On the listing of SMEs and other small businesses – BR Research
The Securities and Exchange Commission of Pakistan (SECP) has relaxed the eligibility requirements for investors in GEM board companies. A GEM board allows companies that do not meet PSX’s direct listing requirements to raise funds (through an IPO) from investors with fewer restrictions. These companies can be startups or other companies with high liquidity and investment risk compared to mature companies on stock exchanges.
SECP – earlier towards the end of 2021 – officially launched the Global Enterprise Marketplace (GEM) Boards to enable small and medium-sized enterprises (SMEs), green field projects, non-profit organizations and other companies to raise capital via the capital market but who do not meet the onerous requirements for listing on the main PSX board.
The main objective of this decision was to provide a regulatory environment conducive to small businesses and equity listing than the main advice. Its main conditions included a public limited company to have audited accounts for the last two financial years with paid-up capital after issuance of at least Rs 25 million. Also, the minimum entry fee has been set at Rs50,000 vs. Rs200,0000 on the main PSX draw. Other incentives for small businesses to list and raise funds in the capital market have been the relaxed post-listing requirements of the GEM Board, such as submitting a semi-annual progress report to the instead of a quarterly report.
The recent easing comes from the regulation of net assets by investors. Previously, investors had to have Rs 5 million of “net assets” to invest in GEM-listed companies, which involved reporting as well as verification by the broker. The changed condition is now that there is no need for broker verification anymore. In addition, “Net Assets” (also referred to as Net Worth) of Rs.5 million is replaced with “Assets” worth Rs. debts.
While the concept of eligible investor was introduced to address liquidity constraints, the GEM board since its inception has only been able to list a few companies with annoying trading volumes. It is hoped that the relaxation of investor eligibility (as outlined above) will create much needed liquidity. It is reported that 5 more companies have applied to be listed on the GEM board.
The global example of the GEM board in Hong Kong is not inspiring. While Pakistan’s GEM council is still in its infancy, some reading of what is happening in Hong Kong can be taken here. The fate of the GEM board launched in Hong Kong some 22 years ago has been plagued with scandals. New York’s NASDAQ-style financial center did not attract trading activity and returns were negligible. Why? Investors blame liquidity issues and a lack of sell-side research. So far in 2022, there have been no GEM board registrations in Hong Kong, with only one registration in 2021. Experts say where there is a conflict of interest: where GEM’s board aims to provide a platform for small businesses with “relatively low quality”. financiers to list, investors are looking for companies with high quality financiers. The Board of GEM in Pakistan also identifies eligible investors as all institutional and individual investors registered with NCCPL who have financial strength or expertise. Are these investors ready to invest in small businesses?