2 July 2020 08:50 am
The Securities and Exchange Commission (SEC) has relaxed some Listing Rules and introduced new rules, making the route less daunting for small and medium-sized enterprises (SMEs) and business start-ups to seek a listing on the Colombo Stock Exchange (CSE) to gain access to public capital.
Similar to the developed capital markets in the West, the SEC has brought in new rules and amendments to the existing rules, to do away with the mandatory prior year positive earnings requirement for SMEs and start-ups before filing for an initial public offering (IPO).
The SEC has approved the expansion of the current eligibility criteria by allowing the applicant entities to satisfy one of three tests stipulated by them.
The current criteria requires an IPO candidate to meet all three criteria—minimum stated capital, net profit and positive net assets—depending on the board in which the firm seeks a listing—the Main Board or Diri Savi Board.
But the new criteria has been designed in such a way that the candidate will have to satisfy any one of the following tests— ‘profit and net assets test’ or ‘revenue and market capitalisation test’ or ‘positive operating cash flow and market capitalisation test’, to file for an IPO.
The move is mainly aimed at attracting technology start-ups, which operate with tremendous upside earrings potential, as seen from the revenue and valuations but with limited physical assets and are yet behind profits.
In the West, the IT-related companies such as Uber and Lyft in the ride-hailing business raised billions of dollars last year but are yet to record positive earnings.
Meanwhile, at a time when the Sri Lankan SMEs are accumulating debt, made possible by very low interest rates and the Central Bank liquidity, the easing of the route to the capital market will also enable them to raise equity and balance their funding mix without becoming overleveraged, exposing them for higher rates in
the future.
The SEC has also provided flexibility to the issuers to decide on the allotment basis,when the value of an IPO is more than Rs.3 billion, subject to the CSE agreeing to the proposed allotment basis.
The new rules also propose to reduce the timeframe for an applicant entity to refund payments due on fully/partly rejected IPO applications and credit investors’ Central Depository System accounts with the securities allotted to improve efficiency.
It has also been decided to extend the timeframe to open the subscription list of an IPO from the existing requirement to allow the applicant to select the most opportune time to proceed.