Because life is all about baby steps. When you first don't quite understand something, the initial reaction for some may be to recoil and take a step back in order to avoid the unknown, while some like to tackle the unknown head on.
Thought I'd tackle one of the popular investing terms, made even more popular these recent few years due to the fall out from subprime credit crisis.
Indeed, if you skimmed that phrase fast enough it would appear as if alien species are being distributed or perhaps Sigourney Weaver gave birth to some more odd critters.
Alas, it's not distributing alien species, it is distributing a physical asset such as company stocks or properties instead of distributing cash. Companies short on cash during dividend payout periods may choose to distribute company stocks in-specie instead of paying a cash dividend.
Someone I know, let's call him Mr ABC, received a brochure from Takoradi Limited recently outlining the Board of Directors' intentions: "Distribution In Speci of Metminco Shares".
If you're an existing Takoradi shareholder(or a confused reader) wondering what the heck that means, it's rather simple:
a) Takoradi Limited owns 152 million Metminco shares and it wishes to distribute 107 million to its shareholders to own directly
b) You own some Takoradi Limited shares
c) Owning 1 Takoradi Ltd share will entitle you to 1.5 Metminco shares
d) So if you own 100 Takoradi shares, you will be given 150 Metminco shares
e) 'Distribution In Speci of Metminco Shares' means that they instead of distributing cash to shareholders in the form of capital return, they will distribute Metminco shares to you instead 'in specie'(as a substitute)
f) This is proposed by the Board of Directors, of course shareholders are entitled to vote and reject that
g) If the proposal is passed, then every Takoradi shareholders will become direct shareholders of Metminco (and get dumped with heaps of paperwork from Metminco directly in future)
a) If this gets voted through, then existing shareholders will own Metminco shares and be a direct shareholder, instead of owning indirectly through Takoradi Limited
b) Takoradi Limited is effectively partaking in a capital reduction, so the market capitalisation value of Takoradi Limited will theoretically fall by approximately $19.26 million (ie 107 million Metminco shares x $0.18/share)
c) Takoradi's share price and market value should drop commeasurately in an efficient market but as we all know the market is inefficient, unpredictable and suffers from insider trading. So distributing $19.26m worth of capital in the form of Metminco shares could mean Takoradi's value dropping by less than or greater than $19.26m when logically and theoretically it should only drop $19.26m
d) You get more paperwork to fill out come dividend time, tax time and filing time now that you own another stock
e) Is that a good deal or a bad deal? You'll need to analyse Metminco and decide for yourself whether they're worth holding onto or sell. If you've got an online brokerage account, you'll probably have to fill out more paperwork to link those new Metminco stocks to your brokerage account enabling you to trade
In-Specie Is A Useful Word To Learn
In Specie is commonly used in the investment sphere. During the credit crunch, companies were short on cash. Infact, previously illustrious companies such as ABC Childcare and Babcock Brown couldn't even roll their loans over due to the liquidity crisis and have since, collapsed.
If you owned stocks in the last few years then there's a good chance that you would have received paperwork offering you the choice to accept dividends in cash or accept a similar amount in heavily discounted company stocks instead (in-specie).
Transferring of 'In-specie' contributions to SMSF have also been huge in the recent years since Howard and Costello changed the super tax laws and made it supremely favourable for retirees and their pension funds.
From the ATO:
Generally, trustees of SMSFs are prohibited from acquiring assets from related parties - such as fund members, their family, and partners, related companies and trusts. However, there are some exceptions.
Therefore, if you're a member of a SMSF you should not contribute your own assets or assets of your associates unless the asset is:
business real property (used exclusively for the running of a business), for example a warehouse you conduct your business from a listed security (such as shares in companies listed on the stock exchange), or an in-house asset, for example an investment in a related party. The market value of in-house assets cannot exceed 5% of the total market value of assets held by the fund.
You can also generally contribute an investment in a managed fund, provided it is a widely held unit trust. If the managed fund is a normal public offer fund with a range of investors it should meet the definition. Smaller vehicles such as some property syndicates may not. You can check this with your managed fund.
Each of the assets must be acquired by the SMSF at market value.
You cannot transfer a residential investment property to your SMSF. It is not covered by the above exceptions.
The transfer of an asset 'in-specie' is a CGT event as the transfer is a disposal. You may make a capital gain or loss from the CGT event according to the usual CGT provisions that apply to that asset.
If you make an 'in-specie' transfer, CGT may still be payable as you may be taken to have received the market value of the asset at the time of the CGT event.
Depending on the situation, a market valuation may be undertaken by either a qualified valuer or a person without formal qualifications. In any case, the person who conducts the valuation must base their valuation on reasonably objective and supportable data.
Use of a qualified valuer should be considered where the value of the asset represents a significant proportion of the fund's value or where the nature of the asset indicates that the valuation is likely to be complex or difficult."