TWO letters have been published in BT over the past week dealing with rights issues and the role of the Singapore Exchange (SGX) when approving such exercises.

The first on April 18 raised concerns relating to China Paper's March 30 rights issue - concerns that the company has since answered in a comprehensive reply on SGX's website.

The second letter yesterday referred to a rights issue by another S-chip last year that was subsequently blocked by the authorities after objections were raised.

Both writers called for greater scrutiny by SGX because of the chance that rights issues could be used to intentionally depress share prices, thus making privatisations cheaper for controlling shareholders.

First, assuming that everyone subscribes to a rights offer (usually pegged at a discount to the prevailing market price to make it attractive) and the market then makes the correct ex-rights adjustment, shareholders should be no worse off after the exercise is completed because the value of their total shareholdings would remain proportionately unchanged.

In theory then, and assuming an efficient market, any post-rights privatisation offer that is made at the prevailing market price at the time should not be overly detrimental to shareholders. Furthermore, unhappy shareholders who don't want to pay for the rights can always sell them during the "nil-paid" trading period, which is usually about one week.

Again, assuming the market correctly prices the nil-paids, these shareholders should end up in a similar position to those who did take up the new shares - that is, with no major loss in their investment.

Finally, if the market operates as it should, then the company's market capitalisation remains relatively unchanged pre- and post-rights. So any privatisation outlay by controlling shareholders would be roughly the same, either way.

But it is not just the Exchange that should examine the reasons why companies are raising capital; the entire market machinery that comprises underwriters, bankers, lawyers, shareholders and auditors should do so too.

In a disclosure-based regime, all these players are responsible for ensuring good faith when companies go hat in hand to the public for money, especially in a low-interest rate environment in which banks are eager to lend.

Having said that, though, there are valid concerns surrounding rights issues that the Exchange should note. These assume greater significance when penny stock fever is running as high as it is and the likelihood is very high that many firms with low absolute share prices will try to capitalise on the rally to raise capital.

Perhaps the most important area is frequency. There are companies which repeatedly tap their shareholders for funds in a short space of time - something that's not only annoying but that also should raise regulatory antennae.

SGX is probably reluctant to be seen intervening too often in company affairs. It does, however, have a duty to preserve fairness and ensure shareholders are not exploited. Since a balance has to be struck, it should be via enhanced disclosure - that is, SGX could require companies that call for a rights issue, say, within six months or a year of a similar exercise to explain themselves to their shareholders in greater detail than otherwise required.

Rights are effectively mini- IPOs because they aim to tap the public for money, and so they should be subject to the same stringent standards that new listings have to satisfy when they enter the public domain.

There should also be a full accounting of how the previous lot of funds was used, possibly endorsed by the independent directors or board with an accompanying comment on whether the money was properly and profitably employed.

For ease of understanding, the breakdown should be in terms of each dollar invested by the shareholder, and this should be extended to the proposed issue as well.

Only in extreme cases when it is clear that shareholders are being unfairly treated or disadvantaged should rights be blocked. If proper disclosure is enforced and if all parties play their part, the incidence of this occurring should be small.