SME Board; an alternative channel for SMEs to raise capital

The SME Board titled ‘Empower, the latest listing platform, developed by the Colombo Stock Exchange (CSE) and the Securities and Exchange Commission of Sri Lanka (SEC) to encourage small and medium sector entrepreneurs to raise capital through the equity markets has received an overwhelming response from the local business community since its launch in July, this year.

The CSE has provided opportunities for large companies to list on the Main Board and Diri Savi Board, Chief Executive Officer at CSE Rajeeva Bandaranaike said in an interview with Daily News Business.

“Despite the fact that SME sector accounts for a major portion of Sri Lankan economy, there is no opportunity provided for companies in the SME sector to make use of the capital market.” He said. “It is timely that the CSE has launched a dedicated platform to enable SMEs to make use of the capital market for capital requirements particularly to fulfill their future growth targets and expansion plans.”

SME enterprises mainly fund their activities through bank financing, private equity, Venture capital, Angel investors as well as using their own wealth.”

Elaborating further on CSE’s involvement with this initiative, Bandaranaike emphasised that the main intention of the CSE is to provide an alternative channel for SMEs to raise capital.

“We don’t intend to compete with bank financing or with the investor category, but we want to compete with the service offering in the end to give an opportunity for SMEs to reduce their debt burden, convert debt to equity and develop their businesses.”

So it’s with that in mind that CSE and SEC worked on SME platform. We’re very upbeat and positive that SMEs will take this opportunity. We at CSE believe SMEs need to grow because that’s a growing segment. They need capital and funding as they can’t rely only on bank financing. There will come a time where they need to reduce their debt burden, convert debt into equity. That’s the time they will look at equity financing,” He said. “I’m not saying all SMEs can qualify for this. However, they need to be ready to raise public funds.”

According to Bandaranaike, for SMEs to raise public funds in the capital market, they need to be ready to raise money and are also required to establish minimum level of corporate governance standards to be qualified for the listing.

Commenting on key differences among the Main Board/ Diri Savi Board and the SME board in terms of listing requirements, Bandaranaike said the CSE has come up with a different set of requirements and certain obligations for SMEs to list compared to the Main Board and Diri Savi Board.

“We do recognise SME companies are quite different to larger companies. So the CSE has made that distinction and SMEs will find it easy to obtain a listing and maintain a listing.”

To be eligible for listing, a company should have a stated capital above Rs. 25 million and bellow Rs. 100 million at the time of listing and in an Initial Public Offering (IPO), the applicant entity should have a stated capital not less than Rs. 10 million at the date of the listing of application. The company must also be in operation at least two years immediately preceding the date of application and total assets should be of or below Rs. 600 million as at the date of the initial listing.

However, SMEs will have to submit their listing applications through a sponsor and sponsor should guide and assist SMEs in the listing process and also abide by the listing rules.

“The CSE has now introduced the concept of sponsor. The sponsor is either an individual or a company. Their obligations are to help the company during the listing and post listing process.

The responsibility of the sponsor is to prepare the SME company for listing applications and for a listing. Furthermore, it is their responsibility to help the company place shares with investors and to help the company to do the Initial Public Offering (IPO) and help capital market.” Bandaranaike said.

Subsequent to the issue, the sponsor is expected to advice, guide and direct the company in terms of complying with all the rules and regulations with the public listing.

Bandaranaike said further that the CSE has brought in this concept to guide and help them through the listing process because most of the time, SME companies don’t have sufficient people to maintain listing when compared to larger companies.

“There is always someone guiding and helping SMEs through this process and they are not alone in this endeavor.” He said. “Since the launch of SME platform one month ago, we have received an overwhelming response both from sponsors and as well as companies. Once we announced this, companies have been coming to us and talking to us rather than us going and talking to them.”

In addition, the CSE has conducted its first forum in Anuradhapura to create awareness among general public about the importance of listing in stocks and listing on SME Board and the forum saw the participation over 50 business owners.

“I think, at least 10 of them are following with us now following the forum.” He said.

Furthermore, CSE is planning on conducing awareness programs for companies throughout the country and the CSE is also partnering with regional and national chambers to create awareness among business communities to this end.

“We are also talking to prospective sponsors, potential institutions that can come and obtain approval as sponsors.”

To this end, the CSE has recently conducted a forum for Chartered Accountants where professionals could act as sponsors.

In addition, the CSE is in discussions with a number of prospective sponsors in this regard.

He further said successive governments have been trying to encourage the SME sector by introducing numerous proposals to develop the sector and CSE’s SME Board has also been introduced in keeping with the national need of promoting the SME sector.

He added that the Bombay Stock Exchange (BSE) has also gone a long way in developing their SME platform quite successfully with more than 150 companies listing on the platform. In addition, BSE has gone to the extent of establishing an incubator for startups as well.

“They are in a very advanced stage. We have learned from them.” He said. “For our own platform, we have taken some ideas from those jurisdictions as well.”

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