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CMA mulls listing rules for startups

By John Otini
Tuesday, February 2nd, 2021
CMA Chief executive Wycliff Shammiah.
In summary
    • Direct listing also give an opportunity to the company’s top managers and investors an opening to cash out.
    • CMA in its recent studies found that SMEs are hesitant to list because the found it expensive to issue an IPO due to the underwriting costs and other related expenses.
    • The investment banking industry has been hit by lack of IPOs for a long time now relying on bond listings only and advisory services.

Capital Markets Authority is mulling introduction of direct listing on the stock market, especially for small and medium enterprises (SMEs) to cut the cost of raising capital.

In a direct listing, a company floats its shares on a stock exchange, but without hiring banks to underwrite the transaction like in an Initial Public Offering (IPO).

The move could overhaul the IPO market by allowing aspiring public companies to sell shares directly to investors.

CMA Chief executive Wycliff Shammiah said that a key regulatory element that has caused continuous concern from market participants has been the cost of listing that includes transaction advisory costs, marketing and listing costs, particularly so for small and medium enterprises.

“With increased interest by SMEs to list and raise capital through IPOs, consideration for a direct listing may be viable given their relative size that could be manageable, especially where a firm has an internal financial expert able to map out the IPO requirements for targeted investors,” he said.

Shammiah said underwriting fees, charged by investment banks are the single largest direct cost associated with initial public offerings. 

While this may be so, underwriting remains a significant process particularly for large IPO offerings targeting to raise significant capital.

Below optimal

Critics are, however, split with some saying that CMA has been operating below optimal for along time and in the process has not brought to the NSE companies that should have been listed.

Others say the rules as currently constituted are prohibitive, especially for small companies seeking to list.

Independent analyst Alykhan Satchu says the capital markets have been seriously sub-optimal for more than a decade, adding that the challenge is the market would be better off bringing a big flagship IPO in order to unclog the pipeline.

“We have a number of companies which were brought to market and should not have been. We need to avoid compounding that error,” he said.

The capital markets regulator said that it will be reviewing the Public Offers and Listing regulations and called on the public to share their ideas to improve the existing market conditions.

“We  encourage  you  to  continue  sharing  your thoughts around direct listings,” Shammiah said.

“Currently, it is very prohibitive and expensive  to list on the NSE at the moment, we need rules that are friendly to startups in order to attract investors,” said the head of operations at Faida Investment Bank Rina Hicks.

 Access capital

He asked the public to assess both its benefits and risks of direct listing to ensure firms are enabled to access capital in addition to enjoying the other benefits of listing at minimum cost, while the public remains protected from possible exploitation.

The move has been triggered by a wave of direct listings among US companies with the recent one being Coinbase, the Crytpocurrency exchange that has been approved to list via direct listing in the US.

Music streaming tech firm Spotify was the first major company to go public through direct listing in 2018. 

Direct listing also give an opportunity to the company’s top managers and investors an opening to cash out.

CMA in its recent studies found that SMEs are hesitant to list because the found it expensive to issue an IPO due to the underwriting costs and other related expenses.

The investment banking industry has been hit by lack of IPOs for a long time now relying on bond listings only and advisory services. Some stockbrokers like Kestrel have closed their investment banking sections.

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