Editor’s note: This is general educational information about how dividend reinvestment plans operate for ASX listed companies. It is not investment advice and is not a recommendation about any company, plan or security. The specific plan terms quoted below are one company’s published rules, cited as an example, and every plan differs. It is based on the documents listed at the end.
Analysis: the shareholder’s only real decision is the election date
Read as a whole, the plan documents allocate almost every variable to the issuer. It sets the pricing period, sets or removes the discount, chooses whether to issue new shares or buy them on market, decides whether residual cash is banked or given away, and may vary, suspend or terminate the plan. The participant’s input is a participation notice, and under Telstra’s rules it is only effective for a given dividend if the share registry receives it no later than 5:00pm Melbourne time on the plan’s election date for that dividend. After that, the outcome is determined by decisions made elsewhere.
The listing rules explain why issuers are given that much room. The exception in Listing Rule 7.2 exists so a plan can operate without eating into the 15% placement capacity, and it is conditioned on the plan being open to full participation rather than capped. The regulatory bargain is breadth in exchange for freedom: a plan that treats all holders alike sits outside the dilution controls, and one that rations participation does not.
The practical reading follows from that. The document that tells a holder what will happen is the plan rules lodged with ASX under Listing Rule 3.10.8, not the dividend announcement, and the numbers that decide the outcome are the pricing period and the discount, both of which can change between one dividend and the next by announcement. A holder comparing the price on their statement with the price on the screen is comparing two different things: an averaged, filtered figure calculated over a window the company chose, against a single quoted trade.
What the documents say
A dividend reinvestment plan looks like an automatic switch: the cash never arrives, more shares do. What actually happens is a sequence of company decisions, each of them disclosed to ASX under a specific listing rule, and each of them made by the issuer rather than by the shareholder. The ASX Listing Rules define such a plan broadly, as any plan which gives holders of securities the opportunity to accept securities in place of dividend, distribution or interest payments, either partly or wholly. Everything else is left to the plan terms.
The price is calculated, not observed
The reinvestment price is not the market price on payment day. Telstra’s published plan rules define the allocation price as the average market price of shares during a pricing period, less any discount the company determines. The average market price is itself defined as the arithmetic average of the daily volume weighted average market price for shares traded during that period on ASX on-market, and on any other prescribed financial markets the company chooses, excluding special crossings, overseas trades, trades from the exercise of options, overnight trades and any other trades excluded from a volume weighted average price calculation, plus any trades the company decides are not in the ordinary course of trading or not fairly reflective of natural supply and demand.
The pricing period is a company decision as well. Telstra’s rules set it as a period determined by the company of not less than 5 trading days, which may commence before, on or after the dividend record date. The rules add that the discount, if any, or the pricing period may be different from one dividend to the next, and that either may be determined or varied by announcement on the company’s website and to ASX at any time. The company’s determination of the allocation price is stated to be binding on all participants.
That design has a consequence worth stating plainly. Two shareholders in the same plan receive the same price, because there is only one calculation. But that price reflects an averaging window that may not overlap with the day the dividend was paid at all, so it can sit above or below the last traded price without anything having gone wrong.
Fractions of shares are not the Australian norm
The common description of these plans, borrowed from other markets, has participants ending up with oddly specific holdings carried out to three decimal places. Telstra’s rules do the opposite. The company determines the maximum whole number of additional shares that may be acquired at the allocation price by dividing the amount in the participant’s plan account by the allocation price and rounding down to the nearest whole number, then subscribes for or purchases that number on the participant’s behalf.
What happens to the leftover cents is the interesting part. The rules allow the company, in its absolute discretion, to retain the residual cash balance in the participant’s plan account, rounded down to the nearest cent, without interest, until it is applied. Alternatively, and by default under the participation terms, the participant is taken to have directed the company to donate any residual balance to one or more registered charities the company determines, and no receipt is issued for that donation. Where the plan is suspended or terminated, or the participant stops participating for any reason, the residual balance is treated as directed to charity as well.
Whether the shares themselves are new or existing is also the company’s choice. The plan rules let it either issue new shares or cause existing shares to be acquired on a prescribed financial market, and permit it to create a trust of which participants are the beneficiaries to acquire and then transfer those shares. New shares rank equally with existing shares from allocation, unless the company determines they will not participate in the next dividend or in an offer of shares open at the time.
What the exchange requires to be told, and when
The listing rules wrap the whole process in notification obligations. Under Listing Rule 3.10.8, if a dividend or distribution plan is established, amended, deactivated or reactivated, the entity must tell ASX and give it a copy of the terms of the plan or the amendment. Under Listing Rule 3.21, the entity must notify ASX immediately of a decision to pay a dividend on a quoted security, must notify a decision not to pay where it has previously announced an intention to pay for that period or paid one for the prior corresponding period, and must provide a completed Appendix 3A.1 not less than 4 business days before the intended record date.
Underwriting the plan carries its own rule. If an entity enters into or activates an underwriting agreement in relation to the level of reinvestment of a particular dividend, Listing Rule 3.10.9 requires it to tell ASX the underwriter’s name, the extent of the underwriting, the fee, commission or other consideration payable, and a summary of the significant events that could lead to termination. The rule note specifies that the consideration payable includes any applicable discount the underwriter receives to the issue price for plan securities.
The capacity rules matter too. Listing Rule 7.1 caps how many equity securities an entity may issue in a rolling period without shareholder approval, using a formula in which B is 15%. Exception 4 in Listing Rule 7.2 takes an issue under a dividend or distribution plan outside that cap, and extends the exception to an agreement to underwrite the shortfall where the underwriting details were disclosed before the payment date under rule 3.10.9 and the issue is made within 15 business days after the payment date. The exception is only available where the plan does not impose a limit on participation, and ASX’s note gives the disqualifying examples: a dollar cap on how much of an entitlement can be reinvested, or a maximum number of securities that can participate.
