. 3692/C of 19 September 2016, established that it is sufficient to deposit with the Italian Companies Register only one certificate of execution of the rights issue and only one last version of the updated articles of association, to be effected within thirty days of the first window for subscription of the new shares, as laid down in Article 2444 of the Italian Civil Code. By so doing, the legal disclosures costs borne by the issuers are kept to a minimum.

Lastly, it is advisable to highlight the investors’ attention to the fact that they must give Consob notice of their net short positions (“NSP”), pursuant to the Short Selling Regulation, on two aspects of the NSP calculation for shares subject to rights issue. These clarifications are valid both for highly dilutive and traditional rights issue.

Firstly, on the numerator side, it should be pointed out that subscription rights are not to be included in the NSP calculation as long positions. The arbitrageur who purchases the subscription rights and sells the shares must therefore notify Consob of the NSP arising from the sales made on the shares when it reaches or passes the threshold of 0.2% of the share capital of the issuer involved. While giving this notification it is advisable to indicate, in the space for “Comments”, that the NSP is supported by positions in subscription rights not included in the notified NSP.

It should be borne in mind that subscription rights can be used to ensure compliance with the prohibition of entering into “naked” short selling, as long as they confer the right to receive the new shares, to an amount equal to or superior to the number of shares sold, before or on the intended settlement date of the sales.

Secondly, on the denominator side, it should be pointed out that the pre-increase capital must be taken into consideration until the issuer announces, where needed pursuant to Article 114 of CLF, an amendment to the number of shares issued. Following this announcement by the issuer, the denominator used in calculating NSP must be increased to include the new shares issued in connection with the rights issue.

For any further explanations regarding how the rolling model functions, please contact Consob, Markets Division, Post-Trading Office, Via G. B. Martini 3, 00198 ROMA or use the e-mail address: post-trading@consob.it.

As provided for in Article 8 of Regulation laying down the procedures for adoption of the regulatory and general enactments passed by Consob with Resolution no. 19654 of 5 July 2016, the rules on the rolling model will be reviewed at least every three years.

THE CHAIRPERSON
Giuseppe Vegas