Roles of SMEs and sponsors on the Empower Board of CSE

Wednesday, 5 September 2018 00:00 -     - {{hitsCtrl.values.hits}}

By Maleesha Sulthanagoda 

The Colombo Stock Exchange (CSE) and the Securities and Exchange Commission of Sri Lanka (SEC) recently launched the “Empower Board,” a listing platform fostering capital raising and growth opportunities for Sri Lankan Small and Medium Enterprises (SMEs). 

SMEs around the country now have at their disposal a range of new capital-raising methods, and entities listing on this platform will be offered guidance during the listing process by both the CSE and an independent sponsor. 

SMEs listing on the Empower Board are therefore required to submit such applications through an independent sponsor registered with the CSE, a party defined as a company or individual with experience in investment banking or corporate finance, and in handling listing applications for issuers in the past. Specifically, sponsors will be required to hold, at minimum, five years’ of experience in the field of investment banking or corporate finance, out of which a year of experience is required to be in handling listing applications of issuers. 

Sponsors are set to be pivotal to obtaining a listing on the Empower Board, in terms of offering SMEs direction, and the CSE is presently in the process of evaluating potential sponsors to be registered and endorsed by the exchange to facilitate listings on the Empower Board. The participants were offered a comprehensive perspective on the requirements to be a sponsor and the registration process. The CSE also invited individuals and companies interested in pursuing a registration as a sponsor for the Empower Board to participate at the event. 

Giving an introduction to the Empower Board, the benefits of being a listed entity, and the role of sponsors in the Empower Board, CSE CEO Rajeeva Bandaranaike said, “The CSE presently gives the opportunity for large companies to be listed on the Main Board, and the second tier companies to be listed on the DIri Savi Board, but there is no forum for the SME sector to make use of the capital market. This is our aim with establishing the Empower Board. A listing board for SMEs is nothing new worldwide. The Empower Board is about empowering entrepreneurs, and the SME sector.”

Benefits of listing on 

the Empower Board 

“SMEs presently have various ways of raising capital. Reaching out to venture capitalists, angel investors, and other choices. What we have done through the SME platform is to provide an alternate source for those SMEs to raise capital. The CSE is not here to compete with banks or other financial institutions but to complement their services,” said Bandaranaike. 

Highlighting the key benefits of a SME being listed on the Empower Board, Bandaranaike said, “One key benefit of the platform is the ability to raise capital. This would give them opportunity to convert some of their debt into equity. Secondly, it also provides an exit mechanism for private equity investors, and venture capitalists. Through that process, we find that the investors can attract a larger and better number of investors if the investors have an option of exiting.”

The listing process can also be used as a valuation for the company. An entity may not raise any capital but may wish to discover a price for the shares of the company, and by listing the company, the market will place a valuation, or a market price per share. 

“In addition to the key benefits, there is a whole range of intangible benefits that an SME can obtain by listing it on the market. For example, by being listed, you are exposed to a larger community, consisting of brokers, analysts, who will talk about your company. You can getter better publicity and exposure. Being a listed company, adhering to minimum corporate governance standards, and rules, you will be able to find that the stature of the company is also enhanced so that there is better perception of the company among customers, suppliers, and stakeholders,” he added. 

Bandaranaike also noted that listing an entity on the Empower board can also help in enhancing marketing aspects, aligning shareholder, management, and employee interests, acquiring support on capital structuring, and when returning to the market to fund the next phase of growth. 

Eligibility to list on 

the Empower Board

CSE CEO Rajeeva Bandaranaike also pointed out the eligibility requirements for an SME to be listed on the Empower Board, highlighting the state of capital that should be possessed, and the amount of assets in possession of the entity, said, “The requirements are fundamentally different when compared to the requirements of the Main board and the Diri Savi board, because we have tailor-made it for SMEs. The primary requirement is that the state of capital should be between Rs. 25 million and Rs. 100 million. In the case of an Initial Public Offering (IPO), the state of capital should be a minimum amount of Rs. 10 million, but then you have to raise another Rs. 15 million to come up to the minimum of Rs. 25 million.”

“In terms of assets, total assets in possession by the SME at the time of applying to be listed should be below Rs. 600 million. There is also a requirement that the company should have positive net assets. In terms of duration of operations and financial statements, an operating history of two years is required and there’s a requirement that SMEs that want to be listed should have a minimum of one sponsor. This is for the simple reason because, SME companies may not have that knowledge and the skills to submit a listing application, go through an IPO process, and as an ongoing basis to comply and conform to all the rules of the CSE. A sponsor will guide, direct, and advise them with these aspects,” he elaborated. 

“We don’t expect this board to be really liquid. There are some other general requirements too. In terms of a prospectus and an introductory document required for an IPO, a company can prepare the prospectus or the introductory document in a soft copy form. This should be made available on the websites of the company, the sponsor, and the CSE.”

In terms of other requirements, financial statements, there is no requirement for a quarterly financial statement to be presented, only a half yearly statement, but the company should submit a supplementary disclosure statement for the first and third quarters. The supplementary disclosure document will give the health of the company. In terms of the annual report, this can be submitted in a soft copy format. Fairly easy conditions have been put in place for the SME board. 

A listing entity should also contain an audit committee, a remuneration committee, and a related party transactions review committee, or a single committee that carries out all these tasks. The chairman of this committee should be a member of a recognised accounting body. 

An unmodified audit opinion for the financial year, immediately preceding the date of the initial listing application, or an audit opinion which does not contain emphasis of matter on “going concern”, as set out in the independent auditor’s report of the audited financial statements obtained in the annual report of the company, should be submitted. 

The cost of listing

The initial listing fee for the Empower Board will be Rs. 75,000, with an annual listing fee of 0.003% of the market capitalisation of the ousted entity as at 31 December of the year immediately preceding. The CSE may waive the annual listing fee payable by a company on the board in respect of the year immediately after the initial listing. As per the Ceylon Depository System (CDS) clearing fees, an annual payment at the rate of Rs. 15 per transaction, subject to a minimum of Rs. 25,000 and a maximum of Rs. 750,000 per annum has to be made.  CSE CEO Bandaranaike also gave a presentation on the requirements to be a sponsor on the Empower Board, highlighting that a corporate body or an individual can be a sponsor on the board with ease. 

The role of sponsors 

in the Empower Board

As the Empower Board is a living platform, fostering capital raising and growth opportunities for Sri Lankan SMEs, sponsors are set to be pivotal to obtaining a listing on the board in terms of offering SMEs direction. The CSE is responsible for the appointment of corporates or individuals as sponsors to facilitate listings on the Empower Board. 

The role of a sponsor will involve advertising, guiding, and assisting the SMEs in relation to both listing activities and post-listing activities. Bandaranaike also noted that the sponsor is expected to engage the SME for a period of two years at minimum, essentially until the release of the second annual report of the entity upon listing on the Empower Board. The sponsor will also be able to charge the listing entity a professional fee for initial and post-listing services provided, upon agreeing the specific scope of services with the entity. 

“The sponsors will be obliged to assess the sustainability of the applicant company seeking a listing, guide the entity and its directors regarding their initial and continuous listing obligations and ensure compliance, ensure that the initial listing application and relevant documents are prepared in conformity with regulatory requirements and are submitted in a timely manner, perform duties independently without conflicts of interests with the entities sponsored, and liaise with the CSE on matters regarding the obligations of the sponsor and other relevant matters. The sponsors are also obliged to submit accurate, and credible information to the CSE at all times and make updated documentations available,” he elaborated. 

Both corporate bodies and individuals are eligible to be appointed as Empower Board sponsors. “If you are a corporate body, it must be incorporated in Sri Lanka. The body must also include at least one staff member with a minimum of five years’ experience in investment banking / corporate finance out of which one year experience should be in handling listing applications or capital raising services. The directors or key management personnel of the said corporate body should not have been declared bankrupt and/or convicted of fraud, misappropriation or breach of trust or any other similar offences which the CSE considers as grounds for disqualification. The corporate body must also hold adequate facilities, equipment, appropriate systems, and controls in place to deliver sponsor obligations,” he added. 

Elaborating on the requirements for an individual to be eligible as a sponsor on the Empower Board, the CSE CEO said, “If you are an individual, you must be a resident of Sri Lanka to be eligible to be considered as a sponsor on the Empower Board. The individual must also possess a minimum of five years’ experience in investment banking / corporate finance out of which he/she must have a year of experience in handling listing application of issuers. The persons in need of being appointed as an Empower Board sponsor also should not have been declared bankrupt and/or convicted of fraud, misappropriation or breach of trust or any other similar offences. The individual must also hold adequate facilities to deliver sponsor obligations.”

Pix by Shehan Gunasekara