A compelling case to list on Colombo Stock Exchange

Colombo Stock Exchange  

CSE Head of Origination and Issuer Relations Purasisi Jinadasa

Colombo Stock Exchange Head of Origination and Issuer Relations Purasisi Jinadasa in an interview with the Daily FT makes a strong case on why companies must seriously consider

listing. He also dismisses various misconceptions and concerns about listing and stresses that the process isn’t difficult or complex. Here are excerpts:

Q: Please explain how the CSE can assist businesses to raise capital?

The Colombo Stock Exchange can be an excellent platform for companies both in the private sector and the state sector to raise debt and equity capital. The stock market is a powerful tool that should be leveraged by companies and seriously considered as an alternative to the traditional methods of raising capital.

At the CSE, 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?

 Bank 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 IPOs of companies with strong growth stories and/or visions. 

Further, 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. 

Related to this question is one misconception regarding listing on the exchange – that it is expensive. This is not the case. In fact, if you compare interest and capital repayment costs to listing costs you will invariably find that listing is much more cost effective. 

Q: You mean to say that costs associated with listing are not high. Can you comment on the cost comparison of raising capital through a listing?

 If you are assessing the direct monetary costs associated with listing, you will find that listing is much more cost-effective. There is no burden of interest or capital repayment. Your future shareholders will invest in your company in exchange for capital appreciation (in the form of share price) and/or dividends.

Depending on the Board on which the you choose to list, the costs can be as little as Rs. 10 million over a 10-year period. 

Q: Is the listing process difficult?

 The listing process is not difficult. There is a clear framework available to understand which Board your company qualifies to list on and depending on the Board, there are clear requirements that the company has to meet. The process will also necessitate either the use of an investment bank of your choice or a sponsor (Empower Board only). Your choice in terms of investment bank should be based on their prior track record in successfully listing companies and raising capital. But it also should include consideration on whether they understand how best to structure your company’s story in order to attract the right investors. The investment bank you choose will ensure that the process moves smoothly on your behalf. 

As mentioned earlier, the O&IR at the stock exchange is available as your first stop on your journey to raise capital via the exchange.

Q: Many organisations fear the disclosures required as it will have tax implications in the future. Can you please explain how this can be handled?

 The benefit of listing prior to the end of 2021 is that the Government is according a 50% reduction in tax for the immediate financial year and a further three years at a reduced rate of 14%. This should address many concerns regarding the transition.

Further, discussions with company auditors and tax experts will ensure that organisations are able to take advantage of any additional tax benefits available. Entities may also evaluate possible structures that benefit from further tax concessions depending on the business. 

Q: Is there a limitation on the amount that an organisation could raise via an IPO?

 The Initial Public Offering (IPO) valuation will take into account the current state of the company as well as future cashflows that will be generated through the execution of the business strategy. The process will permit full price discovery through public appetite for a company’s shares based on the story that the owners and management stand by. Therefore, the limitation will be the overall value of the company determined by this process. However, it is important to note that depending on the strength of a company’s vision, organisations can continue to access the public market via subsequent raises. This may have a dilutive effect on the share price, however if the rationale for additional funds is sound, investors will continue to support the company.

Q: There is always a perception of loss of control, particularly for family-owned businesses. Is this a real concern?  

 This is another common misconception. 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 billion. 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. Nobody can legally force a majority shareholder to sell-down and so a family can continue to execute its vision post-listing. 

There are also other mechanisms to ensure that the owners have control of the company even if their percentage holding is low. In fact, many of the largest listed entities globally continue to have the Founder’s descendants as controlling shareholders, although they hold a small percentage of the total outstanding shares.

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

 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: There is a perception that listed companies are over-regulated. Is this true?

 This tends to be another common misconception. The regulatory requirements for listed entities are only slightly incremental and by no means prohibitive in nature. Primary requirements, depending on the Board the entity chooses to list, will look at governance structures and filings related to annual reporting. The majority of the requirements are already a part of normal business activity at an unlisted entity. 

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

 Both the concessions provided for new IPOs and those provided to Investors (as mentioned earlier) 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 of participants to learn about how best to leverage the market. 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: You mentioned a few misconceptions regarding going for an IPO. Can you highlight them a little more in detail?

 Apart from those I spoke about:

Governance and regulation, is another area that seems to deter individuals from listing. However, governance regulations on listed entities are only incremental to those of unlisted and as indicated earlier, governance requirements also differ given the Board in which you choose to list. 

Loss of company intellectual property tends to be another concern. However, the required disclosures will never require to part with IP. A good example is the exact recipe used for Coca-Cola – a global giant in carbonated drinks. 

Q: How does a company commence the process of listing?

 In order to ensure potential Issuers get the opportunity to better understand how best they can leverage the stock market, one could contact the Origination and Issuer Relations unit. 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 will be available to Issuers at all points through to the submission of the listing application as a sounding board. 

Further, following the IPO, the CSE will continue to provide support to newly-listed entities to better facilitate the transition to a publicly quoted entity.