A country can be truly developed only by producing quality goods and services, which would be sold at higher prices locally as well as globally, beating the competition. The main problem identified in developing economies like ours has been how to increase the production, given the limited capital and poor technology.
The production entities can be mainly divided into three categories, foreign firms operating in the country, local blue-chip companies and small and medium-scale companies. These three types of institutes contribute to gross domestic production.
However, the small and medium enterprise (SME) sector can be identified as the most important sector with significant potential to blossom, contributing to 52 percent of gross domestic product (GDP), accounting for over 75 percent of the total number of enterprises and providing 45 percent of national employments.
When the question is raised as to why the companies in the SME sector are lagging far behind the rest of other local giants, the lack of technology and capital can be found out as factors that have in fact resulted in this plight of the economy.
Certain entrepreneurs engaged in the SME sector have restricted themselves, as they cannot finance to expand their businesses, blending it with sophisticated technology. As SMEs are highly risky ventures by nature, it is difficult to take loans from the formal financial sector. The Colombo Stock Exchange (CSE) recently launched a very commendable initiative that provides entrepreneurs in SMEs with an option to seek capital for their businesses without making debt a hurdle to business growth.
Accordingly, the SMEs that meet specific listing requirements can become a listed entity at the CSE by financing the required capital via a share issuance. This is actually a novel experience for the SME sector in Sri Lanka, as companies have to meet a high level of capital requirements and many more to be listed on the Main Board or Dirisavi Board.
This will further pave the way for more benefits than raising capital. A company can get its corporate profile well-shaped and recognized by listing at the CSE. The most important to be noted here is that the SMEs can attract foreign investors who are experts in relevant industries.
When they operate at grass-roots level, most probably, no foreign investors or industry experts become interested in investing in these firms, as they cannot be caught by the radar of big investors. Hence, corporate recognition that a listed entity can receive is immensely helpful for SMEs in different ways.
There are some criteria to be met by a firm that wishes to be listed on the Empower Board. The stated capital should be above Rs.25 million and below Rs.100 million at the time of listing. In the event of an Initial Public Offering, the applicant entity will have a stated capital of not less than Rs.10 million as at the date of the listing application. Moreover, the asset base is a very important indicator to be considered, when an investment is made to an entity. The assets and company management will decide how many cash flows flow into the company in the future. Hence, the CSE criteria say that as per the audited financial statements for the financial year immediately preceding the date of application, there should be a positive net asset base owned by the applicant entity. If the applicant entity is a parent entity, there should be a positive net asset base as per the consolidated audited financial statements for the financial year immediately preceding the date of application.
The company should have at least a two-year operating history immediately preceding the date of application. The total assets of the company should be of or below Rs.600 million as at the date of the initial listing application. There should be an unmodified audit opinion for the financial year immediately preceding the date of the initial listing application or an audit opinion, which does not contain an emphasis of matter on “going concern” as set out in the independent auditor’s report of audited financial statements contained in the annual report of the entity. Additionally, the application to list securities will be made through a sponsor approved by the CSE.
The two obstacles mainly identified for the development of the CSE are a low number of companies listed in the bourse and low investor participation. However, its impact can be to a greater extent mitigated by this kind of initiative. Hopefully, more SMEs will be entities listed on the CSE and raise capital, expanding their business operation that will ultimately ensure high GDP contribution and high level of employment.
Making a good initiative is not enough for reaping the harvest. Consequently, this should be marketed well, making the SME sector entrepreneurs more aware of its benefits. This initiative is highly commendable, as it will expand the Colombo bourse, strengthening the economy as well.
(Amila Muthukutti is an economist)