Listing on the CSE: A mark of distinction

Tuesday, 15 October 2013 00:10 -     - {{hitsCtrl.values.hits}}

By Kinita Shenoy The Colombo Stock Exchange recently organised an Issuer Relations Forum with the intention of giving unlisted companies an insight into the nuances of listing shares and corporate debt on the CSE. Delivering the welcome address, CSE Chairman Krishan Balendra thanked the audience for their participation and gave a succinct overview of Sri Lanka’s current listing situation. He said that total market cap of the CSE or value of all listed companies is just under $ 20 billion. Explaining that some companies in the region have market caps higher than this, he asserted that the market here is very small not only in absolute terms but relative to our economy. The total market cap of the CSE is less than 30% of Sri Lanka’s annual GDP, while regionally, the average is 180%. For example, Malaysia and Singapore’s exchanges exceed 200% of their GDP. Balendra questioned why it was that such a small part of the country’s economy is listed, adding that “the continuous development of Sri Lanka’s capital markets has created a more positive atmosphere for listing and therefore, we encourage unlisted companies to make use of this opportunity.” He also mentioned that the forum’s purpose was to engage and present the pros of listing and discuss/address any concerns at hand. “A joint committee of the SEC and CSE is tasked with increasing the number on the exchange, and encourage listings. Members of the committee will discuss the benefits of doing so with individual unlisted companies. We have also published an issuer’s relations guide recently with useful facts, data and recent successful listings.” The forum’s keynote address was delivered by SEC Chairman Dr. Nalaka Godahewa, and touched upon the current economic situation as well as a few initiatives taken by the industry to help increase market capitalisation. Preferred choice for the creation of wealth and value The SEC Chairman’s keynote was followed by the CSE Assistant General Manager Regulatory Affairs Renuke Wijayawardhene’s presentation on ‘Listing on the CSE’. Speaking on the benefits of listing equity and debt on the CSE, Wijayawardhene asserted that its vision is to “be the preferred choice for creation of wealth and value”. He explained that the implication is that while other choices exist, this is more advantageous. There have been 85 new listings on the CSE since 2010 – both equity and debt issues. To date, he added, 2013 has mostly seen debt issues to the tune of about 107 billion rupees as many companies have used the listing methodology to raise capital to their own benefit. “The CSE has fared fairly well, outperforming most regional markets. The percentage of market cap in relation to GDP, while still at about 30%, has doubled since 2009, which is a positive sign. The CSE could be used to raise long-term funds especially for well-established companies looking for the next phase growth and the ability to share both benefits and risks. It is not advisable to have a large amount of your capital as debt, but listing can help with the right mix of debt and equity. Going through the IPO process gives you a wide range of investors – foreign, investors, insurance funds as the growth is no longer limited by the owner’s ability to infuse capital. Starting from the IPO stage onwards, there is a lot of free publicity via press and reports, visibility grows and creates a paradigm shift. This also creates objective value. Unlisted companies’ investors discount the value as the share is perceived to be not liquid. Post listing, your company will be subject to independent market valuation. “Share demand will hike share value. More often than not, value rises after listing. You can also return to the market for further growth and to raise capital. If you conduct the company’s affairs well and convince investors, even further capital can be raised. You would also have the ability to retain the company’s best talent via a share-based remuneration package. Increased share liquidity has two key advantages – long term investors, and the ability to make a smooth exit. Shares can also be used as alternate currency for future mergers.” Wijayawardhene explained that prior to taking the decision to list, companies must be convinced they have the right management and culture to list. Self-evaluation as to the company’s long term strategies must be aligned to possible listing as the management defines the future, which reflects the company’s future and can convince potential investors of it. “Being listed, you must be able to be subject to close scrutiny and be able to sell the investors a solid case – a good profit record, competitive advantage and strong management. Proper operational, financial and HR capacity are necessary. Higher expenditure in terms of HR requirements and disclosures can be expected. Ethical business practices and conduct as a responsible corporate citizen are necessary, as are resolution of larger legal cases. Choosing the right time to list is also important.” There are three methods of listing: Offer for sale in which the major shareholder divests, offer for subscription or the creation of new shares, and introduction, which is now allowed under certain restrictions. He added that there are two listing boards in existence – the Main Board with minimum stated capital of Rs. 500 million with guarantee of repayment of capital from a CBSL licensed bank or debt security shall have investment grade rating, and Diri Savi Board, which requires a minimum stated capital of Rs. 100 million. The listing process is in three key stages: Preparing for the IPO which included building the company management team, engaging the external advisory team, long term strategic business plan, PR/investor relation activities. Stage two is before going public which involves getting all documents in order. The final stage is the public phase of listing, prospectus issue, road shows, and investor education. Pix by Upul Abayasekara      

Panel discussion

  Featuring the heads of ‘A-listers’ – heads of top companies listed on the CSE – the panel included CSE AGM Regulatory Affairs Renuke Wijayawardhene, SEC Deputy Director General Dhammika Perera, People’s Leasing and Finance CEO D.P. Kumarage, Laugfs Holdings Chairman W.K.H. Wegapitiya and Odel CEO Otara Gunewardene. The session was moderated by Echelon Editor-in-Chief Shamindra Kulamannage. Kulamannage: Can you outline what the scope of introduction as a method of listing? Perera: It is a quicker and more cost effective method. Unfortunately we faced certain limitations, due to which we previously had to suspend the introductions. Later on, the regulator revisited the mechanism. So there was a re-introduction of introductions, so to speak. When it comes to the public float, the introductions did not require this previously. With the new regulations, anyone who wants to get listed does not need to have an IPO and go through the costly/cumbersome process. You can have your public float built up in terms of a private placement. We have also come up with a “locking” mechanism not for public shareholders but perhaps for promoters and affiliated parties as there was a perception that this introduction mechanism was used as a method for listers to exit. According to the new rules, there will be enhanced disclosure in terms of financial documents and operations.     Kulamannage: What was the approach to preparing the company for listing? What were the challenges? Kumarage: A single borrowing could not go beyond a certain amount, and our growth was very impressive – some years we grew by more than 150%. That made funding a problem, which led to further problem in terms of gearing, etc. So when we wanted to move to the next phase of growth, we had to look at infrastructure and process improvement, staff culture etc. With that, we got ourselves prepared for the listing     Wegapitiya: We have five more companies waiting to be listed. For the last couple of years we were enjoying the benefits of our first listing. This is the best time to list. When we wanted to list our company, it was a well-planned process. As a home-grown Sri Lankan enterprise, we looked at the macro perspective. Less than 200 odd companies are listed. Most of the home grown enterprises have failed to elevate some of our local enterprises – they tend to get into a Bermuda Triangle. But we wanted to fly over that and take the company to the next level with sustainable growth. With their lifecycle, they failed to differentiate the entrepreneur and the enterprise and tend to hand it over to their children etc without realising the businesses’ value. We wanted to broad-base our shareholder ownership, introduce discipline and good governance. We were initially clueless but we had good advice from other companies. It did take us a while to get our processes in order, but it was a good experience for us. There were various myths we heard – you will lose control, have lack of freedom, and be compelled to disclose everything. But now, we do enjoy the benefits of our listing.     Kulamannage: How did you see the opportunity and rationalise it? Gunewardene: When I started the business, I had no idea what an IPO or the CSE was. But as time goes on, businesses evolve and as an entrepreneur you get very passionate about your creation which makes it difficult to let go. For me, the IPO was really letting go of the company I had built – but it has gotten a lot better and it’s been a great experience. It took a while to understand the consequences and benefits. One of the main reasons it was done was to build the company’s value as getting in investors before was tricky as we did not feel our valuation was right etc. the second phase was the attraction of foreign investment to raise funds for our future plans. When the company is listed the process of raising capital is quicker, cleaner and easier.     Kulamannage: In preparing your firms for the IPO, what were the biggest challenges? Kumarage: We had to change the entire culture of the company and change to a public company. We started the improvement of the processes which took some time. We had a good business plan and expansion idea, and once we changed the entire culture, systems and processes in terms of transparency and information divulgence.     Wegapitiya: from the top management to the lower level, every tier of the team had to be convinced as to the new changes and requirements. The same understanding had to be filtered down. Discipline in terms of finance and operations are prerequisites to listing. Other challenges post listing include the fact that creativity is somewhat limited. Unlike before, there are outsiders on the board and ‘gut-based’ decisions cannot be taken as there have to be calculated decisions and justifications. This can sometimes be discouraging as independent directors do not always have the same drive and vision as the entrepreneur. Gunewardene: There exists a certain fear of change – that everyone will know the details of your company and finances. You can get over that fear by realising there are a lot of people willing to help with the process. After that, you need to educate your team and organisation, making sure all stakeholders know the advantages of the change. It is primarily a people-challenge. Wijayawardhene: From our experience, if you’ve gone through an investment bank and done your homework, it makes everyone’s lives easier. Most of the issues are related to the financial statements or legal aspects. Before coming to the CSE, a lot of ‘housekeeping activities’ must take place.     Audience: Did you have to meet any reactions from shareholders/investor relations of people who were disappointed with how the prices turned out? Kumarage: Initially it can perhaps be disappointing but in the long term it means growth and value for the company especially as the market picks up. A good dividend policy and strategy is needed at all times. Wijayawardhene: It is important that the company float is spread out across a diverse bunch of investors as a lack of liquidity makes it difficult to exit and enter. This means a lot of retail shareholders which can create volatility – so this is the importance of the diversity of the public float. It is important to have long term investors whereas retail investors are sentiment driven. Gunewardene: It’s been a good experience. The shareholders hold a bigger portion which has been a challenge especially as I was the founder. I had to give them confidence that the company is still led the same way and I’m still involved and part of the leadership.   Audience: In terms of development after 2008, some prices that came in did not let the investor make a return. Why is it that the investor confidence was built in that direction? Perera: In future, any introductions must have a price justified by a qualified party. Previously the reference price was decided arbitrarily. Through the introductory document, the company needs to disseminate the information. An investment bank or anybody qualified by the SEC. based on the disclosure, it is up to the investor whether to invest or not. It is entirely an investment bank issue. In a typical successful issue, it should trade at a premium. It is something the investment bankers need to take into account. We get the company to disclose everything to the investor as there is no other IPO involved.     Audience: Going back to listing BOI companies, why is there a differentiation between a BOI and non BOI? Wijayawardhene: The main reason for this is to encourage FDIs. A lot of foreign investors would invest in local companies as long as an exit mechanism is available. There are other companies without a public float, but to facilitate those companies this idea has come in. They should approve the listing of some companies.     Perera: At the moment we have not distinguished between foreign or local companies but we insist it is of a certain time and has a minimum number of years of operation. Kulamannage: Post IPO problems range from shareholder expectations on earnings to public image, etc. Which strikes you to be the most demanding? Kumarage: For us it is the dividends. We have to show the investor there is sufficient growth and progress at all times. Gunewardene: Making sure all shareholders see the potential of the company and to be able to show the company’s future in the market.   Closing thoughts Perera: When it comes to listing, there are many requirements involved. Disclosure requirements are very straightforward. Companies’ boards can decide to withhold certain information. If you are negotiating a merger, and the situation is in a state of flux, the board is at liberty to withhold until a more appropriate time. Another myth is the lack of control. To become a Diri Savi Board, you only need to issue 10% and for Main Board 25%. There is no way that you lose control. My advice is to not go by myths but do a proper study and speak to regulators and make an informed decision.     Wijayawardhene: After listing, it does not mean you have to open up your company to the elements – look at Apple for example. Even after going public, they retain utmost secrecy as to their operations and releases. Kumarage: We had enough opportunities to grow; our rating was upgrading, and we got two international ratings. With the incentives given for tax purposes, we raised a six million debenture. This all opened up because of our listing, without which our growth would have been stunted.     Wegapitiya: This sort of event is timely as it is important for companies to have awareness and remove the myths. There was no fear of disclosure as we’d made everything transparent. We hope to grow and become a world class company. It is important to educate Sri Lankan enterprises, after which there will be many more companies ready to list. Gunewardene: It’s really about what’s best for the company. That’s the main thing to look at whilst looking at prices also. You need to keep the investors and company in mind rather than the founder or the owner at the time of listing. It’s been a good experience for both me and ODEL to be a listed company.