This article outlines the strategic value of listing on a stock exchange, detailing the role of the Listing Division, followed by the benefits for companies, the broader economic impact, and the essential considerations entities must assess before going public.
Role of the Listing Division
The Listing Division of the Colombo Stock Exchange supports potential and existing listed companies in raising debt and equity capital through a diverse range of products.
The Division’s role includes the reviewing applications from prospective issuers and granting approval to those that meet the required criteria and comply with the applicable rules for listing on the CSE, whilst positioning the CSE as the most preferred platform for further capital raising by listed companies.
The Listings Division also strives to grant approvals within the stipulated timelines, provided all documentation is submitted in compliance with the listing rules.
In reviewing the Initial Listing Applications of potential and existing listed companies, the Listing division ensures that such companies have adhered to the applicable Rules of the CSE and the CSE Listing Framework, which maintain transparency and adequacy of disclosures made in offer documents (i.e. Prospectus, Introductory Document and Circular to Shareholders).
The CSE’s review process also includes an in-depth analysis of the potential issuer’s financial performance in the present operating history and a financial analysis conducted for a pre-defined future period.All listing applications are reviewed by a dedicated Listing Review Committee comprising several members of the CSE’s senior management, who are responsible for granting approval for listings.
Overall, the entire review process carried out by the CSE ensures that the potential issuer conducts the IPO, and the existing issuers carry out further issues of securities in line with the rules, regulations, and procedures of the CSE.
The Listing Division also:
• Advises listed companies, potential issuers, and investment banks on the listing of securities and the application of the CSE Listing Rules/Listing Framework.
• Contributes to the formulation of policies and rules applicable to listed companies.
• Supports the implementation of strategic initiatives which are of importance to listed companies and potential issuers.
• Performs the related system entries to enable the listing of securities.
Advantages of accessing the capital market
Listing permits companies to raise capital by issuing shares to the public through an Initial Public Offering (IPO) or further issue of shares, which encapsulate benefits not typically seen in traditional methods of funding such as borrowing. This helps companies in diversifying their funding avenues for various purposes.
The funds raised through IPOs can be used for purposes such as debt settlement, which in turn helps companies manage their gearing and debt exposure, and strengthens the balance sheet.
The funds raised through a Stock Exchange can also be used for expansion and new business opportunities. Funds raised through an IPO canalso be used for any purpose without restrictions, providedthe companiesoperate within the prevailing regulatory and legal parameters.
Listing typically requires companies to comply with corporate governance rules and regulations, which can improve transparency and accountability of a company. This, in turn, allows the company to attract strategic investors who may be looking to invest with a strong profile and sound governance practices.
Listing provides companies with a greater opportunity for value creation and price discovery through secondary market trading. It also enhances corporate visibility and recognition, while improving the overall profile of the company in terms of business, systems, processes, and employment.
Contribution to broader economic development
Listing permits companies to raise capital by offeringshares to the public, which can be used for expansion, research and development, or new business opportunities. Suchcapital injection fuels economic growth by enabling companies to invest in infrastructure, technology, and job creation.
Listing attracts not only domestic investors but also foreign investors, allowing foreign funds to flow into the local market, where such inflowsare pivotal for economic growth as it helps fuel local businesses.
Listing on a stock exchange requires companies to adhere to strict corporate governance and disclosure regulations, promoting transparency and accountability. This increases transparency and builds trust among investors and encourages long-term investment in the economy.
Listed companies and their new business ventures enable the creation of new job opportunities in various sectors, contributing to a larger and more skilled workforce. This helps address unemployment issues and leads to improved living standards for the population.
Key factors to be taken into account before listing
• Financial stability of the company: A company planning to list should review its financial statements to assess profitability, asset value, and debt levels with a view to meet the predefined listing criteria of the Stock Exchange. Such a review should primarily focus on consistent revenue growth, profitability, and asset valuation.
• Market conditions and investor sentiment: It is essential that a company thoroughly assesses market conditions to determine the right time to launch an IPO. In doing so, the company should have a clear understanding of investor sentiment, industry outlook, and other relevant factors.
• IPO pricing and valuation: A company should determine a fair IPO price that reflects its true value and attracts investor interest. Various valuation techniques can be used to arrive at an appropriate price.
• Financial, legal, or governance issues: Prior to listing, a company should carefully examine any prevailing/potential financial, legal, or governance issues that may adversely impact the success of the IPO or the sustainability of the business in a listed environment. This assessment will help the company achieve a smooth listing process.
• Corporate governance and management: A strong corporate governance structure builds trust and transparency with investors. Before listing, a company should have a clear plan on how it plans to comply with the corporate governance practices prescribed by the Exchange.
• Rules and regulations of the Exchange: Before listing, a company must have a clear understanding of the rules, regulations and procedures it must comply at the time of listing, as well as those applicable on a continuous basis along with the applicable enforcement action. Such understanding will help companies reap the benefits of listing without any interruptions and limitations.
• Shareholder considerations: A company should analyse its existing ownership structure to understand who holds shares and their potential impact. It should also assess how shareholding may be diluted through an offer for sale or offer for subscription, while ensuring compliance with the applicable minimum public holding requirements.
The writer is Vice President, Listing Division, Colombo Stock Exchange.
