The 2017 World Federation of Exchanges (WFE) research which sought to understand companies’ experience of being listed and how this experience compared with expectations at time of listing – had asked companies whether, given their experience and what they now know about being listed, would list again, or not. Nearly three-quarters of all surveyed companies indicated that they would. This positive feedback among listed companies holds into our own jurisdiction where majority of companies also shares their generally positive experience following their listing.
In the said research, companies were also asked to indicate whether their experience of being listed was better than, worse than, or in line with their pre-listing expectations across a range of factors. While there are significant differences across indicators and geographies, companies across jurisdictions consistently reported a better-than-expected listing experience for certain indicators. The areas where companies consistently reported a better-than-expected experience were: (i) Impact on visibility and reputation; (ii) Effect on financial performance/profitability; (iii) ability to raise capital from a diverse investor base; (iv) Corporate social responsibility.
On the other hand, a reasonable proportion of companies reported a less-than-expected experience across the following factors: (i) Time and costs of aligning financial record keeping and reporting with listings requirements; (ii) Level of liquidity of the stock; (iii) Volatility of the stock price; (iv) Time and costs associated with meeting ongoing listings requirements.
What keeps SMEs Away from Listing? Our own experience
In examining the motivations and experiences of listed firms, the DSE’s 5-years participated in the Top 100 Mid-Sized Companies survey (as a co-sponsor) where questionnaires sought to understand what prevented unlisted firms from using public equity markets were shares and responded into, on it more than a half of the surveyed unlisted firms said they had need for capital financing and may consider listing but so far decided not to list. For these firms, the reasons for their decision not to list for now varied considerably across. Some SMEs decided that listing was too costly while others felt that meeting the listing requirements would involve changing too many internal business processes. Some SMEs were particularly concerned with transparency and also about costs of maintaininga listing, even though this was also given as a reason for not listing. Based on these responses one would conclude that, lack of information about listing contributed to the thinking and decision-making process for many SMEs.
Among the unlisted firms that said they had not considered listing, the reasons similarly varied across. Several companies mentioned concerns about the need to comply with various regulations, transparency and disclosure requirements, reporting standards, and associated costs being the major reasons, while a few companies mentioned unwillingness to lose control of the company. In line with the response that companies felt they didn’t know enough about listing, about half of firms said they had never considered listing.
Interestingly, very few companies that either considered listing and decided against it, or who had not considered listing, gave the availability of alternative sources of funding as a reason for not listing. This finding seems to reinforce the existence of a funding gap and the need to continue focusing on finding viable funding options for capital-constrained SMEs.
Firms were also asked about their associations with being a listed company. Unlisted SMEs had relatively unfavourable views of what it means to be a listed company. However, based on what surveyed firms said they associate with being a listed company, some of these views may be based on misperceptions about the experience of being listed on a main board rather than an SME board. The views of unlisted SMEs seemed to be shaped more by the experience of firms listed on the main segment than by those listed on the SME/EGM segment. For example, some unlisted firms strongly associated being listed with greater shareholder pressure and loss of company control. Likewise, strong associations of listing with shareholder pressure and illiquid trading more closely align with the reported experiences of smaller firms on DSE’s main investment market. In all these cases, there may be an opportunity for the stock exchange to emphasize the experience of firms on the EGM to counter these views among the pool of SMEs the DSE targets for future listings.
On the positive side a large majority of surveyed unlisted SMEs have more favourable associations with being a publicly listed firm. More than half of surveyed SMEs thought listing would have a positive impact on their visibility and reputation. Related to this, three-quarters expected that listing would lead to greater public scrutiny. And over three-quarters of these firms expect that listing would enhance their financial access. This would suggest that the decision not to list is a function more of a lack of information than a negative perception about listing.
While acknowledging that one of the major factors for companies not to consider raising public capital and listing is the lack of information, that’s why the DSE is currently addressing this challenge by implementing the DSE Enterprise Acceleration Program (DEAP) , the program aiming at building institutional capacity for SMEs’ owners and managers so they can run their firms sustainably, cognizant to the fact that to be able to attract diverse forms of capital finance including bank finance, private capital and public capital finance requires 360-degree way of managing firms affairs.
The difficulty in simply extending the more traditional equity market solution to SMEs is that the nature of SMEs (given their smaller size and often fewer years in existence) means that the relative costs of listing and compliance (initial and ongoing) may be higher than they are for larger, more established companies. Their more limited institutional capacity also means the quality of their disclosure is likely to be lower than that of larger, more established firms. Finally, SMEs are also often intrinsically riskier than more established firms. Therefore, the challenge for the DSE is to find ways to reduce the cost burden without unduly compromising investor protection. The suggestion could be the need for addressing both direct and indirect costs of listing while also improving prospective firms’ understanding of what it means to be listed, including their ability to meet the listings requirements. But also raising awareness, building capacities and gaining experience of listing by DSE introducing the non-trading listing platform whose aim is enhancing SMEs visibility and profile while also enjoying the listing experience may be helpful.