Money Matters

A gem of an opportunity

Money Matters
By Raeda Latif
Mon, 06, 20

There was a time when small to medium-sized companies found it cumbersome to list on Pakistan Stock Exchange (PSX). The pre-requisites were tough and the post-listing requirements were not easy to follow. However, lately, a lot has changed for the better. The Securities and Exchange Commission of Pakistan (SECP) has approved listing regulations of the Growth Enterprise Market (GEM) Board to enable and facilitate small and medium enterprises (SMEs), greenfield projects, tech start-ups and other companies to conveniently get listed on the Stock Exchange and access capital thereupon.

There was a time when small to medium-sized companies found it cumbersome to list on Pakistan Stock Exchange (PSX). The pre-requisites were tough and the post-listing requirements were not easy to follow. However, lately, a lot has changed for the better. The Securities and Exchange Commission of Pakistan (SECP) has approved listing regulations of the Growth Enterprise Market (GEM) Board to enable and facilitate small and medium enterprises (SMEs), greenfield projects, tech start-ups and other companies to conveniently get listed on the Stock Exchange and access capital thereupon.

Small to medium enterprises make up a big chunk of business in Pakistan. SMEs constitute nearly 90 percent of all enterprises in Pakistan. They contribute about 40 percent to the annual GDP and employ about 80 percent of the non-agricultural labour force. The growth enterprises play a major role in a country’s economy. They provide a large number of jobs and contribute significantly to the GDP of a country. It is not only the government’s job to provide employment but also that of the private sector. Companies which are successful not only provide jobs but also provide diversified products, invest in R&D (research and development), create supply chains, increase market outreach and penetration, add to their infrastructure, and increase their production capacity. They also add value to their products and services so that their goods are exportable as well.

Such successful companies can be as diversified as service providers like media production houses & digital media houses, agro-based companies like fruit packagers & exporters, dairy-based companies such as packaged milk producers, and business-to-business companies such as textile units & IT companies etc. For such companies to succeed in their respective businesses, sufficient funding is necessary. However, the resources of funding while being diverse are costly at the same time. This is one of the reasons that PSX is incorporating the GEM Board as it not only helps such enterprises in expanding, diversifying and raising capital but also in the development of the Capital Market of the country which is important for increasing trade, commerce and industry. This (GEM Board) platform will encourage investors to invest in strong, growing and successful companies. By investing in Growth Companies, investors will get the opportunity to benefit from their growth. Investors invest in these companies for capital gain and/ or dividends while the companies receive the much-needed capital. In other words, this activity completes an important part of the economic cycle whereby investors get an opportunity to invest and companies get capital to grow.

In order to facilitate companies for listing on the GEM board, Pakistan Stock Exchange has outlined the regulations governing listing and trading of equity securities of SMEs. This step will especially pave the way for medium-sized enterprises, growth enterprises and even start-ups to get listed on the Stock Exchange.

Before we explain how listing has become accessible for a growth company, it is essential to explain why it is beneficial for such companies to get listed or why should companies get listed at all. There are numerous advantages for a company to get listed. It is basically a source of raising long-term low-cost capital. Capital is necessary for all companies, especially medium-sized and smaller ones, to set up, diversify their products, carry out growth & expansion, enhance their current capacity, increase their operational capabilities, invest in new projects, add value to their products, export their goods and meet working capital requirements.

The resources generated through listing has far-reaching and broad benefits for the listed companies. Not only can substantial funds be generated through listing, but also at a low cost. This is especially true given the high price of borrowing from other sources of funding nowadays. The interest rate environment is not very conducive to borrowing from banks and financial institutions as that carries with it the onus of servicing debt at a high rate on a monthly basis. Furthermore, in most cases, the financing is collateralised and in that the borrowing companies have to submit substantial collateral against the said financing. As against this, capital raised from the stock market is economical or reasonably-priced and can help the companies avoid the high cost of short term or long term borrowing from financial institutions in Pakistan.

The raising of capital from the Stock Exchange also allows for an enhanced image and profile for a company leading to its greater visibility amongst the public in general and the investors & portfolio managers in particular. This is all the more significant given that this increased visibility allows the public and investors outside the country, as well, to track, monitor, and invest in these listed enterprises. So even if it is a B2B (business-to-business) type company and doesn’t have exposure in the consumer market, yet its listing on the Stock Exchange brings about increased noticeability and attracts investor interest locally as well as internationally.

Not only does a company attract public and investor interest by going public or getting listed, it also adds to a level of prestige for that company in that it follows the minimum requirements that make for a company that bears an international standard and follows international best practices of operations & performance. Listed companies are regarded as industry leaders in their respective sectors. Such companies adhere to the regulatory, compliance and corporate governance guidelines outlined for listing. Hence, they enjoy a level of prestige amongst local investors, market analysts, researchers, and fund managers.

Furthermore, through prospective private placement and listing, such companies attract media attention and interest which brings them in the limelight engaging public and investor interest. This brings in added marketing for the said companies by default. A major advantage of listing on the GEM Board of the Pakistan Stock Exchange is that companies will have tax benefit of 20 percent on tax payable in the first and second years of listing and 10 percent on tax payable on each of the subsequent two tax-years i.e., the third and fourth year respectively. This is a key benefit that a company can derive in monetary terms by listing on PSX.

Another advantage that a company can have by listing is that the matter of legacy or succession becomes streamlined wherein the rules of smooth transfer of management powers are outlined beforehand. In family-owned companies and businesses, the transfer of management powers is usually not clearly defined, leading to much strife and discord amongst the subsequent generation(s) vying for control of the company. This is done away with by way of following the rules & regulations inherent in listing.

Last but not the least is that such enterprises can attract and retain the best available human resource from the talent pool of the country because individuals/ employees like to work for a company that enjoys high esteem, good reputation and is well known. The listing on the GEM Board of the Stock Exchange is an ideal way forward for growth companies to list on the Exchange in their efforts to secure long term low-cost financing.

The writer is associated with Pakistan Stock Exchange