Clearing misconceptions, key to boost equity market listings | Sunday Observer

Clearing misconceptions, key to boost equity market listings

4 April, 2021
Head of Origination and Issuer Relations at Colombo Stock Exchange, Purasisi Jinadasa
Head of Origination and Issuer Relations at Colombo Stock Exchange, Purasisi Jinadasa

The Stock Exchange is a powerful tool that should be leveraged by corporates as a viable alternative to the traditional lending sector. However, certain misconceptions about listing have dissuaded investors coming to the Exchange, said Head of Origination and Issuer Relations at Colombo Stock Exchange, Purasisi Jinadasa in an interview with the Sunday Observer Business last week. 

Excerpts of the interview

Q: The stock exchange is one of the methods to access funding in Sri Lanka. Can you comment on this?

A: The stock market is a powerful tool that should be leveraged by companies and seriously considered as an alternative to the traditional lending sector. However, there seems to be a few misconceptions surrounding listing which need to be addressed. 

Q: What are the most common misconceptions?

A: The most common include the cost of listing, stringent disclosure requirements, prohibitory governance structures, loss of control and possible loss of intellectual property. 

With regard to cost, what an Issuer will find is that raising capital via the exchange is generally cheaper over the long-run than accessing debt capital via the traditional methods. Depending on which Board the Issue is listed, the cost over a 10-year period can be as little as Rs. 10 mn. Further, the added benefit is the less restrictive nature of accessing capital – no interest or capital repayments and no need for collateral. 

Disclosure and governance requirements are another concern. However, if one evaluates the regulations, the requirements are only incremental. Most of the disclosures will be ones that are generally communicated to an unlisted company’s controlling shareholders and existing Board, while governance looks at a couple of additional independent directors. These requirements are solely to safeguard minority shareholder interests post listing. 

Loss of control is a common point brought up frequently. This misconception probably stems from experiences by family owned businesses that went about the process to list in an unstructured manner. If a structured process is followed, the family can continue to execute its vision post-listing. In terms of listing requirements, depending on the Board a company chooses, there is a minimum public shareholding requirement.

However, the highest would be applicable to the Main Board and is only 20% if the market capitalisation is less than Rs. 2.5 bn. If it is higher, then the required public holding percentage falls. Therefore, the family and/or owners continue to retain 80% even at the highest requirement, which translates to effective control of the company. There are also other mechanisms that can be employed to prevent dilution of the family stake in the business.

Loss of the ‘secret ingredient’ that makes the business successful is also a fallacy. If you take practical examples from around the world, you will see that the largest listed companies continue to dominate its sectors despite being listed. In fact, the latest study done by the University of St. Gallen and EY depicts that 50% of the top 20 global companies by revenue are listed and continue to be family controlled. 

There is no requirement for companies to divulge intellectual property or other sensitive information that will place the operations at a disadvantage compared to an unlisted competitor. In fact, by listing, a company is likely to perform much better as it attracts seasoned professionals who invigorate the innovation process.

Q: What are the benefits of listing?

A: One of the primary benefits is the diversification you would achieve in terms of funding options. Your company is no longer restrained by lending conditions and you are better able to reach your optimal capital structure. 

There is also a benefit due to price discovery. Through an IPO, the owners will be able to better gauge the value of the company. Apart from the benefit attributable to financing lines, the owners now have a mechanism to exit if their priorities lie elsewhere and enable them to diversify their wealth. 

Finally, the two points mentioned earlier, which include attracting and retaining top talent via the ability to provide part ownership in the company as well as due to proper governance structures that top talent can rely on for effective business practices. 

Q: How would a family business begin the process of listing?

A: One of the first steps that family-owned or even closely held entities that have had success post-listing have done is to establish clear governance structures to address family matters. This is generally done by establishing a family council and a constitution which will govern how the family chooses to run the business through the generations. 

Following the above process, the potential Issuer will seek to engage an Investment Bank which will look at business readiness in terms of an IPO. This process will assess the current governance structures and other aspects of the business against the listing requirements. This will be followed by the determination of the valuation and finalisation of the listing application. Once the application is received by the exchange, the approval to list should not take more than 4 weeks. 

Q: The engagement of an Investment Bank seems to be an essential part of the listing process. How should an Issuer go about choosing one?

A: I would suggest the Issuer take this part of the process as equally important, as the Investment Bank has a large part in the success of the IPO, as well as the future success of the company once listed. In determining an appropriate partner, things to consider are past track record, ability to properly develop and articulate the business strategy and future goals as well as willingness to remain an active partner post-listing.

Part of the application process will include the completion of a Prospectus, which will outline what the management expects to do with the funds raised and more importantly, the company’s future growth strategy. For a large part, those points will determine the ultimate valuation as well as the types of investors you attract for your IPO. The proper articulation of future prospects and achieving those targets post-listing will also ensure the share price remains strong and that the company can continue to access capital via the exchange for future needs.

Q: What platforms are available at the CSE for companies to raise capital?

A: At the exchange, we have three boards on which companies can list given its funding needs and stage of growth. The Empower board is for nascent businesses seeking to grow, while the Diri Savi and the Main Board are generally for mid to larger established companies. The rules and regulations applicable to each of the Boards takes into account the needs of the Issuers and ensures adequate protection for Investors.Listing on the exchange permits access to global capital and further facilitates attracting the right capital given a company’s stage of growth and future vision. 

Q: The interest rates at present are low, hence why would you recommend companies to come and raise capital for their next phase of growth?

A: Interest rates are low for both borrowers and savers. This actually provides a prime opportunity for companies to list as the valuations that they may be able to solicit will be more attractive. Investors (aka savers) are hungry for higher yields and they will not find those savings rates at our banks or via new debt instruments. Therefore, they will be willing to pay a higher price for IPO’s of companies with strong growth stories and/or visions.

The government has encouraged long-term investing by providing a tax deduction of Rs. 100,000 per month for investments made in the stock market. This will further fuel the growth of stocks becoming a common component of a savings portfolio – which is actually an important aspect of a diversified retirement savings plan, however not widely used in Sri Lanka. In other words, more demand for quality listings. 

The government has also accorded tax reductions for companies that list prior to the end of the year, which some Issuers may find attractive.

Q: SMEs contribute over 50% of the GDP. How has the CSE come forward to aid SME growth?

A: Small and Medium Enterprises are the backbone of economies globally and at the CSE we launched a new Board – The Empower Board – in order to cater to the growth needs of this segment. The Empower board is a platform for smaller and nascent companies to access global capital and enables them to lower their reliance on restrictive bank lending terms. We encourage SMEs to contact us and explore the opportunities that listing will provide them.

Q: You mentioned the tax relief provided in relation to activity at the stock market. Do you expect these benefits to be sustainable?

A: The concessions provided for new IPOs and those provided to Investors are strong steps to strengthen stakeholder participation. The Sri Lanka stock market in terms of Investor participation and Issuer participation is still nascent and therefore such policies will drive both types to learn about how best to leverage the stock exchange. As participation increases and Investors and Issuers start benefiting due to stronger uptake as a result of these policies, you will find them to be sustainable and effective methods to grow the overall capital market. 

Q: How does the exchange support issuers interested in listing?

A: The Origination and Issuer Relations (O&IR) unit is available for potential issuers to get the opportunity to better understand how best they can leverage the stock market. The O&IR provides potential Issuers a starting point to familiarise themselves with the listing process as well as the advantages of leveraging the exchange for funding needs.

The unit at the exchange is available to Issuers at all points through to the submission of the listing application as a sounding board. Following the IPO, the Colombo Stock Exchange will continue to be available and provide support to newly listed entities to better facilitate the transition to a publicly quoted entity.