KSE Listing smaller companies: Helping SMEs through the equity market

Speaking to The Express Tribune in an interview, Naqvi said a dedicated trading board for the shares of SMEs is expected to be up and running as soon as the Securities and Exchange Commission of Pakistan (SECP) puts its seal of approval on the proposed regulations.

“We expect to start the SME board with four to five listings in the second half of 2015. We hope to get at least 10 companies listed on the SME board by the end of the year,” Naqvi said.

Unlike the paid-up capital of Rs200 million that an ordinary company must have to qualify for a listing on the main trading board, the KSE has proposed that the minimum paid-up capital requirement be lowered to Rs25 million for the SME board.

Although there are roughly 70,000 listed companies in Pakistan, only 560 of them are currently listed on the KSE, which is the major stock exchange of the country.

“We want to enable smaller businesses to obtain long-term capital – a facility they are currently unable to access from the conventional financial sector,” the KSE MD said.

An entirely different set of regulations for the SME counter will ensure that small companies do not get crushed by the typical regulatory oversight meant for large companies while ordinary investors also remain fully protected, Naqvi added.

Different regulations

For example, the initial public offering (IPO) on the SME board will require at least five initial subscribers with each buying minimum shares worth Rs1 million. This will ensure that small investors with rudimentary knowledge of the market remain out of it, as the target investor base includes qualified institutional buyers (QIBs) and high net worth individuals (HNWI) only.

In order to minimise the chances of fraud by company sponsors, the proposed regulations entail that their 100% shareholding should remain frozen in the Central Depository Company (CDC) for one year. Moreover, 25% of sponsors’ shareholding will remain locked in the CDC for the first three years as well.

The KSE will charge a minimal initial listing fee of up to Rs50,000 while the annual listing fee will range from Rs20,000 to Rs50,000.

In contrast with ordinary companies that must publish a detailed ‘prospectus’ before an IPO, SMEs looking for a public listing will only prepare an ‘information memorandum’ for prospective investors and upload it on the company and KSE websites.

Trading of SME shares will take place on the KSE’s Karachi Automated Trading System (KATS) while the minimum order size in the secondary market will be Rs100,000. This will ensure that only informed, sophisticated investors put in money into SMEs that are typically riskier than ordinary company with greater paid-up capital requirements, Naqvi noted.

In order to ensure liquidity, every listed SME will be required to maintain a minimum free-float of 20% of its paid-up capital.

The proposed substantial acquisition laws suggest that an acquirer must disclose the aggregate of its shareholding to the exchange if it buys more than 5% shares in a listed SME. If the acquirer wants to buy more than 25% shares of the listed entity, it is required to make a public announcement of the offer until its total holdings exceed 51% of total outstanding shares.

The SME will prepare its periodic financial statements and get them audited by chartered accountants regularly. However, it will be exempted from submitting 200 printed copies to the KSE. Instead, the SME will be required to maintain a website that will be used to disseminate documents like information memorandum and financial statements.

Naqvi said the bulk of corporate governance requirements will not apply to SMEs, as their heavy costs may hurt a small company’s profitability. However, the SME will report and disseminate price sensitive information and related-party transactions as usual. “The regulatory hand will be light. We want these companies to eventually migrate from the SME board to the main board,” he said.