The Colombo Stock Exchange (CSE) has expanded the eligibility criteria for initial listing of shares on the Main Board and the Diri Savi Board, which will enable a wider spectrum of companies to qualify for a listing.
The rule revisions, which also brings changes to IPO timelines and the basis of allotting shares, is to complement Sri Lanka’s rapidly developing commercial landscape comprising multiple business models and segments. The revisions are also directed at improving the efficiency of the listing process while offering greater flexibility to companies listing on the CSE.
The rule revisions have been carried out by the CSE after extensive industry-level consultations and received the approval of the Securities and Exchange Commission of Sri Lanka (SEC) recently.
Main Board Requirement now will cover a wider criteria
In addition to the existing criteria of the three consecutive financial year net profit after tax requirement, companies with Positive Net Assets as per the audited financial statements for the two financial years prior to submitting the Initial Listing application, could list on the CSE with an aggregate net profit after tax for three consecutive financial years, where companies would not be required to be profitable in each financial year in the three year period, thereby offering considerable flexibility.
The new changes will also enable companies to meet the eligibility in the form of revenue or positive operating cash flow (one of either), if the company’s market capitalisation is valued at Rs. 5 billion or above at the point of listing. If the application for listing is based on the revenue option, the company must demonstrate an aggregate revenue of Rs. 3 billion for three financial years immediately preceding the date of the initial listing application. If the application is based on the positive operating cash flow option, then the company will be required to demonstrate positive operating cash flows (after adjustment for working capital) for two consecutive financial years immediately preceding the date of the initial listing application.
These new options offer potential issuers greater flexibility in terms of meeting the listing eligibility, enabling companies with growth potential to obtain a listing on the Main Board of the CSE.
Diri Savi Board changes
In addition to the requirement for positive net assets for the financial year immediately preceding the date of the initial listing application, the criteria has been expanded to offer a revenue-based alternative if the net asset requirement cannot be met.
If the company’s market capitalisation is valued at Rs. 2 billion or above at the point of listing, demonstrating revenue of Rs. 350 million for the financial year immediately preceding the date of the initial listing application will be an acceptable alternative to the positive net assets requirement.
Addressing going concern uncertainty
However, with the objective of safeguarding the interests of investors, the approved revisions will also require the Independent Auditors Report in the Audited Financial Statements of the applicant entity for the financial year immediately preceding the date of the initial listing application not to contain an emphasis of matter on going concern. This requirement applies to both the Main and Diri Savi Boards.
Flexibility when allotting shares in larger IPOs
The CSE’s proposal to revise the basis of allotting shares in IPOs above Rs. 3 billion has also been approved by the SEC. Issuers now have the flexibility to determine the basis of allotting the shares in a fair and equitable manner, in consultation with the CSE, as opposed to the previous requirement, which details minimum requirements on allotments to retail individual investors.
However, the present requirements will remain the same for IPOs that are less than Rs. 3 billion.
IPO process efficiency and flexibility
Other changes proposed to the IPO process will enable issuers to have greater flexibility in the IPO process in terms of timing a listing and obtaining an optimum price for an issue.
Under the new rules, the issuer will be given the opportunity to open the subscription list within a period of six months from the date of obtaining the in-principle approval from the CSE. The said period of six months is a considerably extended period in comparison to the previous rule, which required that the subscription list must be opened within 20 market days from the date of receiving the in-principle approval from CSE.
Under the amended rules, the issuer will not be required to mention the issue price or the price range (in the event of book building) at the point of publishing the soft copy of the initial draft Prospectus on the CSE website. The issue price determined by the issuer may be informed to the public by way of an announcement to the market through CSE, 10 market days prior to the date of opening the subscriptions. This new process will replace the previous process where the issue price must be informed to CSE in advance, at the point of obtaining in-principle approval for the initial listing application.
Clarifications and queries on the amendments could be directed at the Chief Regulatory Officer via E: email@example.com T: 077 3469463, 0112 356 540 Or F: 0112 448 925