Special treatment: KSE considering setting up separate lists for SMEs

KARACHI:

Karachi Stock Exchange (KSE) Deputy Managing Director Haroon Askari has said the KSE is considering setting up a dedicated counter for the small and medium enterprise (SME) board to help SMEs float shares. The flotation will be done under a new regulatory framework, which will be more flexible than the one that governs companies listed on the KSE ready board.

In an exclusive interview with The Express Tribune, Askari said a technical committee, set up by the Securities and Exchange Commission of Pakistan (SECP) earlier this year, has already formulated regulations governing the SME board. “They will be presented before the KSE board of directors shortly, which will be followed by formal approval from the SECP,” Askari said.

Under the proposed regulations, a company may apply for the listing of its equity securities to be issued to the general public only if its minimum paid-up capital is Rs50 million or more. The proposed rules categorise small-cap companies as entities with paid-up capital of more than Rs50 million but less than Rs100 million. Similarly, companies with paid-up capital of more than Rs100 million and less than Rs200 million will be considered medium-cap companies.

Companies with the paid-up capital of Rs200 million and more will not be allowed to be listed on the KSE SME board, as they are already eligible to be listed on the KSE ready board.

The proposed regulations require that companies must maintain a minimum ‘free-float’ – the shares of a company readily available for trade on the stock market – of at least Rs5 million or 35% of its paid-up capital at all times.

Sponsoring member

The proposed rules mandate SMEs to appoint a sponsoring member – which could be a corporate brokerage house, investment bank, commercial bank, or any other SECP-approved financial institution – before applying for listing on the KSE. The role of a sponsoring member will be to examine the technical, managerial, commercial, economic and financial aspects of the project.

In case the sponsoring member is not a corporate brokerage house, the proposed rules say the company should appoint a broker to act as a primary market maker whose job will be to provide liquidity in securities by promising to buy or sell them at specified prices at all times.

The suggested rules stipulate that a company listed on the SME market must retain a sponsoring member at all times. In case an SME company ceases to have a sponsoring member, the KSE will suspend trading in its securities and impose a penalty of Rs10,000 for each day of default.

Higher risk

Askari says the SME market is being designed for emerging companies, which tend to have a higher investment risk compared to established, larger companies. Therefore, investors must make investment decisions carefully, and possibly in consultation with an independent financial adviser.

According to the proposed regulations, any company interested in listing on the SME market will be required to write “This is a small-cap company with a high probability of stock price and volatility risk. Investors are strongly advised to evaluate their risk tolerance and sustainability capability prior to investing in this company” in their prospectus in bold letters.

“We’re considering whether we should let the general public invest in these companies or allow only sophisticated investors to take advantage of this investment option,” Askari said; adding that, if approved by the SECP, the SME board will become operational before June 30, 2013.

Published in The Express Tribune, November 24^th, 2012.