Richard Inder: Scrutiny crucial to confidence

The Unlisted share market was naive to think it could escape the same scrutiny given to those companies listed on the main NZX boards.

Commerce Minister Margaret Wilson's move this week to take the first steps to giving investors in the market the same protections to those listed on the NZX exchanges is the right one.

Unlisted, as it said in a press release this week to mark its one-year anniversary, was created for those "companies whose shares would have otherwise been traded privately or through lawyers or company accountants".

But it looks nothing like this.

The value of 21 companies listed on the Unlisted exchange is about $1 billion. This compares with the $442 million market value of the 23 companies traded on the NZX's small companies board, the NZAX.

Some on Unlisted have wide shareholdings. Selwyn Cushing's New Zealand Rural Property Trust has 3200 unit holders. Sky Line Enterprises, Unlisted's largest company, has a market capitalisation of $220 million, large enough to rank in the top 30 companies on the main board.

These are the characteristics of companies that should be subject to the disciplines of disclosure demanded of companies on the main board. The potential for a small group of investors to take advantage of privileged information at the expense of others is just too great.

At the very least, the market looks like one for those companies who wish to avoid the costs of complying with the disclosure regime of the main board. Allowing this to continue is bound to encourage others to follow suit.

New Zealand's prosperity depends on a securities market with depth and trading standards comparable to those in international finance centres.

Unlisted, if it continued unchecked, would undermine both goals.

It would, however, be unfortunate if it were put out of business by Wilson's move.

Its founders, the wholesale electricity market operator M-Co and 12 other investors, including former NZX chief executive Bill Foster, have brought some transparency to the over-the-counter market, which must encourage investment.

The Government's concern is damage to the integrity and effectiveness of New Zealand securities markets or investor confidence in them.

When it considers this, it looks at comparative regulation; investor perceptions of the market in question; its own rules; its treatment of participants; and finally its size, the number of trades and the volume of trades.

If the current case shows anything it is this: size matters. The government should give more specific guidelines on the characteristics of companies that should be subject to the disclosure regime.

Rural war

Fonterra's and Pyne Gould Guinness' losing control of Williams & Kettle to Craig Norgate's Wrightson does not mean an end to hostilities in the rural services sector. Indeed, it looks like the beginning.

PGG and Fonterra are now so cosy that further steps to link the dairy giant's rural services arm, RD1, are to be expected. Fonterra has made no secret of its desire to quit RD1 and its taking PGG scrip in exchange for the operation does not look out of the question.

The Commerce Commission is also unlikely to stand in the way of more mergers as long as the relative strengths of Wrightson and PGG/RD1 are maintained.

Notwithstanding its recent aggressive stance on Carter Holt Harvey, Telecom and gas distribution, it has already sanctioned similar duopolies in sectors such as food retailing.

Allied Farmers, whose shares have jumped by more than a quarter since last week, is seen as the most likely target.

Wrightson and PGG want to exert more influence over gumboot suppliers, and boost the services they can offer their farmers. Companies are co-operating with the agri-chemical and agri-tech firms on research and development.

The quid pro quo is preferential access to new technology. A bigger company has a much better chance of being on the right side of the transaction.

Rationalisation of the industry also looks inevitable as the new enlarged groups pass on some of their savings to win new customers.