RANG ATIRA SECTION 36 OF THE SECURITIES MARKET ACT - UNLISTED

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1 RANG ATIRA RANGATIRA LIMITED, LEVEL 10, SOLNET HOUSE, 70 THE TERRACE, PO BOX 804, WELLINGTON 6015, NEW ZEALAND TEL: , FAX: March 2005 Minister of Commerce Parliament Buildings WELLINGTON Dear Minister SECTION 36 OF THE SECURITIES MARKET ACT - UNLISTED Introduction We received a letter from the Hon Margaret Wilson, Minister of Commerce, dated 15 December 2004 inviting us to make written submissions about her concerns relating to the current status of Unlisted with respect to the Securities Markets Act. Her contention is that: (a) (b) the integrity and effectiveness of the securities markets in New Zealand; or the confidence of investors in securities markets in New Zealand is likely to be detrimentally affected by section 368 not applying to Unlisted. Major reasons argued in support of this opinion are as follows: 1. Size and nature of unlisted 2. Comparative international regulation 3. Regulatory difference and arbitrage 4. Potential for confusion Our submission against the Minister s proposal to declare Unlisted to be subject to the Security Markets Act is as follows. Rangatira Rangatira is incorporated in New Zealand under the Companies Act It was first incorporated in December As at 30 November 2004 Rangatira had 233 shareholders. 51% of its ordinary shares are held by the JR McKenzie Trust, a charitable organisation originally established in A further 10% (approximately) of the shares are held by other community and charitable organisations. The remaining 39% of shares are held by companies and private shareholders.

2 2 Rangatira s shareholders tend to be long term investors, consistent with Rangatira s own investment philosophy. While Rangatira s ordinary shares are divided between 67% A shares and 33% B shares, there is little difference between these two categories. The difference is only in voting rights, originally intended to differentiate between charitable and non-charitable shareholders. Over 50% of Rangatira s funds are invested in private equity and this provides a valuable service to the New Zealand economy by supporting and enabling small and medium sized businesses to grow. Our motto is investing in business for growth. We do this very successfully. Trading in Rangatira s Shares Trading in Rangatira shares is infrequent. In the calendar year 2004, only around 150,000 shares changed hands, i.e. less than 1% of the Company s total shares. The majority of trading in Rangatira shares during 2004 occurred outside the Unlisted facility. These trades were done between private individuals and would not have been subject to the Securities Market Act in any event. Rangatira understands that only about 20 shareholders used the Unlisted facility to buy Rangatira shares in A majority of Rangatira s shareholders tend to be long term investors. While they only trade their shares infrequently, many shareholders have an ongoing interest in monitoring the value of their holding and general trading in the shares. Trading in Rangatira shares was originally done in-house by the Company Secretary. A few years ago, Rangatira migrated to the NZX s grey market facility. However, in 2004 the NZX unilaterally decided to discontinue this service. Rangatira currently uses The Market Company Ltd s Unlisted service ( Unlisted ) as a trading platform and to inform and assist its shareholders on share trading matters. Rangatira s Requirements for a Share Trading Information Platform Ready access for all interested parties to public information released by Rangatira. Record of recent trading in Rangatira s shares (both A and B shares) including volumes and prices for trades done through Unlisted and outside of Unlisted.. Access for sharebrokers to obtain buyer/seller information and update records directly themselves. The service provider to be independent of Rangatira.

3 3 Ability for all interested parties to access the information electronically through the web. Transparency, professionalism and cost effectiveness in providing the service. Possible Options for a Share Trading Information Platform The Unlisted service meets all of Rangatira s requirements and we are not aware of any alternative service available that even approaches this quality of service. This is our preferred option. In-house trading with the Company Secretary maintaining a list of buyers and sellers. In-house trading has the advantage of being a low cost solution. We estimate the costs are similar to Unlisted. However, there are several disadvantages for existing and prospective shareholders. In particular, information on recent share trading, contact details for brokers who manage the trading of Rangatira s shares, and details of public disclosures by Rangatira are not available from one readily available source. This would most likely be Rangatira s second best option. An NZSX listing would result in compliance costs which are significant for a small company like Rangatira we have only three full-time and one part-time employees. A majority of Rangatira shareholders do not require the ability to readily trade their shares and would not support the increased costs associated with an NZX listing. This is not a viable option. The NZAX facility is designed for growth companies requiring significant amounts of capital. Rangatira does not fit this description and could not justify the compliance costs. This is not a viable option. Overseas sharemarkets. We have been approached in the past to list on over the counter sharemarkets in other countries. These markets offer the same services as Unlisted. NZ sharebrokers have no difficulty in trading shares on overseas sharemarkets and could easily provide this service to Rangatira shareholders. This is a possible option if the Unlisted facility is no longer available on the current basis. Comments on the Minister s Notice Size and Nature of Unlisted The Minister comments on the size and presence of Unlisted by comparing it with the NZAX. The $880m combined market capitalisation of the companies on Unlisted is small by comparison with the National GDP of $118,093m and the NZSX with combined market capitalisation of $52,022m. The Minister s comparison with NZAX is a reflection on the lack of success of the NZAX rather than the relative success of Unlisted. The two outcomes are not related. NZAX would have been no more successful in the absence of Unlisted

4 4 the reason for its lack of success is that most companies with market capitalisation of less than $100m cannot justify the costs and constraints of the Securities Act and have therefore avoided it by not joining the NZAX or NZSX. If Unlisted is also required to comply with the Securities Market Act, we believe most companies with market capitalisation of less than $100m will then avoid that facility and find some alternative means of managing their share trading. Comparative International Regulation We are surprised that the Minister considers all overseas markets are subject to regulations similar to NZ s Securities Markets Act. In our experience the primary sharemarkets overseas are regulated, however, the secondary markets appear to have little to no regulation. These views have been formed from representations made to us. Without Unlisted, which could happen if it is made subject to the Securities Market Act, NZ would be almost unique in the world financial markets in having only one provider of financial markets (NZX). This monopoly position would be clearly undesirable and that risk should be closely reviewed by the Ministry of Commerce. Regulatory Difference and Arbitrage The Minister states that most if not all of the companies operating on Unlisted are potential candidates for the NZAX or, for that matter, the NZSX. Realistically, Rangatira is not a potential candidate for either the NZAX or the NZSX. Neither of these provides the service that Rangatira and its shareholders require. We believe most if not all of the other companies on Unlisted are in a similar position to Rangatira. Potential for Confusion Investors in the NZ market are offered an array of investments that are not covered by the Securities Market Act. These include shares in private companies, shares in co-operatives and shares in overseas companies. It is incomprehensible that the Minister should focus on Unlisted when these other areas are much larger and with far greater risk to investors. The Minister has suggested that international investors may not understand that Unlisted is not registered as an exchange. International investors well understand the need to be cautious when investing on a global basis and that is fundamental to their risk management procedures. The New Zealand Government should have no obligation to protect these investors from making uninformed decisions. Recently, we have seen a proliferation of investment in NZ companies by overseas private equity funds. These funds are investing in private NZ companies and clearly see no need for regulatory protection.

5 5 Access Brokerage Access Brokerage is not a useful example of what can go wrong in Unlisted. It is an example of what did go wrong in a registered stock exchange environment operating under the Securities Market Act. It is an example of the inadequacies of controls and information flows through the NZX models, not the Unlisted model. It is interesting to note that the customers of Access were saved by the BNZ, a private company. The investors received no comfort or protection from the exchange (NZX) or the regulator (Ministry of Commerce). Conclusion If the Minister declares that Section 36B of the Securities Market Act applies to the person operating Unlisted, Rangatira will have to review its options for the future. Rangatira s course of action will depend upon the full range of options available, but for reasons of cost, compliance and convenience, it is highly unlikely that Rangatira will chose to use any service that is subject to the Securities Market Act. Yours faithfully IS Frame Chief Executive