An alternative share market to cater for funding needs of Fiji's SMEs
By Dionisia Tabureguci
A NEW share market to facilitate the listing of small and medium sized enterprises has been proposed and is likely to be established at the South Pacific Stock Exchange (SPSE) sometime next year, according to the Capital Markets Development Authority.
Tentatively called the Alternative Investment Market (AIM), the initiative would see the creation of a trading board upon which companies with assets of less than F$5 million may list and have their shares traded.
In an interview with Islands Business Magazine, CMDA chief executive officer Suren Kumar said the project is a response to the need by a greater number of companies in the country for an alternative source of funding.
“These companies, which are small in nature, want to raise capital and want to undertake projects but they can’t get bank funding because the projects may be a bit too risky for the banks. Therefore, they need to see an alternative source of capital. Equity capital is something that can take a little bit more risk than bank capital,” said Kumar.
Fiji’s capital markets have gradually expanded over the years to now include a stock exchange, a unit trust market, which comprise both local unit trusts and overseas unit trusts, as well as a bond market.
The 16 companies that are currently listed on SPSE have used the facility and the flexibility that it allows to make commercial progress with their businesses. They have used the stock exchange to raise more funds to pay their debts or to grow their business, and the stock exchange has also been used to merge subsidiaries. As well, the stock exchange has been used as a point of exit for family owned businesses, such as supermarket chain RB Patel Group, whose original owners have progressively reduced their shareholding to what is now a little above 50 percent. Public ownership of RB Patel now comprises large shareholders like the Fijian Trust Fund as well as members of the public.
Following on from these developments, the establishment of an AIM is seen by CMDA as a way of increasing the choice for investors and creating a platform for Fiji’s small and medium sized businesses to be included in the benefits within the capital markets, which include an alternative source of funding other than banks.
Kumar talks to Islands Business Magazine on CMDA’s plan to set up the AIM and the purpose behind this project.
The establishment of this Alternative Investment Market (AIM) will be a big development for the local stock market. Why has there been such a need?
When I first joined (in 2004), you had asked me what I would do that was going to be different and which would lift the development aspect of the market. Well, I had a lot of broad concepts in my mind as to what would actually facilitate the development and escalate the momentum on it. Establishing AIM is one piece of that. While it is only one piece, it is actually a very large piece in the whole spectrum and we will see how it goes. At the moment, we see that there is a big need for small companies to raise capital. These companies want to undertake projects but they can’t go and get bank funding because the projects may be a bit too risky for the banks. There is therefore an alternate source of capital, in this case, equity capital, which can take a little bit more risk than bank capital. Because people are prepared to say ‘yes, I want to invest in that company. Even if I lost something, it would still be okay because I had a feeling that it may be a very successful product.’ Or ‘it might just not work but I am happy to support that because I like the concept, I like the idea, I think it is a good thing.’ So the establishment of AIM is mainly to facilitate a lot of companies with a capital need of, say $100,000 to about $3 million.
What is an alternative investment market and how does it work?
The alternative market operates in the same way that the main market at SPSE operates. We already have the main board, which has 16 listed companies at the moment. And then we will have the AIM, a second tier market, which we will probably generally refer to as the investment market. So companies that are being listed on the investment market will be different from companies listed on the main board. Therefore, AIM will be a different category altogether. It is almost like a supermarket, where in the food aisle, you have apples and oranges. An alternative investment market is a totally different type of product but facilitated through the stock exchange. And the way it is going to operate - if you ask how it would work - is very similar to the main board companies. If you want to buy and sell shares on this market, you will still have to go through a broker and the market will still be regulated by the CMDA and the stock exchange. However having said that, some of the rules and regulations may be slightly different. Where in the case of companies listed on the main board there are quite a lot of rules and regulations they have to follow, companies that qualify to list on the alternative board may, for example, not be required to make as detailed a disclosure as is required of companies listed on the main trading board. So the rules may be a bit relaxed for these companies.
Suren Kumar, CMDA CEO believes an alternative market would work
The other aspect would be in terms of prospectus preparation where we will try to reduce the costs for these small companies. At the moment, if a company wants to list, it has to hire a consultant, an advisor, an investment bank to be able to do things for them. And then it comes through to us, we review it, we amend it and then we give the approval after that. In the alternative market, we will try to have a standardised disclosure document. If companies want to raise funds, they don’t need to hire all the expensive consultants. They can do it in-house if they have the skills set but we will have the guideline, a standardised document for prospectus and an information memorandum and that would allow them to minimise the costs. The intention is to make it as compatible or as competitive as borrowing money from the bank, in terms of disclosure, documentation and other things. If you are borrowing $100,000 from the bank, you shouldn’t incur more than $10,000 in costs so that is the kind of range that we are looking at as well. If these companies want to raise between $250,000 and $500,000, they shouldn’t incur anything more than $10 000 to $20,000. And a large part of that cost is actually prospectus preparation, hiring of consultant, lawyers, so that is something we are looking at quite seriously and that is going to be the significant difference between the main market and the alternative market.
This is going to be called a sub-market?
Well, we are going to call this an alternative investment market. It is not a sub-market. It is another market and adds another product to the stock exchange. In this sense, the SPSE will have two distinct offerings: the main board products and the alternative markets products. There could be other products that the stock exchange would have and we are also looking at that right now. But they may come after we have digested this one (AIM).
What could be an example of a business that may want to use this facility?
A bright university student who has a bright idea is a good example. He knows that the product will work but doesn’t have the capital at this stage. The idea is an intelligent one which the market knows will work but people are not able to buy that product because it is not out there in the market. What we now need is for some people to provide some risk capital to join with this person who has the bright idea and together, they roll out the business and grow it. That is how wealth and employment are created. And that is the idea – to foster entrepreneurship. There are many smaller companies around who might want to go public but who cannot afford to list on the main market. As you know, when you talk about the main market, you are really only talking about five percent of businesses in Fiji. A majority of our businesses are small - about 95 percent - they are really the job creators of this country and they are not catered for by the stock market.
In this case, they have an option to list on the alternate market where the compliance cost is lower, the listing fees is lower, yet the market is still regulated and provides the same protection for investors and companies that participate in the main market. So this market is really for small companies with assets of, say, below $5 million who don’t have ready access to funds but who have good ideas and want to grow their businesses.
So you are really looking at encouraging the small and medium sized enterprises…
Oh yes, that is the whole idea. We cannot get too small. We will probably be suitable for companies that want $200,000, who might have an asset base of $100,000 and would like to raise another $200,000.
How soon would we see this AIM established in Fiji?
We would like to have AIM up and running within the next year and we need to tidy up on the rules and regulation side of things, have the offer documents ready before we are able to take it forward to that next level.
With the establishment of Fiji’s AIM, what would happen to companies on SPSE?
Companies on SPSE would remain there because we are targeting companies of different size here. We can’t list any kind of company on AIM. The maximum amount of asset is probably worth F$5 million. Companies worth higher than that – the F$5 million category will have to, by default, list on the main board. For companies on AIM that have grown their businesses to more that $5 million and wish to remain listed, they have to move onto the main board. AIM therefore can be seen as a stepping-stone for smaller companies to grow their business and graduate onto the main board. The bigger companies on the main board may, however, list their small independent subsidiaries on AIM.
Setting up such a facility would no doubt involve some preliminary findings on the interest that may be expressed by companies that are being targeted for listing on this facility. What has been the response?
Yes, we have approached a number of organizations and the response from them has been very positive. Some think it would be attractive to list some of their subsidiaries on AIM. Some, who had probably not considered the capital markets, now think that AIM is an attractive and a better option for them. They want to get in slowly, get used to regulations, compliance costs and then springboard to the main market. We have also spoken to some companies that are on the main board and there have been consideration to list their subsidiaries. This would be good for them as it will assess the value of these subsidiaries. At the moment, the (subsidiaries) companies are private and if they are owned by the listed companies, then for disclosure purposes, the value has to be determined. In order to assess it, a valuer has to come in and there is cost associated with that. By bringing these subsidiaries to list, there is a ready market that determines the value.
What kind of support would CMDA require from government in order to help this market establish properly?
We have moved away from saying that government will support us in everything we do. We don’t think we can rely on that. We will have to continue to do what we believe will develop the market. So we are moving away from the thinking that government will have specific incentives for individual markets. We need the government support in terms of the operations of the authority, in the performance of its functions in terms of regulation and development but we don’t see that we need some specific government intervention. We are going to go ahead anyway. We believe there is enough demand out there and enough interest that specific government incentives may not be required. And it is a supply and demand-based thing so we don’t need to create or let the government intervene in that in any way. The government has its own priorities in various sectors and I think the industry itself can develop on its own.
So the market will largely develop on its own?
Yes. We are saying that the businesses that are out there are already in existence. We just need to get the private sector more engaged, more involved in the capital markets. We do need the government in the sense that government will be able to facilitate donor agencies to assist us in our programmes. The donor agencies have expressed support and we would need government’s support in that to allow us to work with the donor agencies to facilitate that market. Various rules, regulations, corporate governance, are going to be a big part of that. Our marketing in terms of saying that we have got integrity in the market, and corporate governance do play a very important role and influence in people’s decision making process so, we are very much for good corporate governance and we have got a few donor agencies that have expressed strong interest to support us. Ultimately, Fiji as an investment destination will benefit from this. By having quality corporate governance in place, we attract quality capital for quality development in the market. If you don’t have good corporate governance, then you don’t attract quality capital into the market.
You say that CMDA is currently undertaking research into overseas jurisdictions on an appropriate structure for Fiji’s AIM. How is this going?
We have gone into and looked at a variety of markets, in particular the New Zealand market. I actually was involved in the New Zealand market and had listed companies on the alternative market there so I have some experience on that market.
We have been engaged with the New Zealand alternative market as well as the New Zealand Stock Exchange with regards to the development of the Fiji AIM. For the regulation side of things, we have been talking to the securities commission there. We have also been talking to people who have been involved in the alternative market there in recent times: advisors, directors of companies that are listed on the alternate board as well as on the main board. We have talked to them and tried to see what is suitable for us, what is right for us. We have also looked at markets in South Africa, Eastern Europe and London. We are looking at the good things that they have had and we are learning the lessons that they have learnt. We will try to avoid some of the flaws that they have had in order that we don’t make the same mistakes. We have that benefit and advantage that we have something that has already been tested and tried and has worked.
What about investors…what benefit is there for them?
Well, obviously when the companies list, then they will have the ability to actually buy and sell shares in those companies. And there could be initial public offerings coming in as well so investors would be able to take advantage or participate in the public offer when those companies come to the market. So there will be definitely be opportunities for investors to buy into new companies as well as businesses to list and raise funds.
...a trading day at SPSE
____
NOTE: This is the original transcript of an interview with Surendra Kumar, published in the Islands Business Magazine as: Interview: WHY WE NEED AN ALTERNATIVE MARKET, pp 40,41, December 2006 edition.
Islands Business is the flagship publication of Islands Business International
****
By Dionisia Tabureguci
A NEW share market to facilitate the listing of small and medium sized enterprises has been proposed and is likely to be established at the South Pacific Stock Exchange (SPSE) sometime next year, according to the Capital Markets Development Authority.
Tentatively called the Alternative Investment Market (AIM), the initiative would see the creation of a trading board upon which companies with assets of less than F$5 million may list and have their shares traded.
In an interview with Islands Business Magazine, CMDA chief executive officer Suren Kumar said the project is a response to the need by a greater number of companies in the country for an alternative source of funding.
“These companies, which are small in nature, want to raise capital and want to undertake projects but they can’t get bank funding because the projects may be a bit too risky for the banks. Therefore, they need to see an alternative source of capital. Equity capital is something that can take a little bit more risk than bank capital,” said Kumar.
Fiji’s capital markets have gradually expanded over the years to now include a stock exchange, a unit trust market, which comprise both local unit trusts and overseas unit trusts, as well as a bond market.
The 16 companies that are currently listed on SPSE have used the facility and the flexibility that it allows to make commercial progress with their businesses. They have used the stock exchange to raise more funds to pay their debts or to grow their business, and the stock exchange has also been used to merge subsidiaries. As well, the stock exchange has been used as a point of exit for family owned businesses, such as supermarket chain RB Patel Group, whose original owners have progressively reduced their shareholding to what is now a little above 50 percent. Public ownership of RB Patel now comprises large shareholders like the Fijian Trust Fund as well as members of the public.
Following on from these developments, the establishment of an AIM is seen by CMDA as a way of increasing the choice for investors and creating a platform for Fiji’s small and medium sized businesses to be included in the benefits within the capital markets, which include an alternative source of funding other than banks.
Kumar talks to Islands Business Magazine on CMDA’s plan to set up the AIM and the purpose behind this project.
The establishment of this Alternative Investment Market (AIM) will be a big development for the local stock market. Why has there been such a need?
When I first joined (in 2004), you had asked me what I would do that was going to be different and which would lift the development aspect of the market. Well, I had a lot of broad concepts in my mind as to what would actually facilitate the development and escalate the momentum on it. Establishing AIM is one piece of that. While it is only one piece, it is actually a very large piece in the whole spectrum and we will see how it goes. At the moment, we see that there is a big need for small companies to raise capital. These companies want to undertake projects but they can’t go and get bank funding because the projects may be a bit too risky for the banks. There is therefore an alternate source of capital, in this case, equity capital, which can take a little bit more risk than bank capital. Because people are prepared to say ‘yes, I want to invest in that company. Even if I lost something, it would still be okay because I had a feeling that it may be a very successful product.’ Or ‘it might just not work but I am happy to support that because I like the concept, I like the idea, I think it is a good thing.’ So the establishment of AIM is mainly to facilitate a lot of companies with a capital need of, say $100,000 to about $3 million.
What is an alternative investment market and how does it work?
The alternative market operates in the same way that the main market at SPSE operates. We already have the main board, which has 16 listed companies at the moment. And then we will have the AIM, a second tier market, which we will probably generally refer to as the investment market. So companies that are being listed on the investment market will be different from companies listed on the main board. Therefore, AIM will be a different category altogether. It is almost like a supermarket, where in the food aisle, you have apples and oranges. An alternative investment market is a totally different type of product but facilitated through the stock exchange. And the way it is going to operate - if you ask how it would work - is very similar to the main board companies. If you want to buy and sell shares on this market, you will still have to go through a broker and the market will still be regulated by the CMDA and the stock exchange. However having said that, some of the rules and regulations may be slightly different. Where in the case of companies listed on the main board there are quite a lot of rules and regulations they have to follow, companies that qualify to list on the alternative board may, for example, not be required to make as detailed a disclosure as is required of companies listed on the main trading board. So the rules may be a bit relaxed for these companies.
Suren Kumar, CMDA CEO believes an alternative market would work
The other aspect would be in terms of prospectus preparation where we will try to reduce the costs for these small companies. At the moment, if a company wants to list, it has to hire a consultant, an advisor, an investment bank to be able to do things for them. And then it comes through to us, we review it, we amend it and then we give the approval after that. In the alternative market, we will try to have a standardised disclosure document. If companies want to raise funds, they don’t need to hire all the expensive consultants. They can do it in-house if they have the skills set but we will have the guideline, a standardised document for prospectus and an information memorandum and that would allow them to minimise the costs. The intention is to make it as compatible or as competitive as borrowing money from the bank, in terms of disclosure, documentation and other things. If you are borrowing $100,000 from the bank, you shouldn’t incur more than $10,000 in costs so that is the kind of range that we are looking at as well. If these companies want to raise between $250,000 and $500,000, they shouldn’t incur anything more than $10 000 to $20,000. And a large part of that cost is actually prospectus preparation, hiring of consultant, lawyers, so that is something we are looking at quite seriously and that is going to be the significant difference between the main market and the alternative market.
This is going to be called a sub-market?
Well, we are going to call this an alternative investment market. It is not a sub-market. It is another market and adds another product to the stock exchange. In this sense, the SPSE will have two distinct offerings: the main board products and the alternative markets products. There could be other products that the stock exchange would have and we are also looking at that right now. But they may come after we have digested this one (AIM).
What could be an example of a business that may want to use this facility?
A bright university student who has a bright idea is a good example. He knows that the product will work but doesn’t have the capital at this stage. The idea is an intelligent one which the market knows will work but people are not able to buy that product because it is not out there in the market. What we now need is for some people to provide some risk capital to join with this person who has the bright idea and together, they roll out the business and grow it. That is how wealth and employment are created. And that is the idea – to foster entrepreneurship. There are many smaller companies around who might want to go public but who cannot afford to list on the main market. As you know, when you talk about the main market, you are really only talking about five percent of businesses in Fiji. A majority of our businesses are small - about 95 percent - they are really the job creators of this country and they are not catered for by the stock market.
In this case, they have an option to list on the alternate market where the compliance cost is lower, the listing fees is lower, yet the market is still regulated and provides the same protection for investors and companies that participate in the main market. So this market is really for small companies with assets of, say, below $5 million who don’t have ready access to funds but who have good ideas and want to grow their businesses.
So you are really looking at encouraging the small and medium sized enterprises…
Oh yes, that is the whole idea. We cannot get too small. We will probably be suitable for companies that want $200,000, who might have an asset base of $100,000 and would like to raise another $200,000.
How soon would we see this AIM established in Fiji?
We would like to have AIM up and running within the next year and we need to tidy up on the rules and regulation side of things, have the offer documents ready before we are able to take it forward to that next level.
With the establishment of Fiji’s AIM, what would happen to companies on SPSE?
Companies on SPSE would remain there because we are targeting companies of different size here. We can’t list any kind of company on AIM. The maximum amount of asset is probably worth F$5 million. Companies worth higher than that – the F$5 million category will have to, by default, list on the main board. For companies on AIM that have grown their businesses to more that $5 million and wish to remain listed, they have to move onto the main board. AIM therefore can be seen as a stepping-stone for smaller companies to grow their business and graduate onto the main board. The bigger companies on the main board may, however, list their small independent subsidiaries on AIM.
Setting up such a facility would no doubt involve some preliminary findings on the interest that may be expressed by companies that are being targeted for listing on this facility. What has been the response?
Yes, we have approached a number of organizations and the response from them has been very positive. Some think it would be attractive to list some of their subsidiaries on AIM. Some, who had probably not considered the capital markets, now think that AIM is an attractive and a better option for them. They want to get in slowly, get used to regulations, compliance costs and then springboard to the main market. We have also spoken to some companies that are on the main board and there have been consideration to list their subsidiaries. This would be good for them as it will assess the value of these subsidiaries. At the moment, the (subsidiaries) companies are private and if they are owned by the listed companies, then for disclosure purposes, the value has to be determined. In order to assess it, a valuer has to come in and there is cost associated with that. By bringing these subsidiaries to list, there is a ready market that determines the value.
What kind of support would CMDA require from government in order to help this market establish properly?
We have moved away from saying that government will support us in everything we do. We don’t think we can rely on that. We will have to continue to do what we believe will develop the market. So we are moving away from the thinking that government will have specific incentives for individual markets. We need the government support in terms of the operations of the authority, in the performance of its functions in terms of regulation and development but we don’t see that we need some specific government intervention. We are going to go ahead anyway. We believe there is enough demand out there and enough interest that specific government incentives may not be required. And it is a supply and demand-based thing so we don’t need to create or let the government intervene in that in any way. The government has its own priorities in various sectors and I think the industry itself can develop on its own.
So the market will largely develop on its own?
Yes. We are saying that the businesses that are out there are already in existence. We just need to get the private sector more engaged, more involved in the capital markets. We do need the government in the sense that government will be able to facilitate donor agencies to assist us in our programmes. The donor agencies have expressed support and we would need government’s support in that to allow us to work with the donor agencies to facilitate that market. Various rules, regulations, corporate governance, are going to be a big part of that. Our marketing in terms of saying that we have got integrity in the market, and corporate governance do play a very important role and influence in people’s decision making process so, we are very much for good corporate governance and we have got a few donor agencies that have expressed strong interest to support us. Ultimately, Fiji as an investment destination will benefit from this. By having quality corporate governance in place, we attract quality capital for quality development in the market. If you don’t have good corporate governance, then you don’t attract quality capital into the market.
You say that CMDA is currently undertaking research into overseas jurisdictions on an appropriate structure for Fiji’s AIM. How is this going?
We have gone into and looked at a variety of markets, in particular the New Zealand market. I actually was involved in the New Zealand market and had listed companies on the alternative market there so I have some experience on that market.
We have been engaged with the New Zealand alternative market as well as the New Zealand Stock Exchange with regards to the development of the Fiji AIM. For the regulation side of things, we have been talking to the securities commission there. We have also been talking to people who have been involved in the alternative market there in recent times: advisors, directors of companies that are listed on the alternate board as well as on the main board. We have talked to them and tried to see what is suitable for us, what is right for us. We have also looked at markets in South Africa, Eastern Europe and London. We are looking at the good things that they have had and we are learning the lessons that they have learnt. We will try to avoid some of the flaws that they have had in order that we don’t make the same mistakes. We have that benefit and advantage that we have something that has already been tested and tried and has worked.
What about investors…what benefit is there for them?
Well, obviously when the companies list, then they will have the ability to actually buy and sell shares in those companies. And there could be initial public offerings coming in as well so investors would be able to take advantage or participate in the public offer when those companies come to the market. So there will be definitely be opportunities for investors to buy into new companies as well as businesses to list and raise funds.
...a trading day at SPSE____
NOTE: This is the original transcript of an interview with Surendra Kumar, published in the Islands Business Magazine as: Interview: WHY WE NEED AN ALTERNATIVE MARKET, pp 40,41, December 2006 edition.
Islands Business is the flagship publication of Islands Business International
****
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