SMALL and medium enterprises (SMEs) commonly face capital constraints and many have a hard time getting bank loans. Now, their thirst for fresh capital may be quenched by Bursa Malaysia, which is considering creating a third board to pave the way for the listing of SMEs.
“We welcome the proposal to have a new board for SMEs,” SME Association of Malaysia president Michael Kang tells The Edge.
This could address the major challenges SMEs face in getting access to cheaper capital for business expansion.
“[The new market] will definitely address the problem of SME access to the capital markets, especially mid-tier companies and mid-sized firms,” he says.
According to Kang, some members of the association have already expressed interest in fundraising through a listing and a number have applied for listings abroad to seek more capital.
Bursa may need to act fast — local SMEs are already eyeing initial public offerings (IPOs) overseas.
The local bourse currently has two markets — the Main Market and ACE Market. However, it is difficult for SMEs to meet the listing criteria of both exchanges, especially the requirement of profit for three consecutive years and the relatively high average cost of raising capital.
Recognising the challenges faced by SMEs, the stock exchange regulator has proposed to establish the new market to support the growth of Malaysian SMEs by providing greater access to the capital markets.
“Generally, the smaller SMEs that have not opted for the ACE Market have often exhausted their traditional funding avenues, namely bank borrowings, government facilitation and grants,” Bursa says in its consultation paper issued early September.
It says the new market could potentially facilitate up to 19,000 SMEs in the country, as long as they are public companies.
According to Bursa’s definition, SMEs are companies in the manufacturing sector with 75 to 200 employees and RM15 million to RM50 million in total annual sales and/or services companies with 30 to 75 employees and RM3 million to RM20 million in total annual sales.
While the idea to create a new market to foster smaller firms is not entirely new, Bursa’s proposal to allow SMEs to list without a profit track record and operating history has raised eyebrows, though it limits the investor group to sophisticated investors, that is individuals with RM1 million in net assets, and/or venture capital and private equity firms.
Presently, there are SME boards in China, Hong Kong, Japan, South Korea and India.
“Generally, it is a positive development as this will help the SME and small market sector. But for any proposed new platform, it is important to provide sufficient incentives and pull factors for entrepreneurs wanting to list their companies,” Astramina Advisory managing director Wong Muh Rong says.
Wong says the listing platform provides an avenue for fundraising. However, the downside is that if there are too many requirements SMEs need to comply with, it would be burdensome for the listing candidates.
“So, the light rules regime is in the right direction. But buyers or investors be aware. Given the improvement in technology and access to information, despite the light regime, market or sophisticated investors will have the resources to get their information through market intelligence,” she comments.
She opines that the new board will also be another platform to match mergers and acquisitions.
Some quarters, however, argue that the ultra-loose listing rules may allow less than worthy firms to slip through the gates — similar to some of the Chinese stocks listed on Bursa Malaysia, whose performance was relatively robust in the beginning but later were involved in various accounting scandals.
“Listing without a track record is not unusual. There are many companies on Nasdaq that are loss-making and continue to be long after listing,” says Munir Abdul Aziz, deputy managing partner and partner in corporate, commercial and securities practice at Wong & Partners.
From a regulatory perspective, he notes that the requirements of the SME board and the ACE Market are similar, as continuing disclosure requirements appear robust and should offer good protection to investors.
Citing South Korea’s Korea New Exchange, he says the stock exchange requires listed issuers to hold semi-annual investor relation meetings to discuss operational progress, in addition to the disclosure of financials.
“Further, only sophisticated investors are allowed to invest in the new board. They are keenly aware of the risks of start-up or SME funding whose financials (present and potential) are not the basis of admission,” says Munir, adding that such investors are better placed to assess the future prospects of the listed issuer, which forms the principal basis upon which investors will likely invest.
However, he notes that limiting the investor profile will mean that liquidity and trading volumes may be tight, unless appropriate measures are taken to facilitate market-making activities.
Gregory Bournet, executive director Corporate Finance at PricewaterhouseCoopers, points out that the move may create upward pressure and liquidity for capital markets despite its ability to increase market activity in principle.
“Looking at National Equities Exchange and Quotation in China and Growth Enterprise Market in Hong Kong, [there is] no real liquidity yet,” he says.
Having said that, Bournet notes that many countries in the region, such as Cambodia, are looking to develop and improve their SMEs, hence, it would be good for standardised listing requirements in the region in order to gain investors’ confidence around the region.
He also voices concern that there would be competition between the ACE Market and the proposed new market for new listings.
In terms of investment risk, he says the risk always goes hand in hand with return and, as such, the upside opportunities should reflect the risk.
“Investors need to do a detailed assessment of each opportunity before putting their money in. They might have different preferences relative to risk. Some might want to diversify into more risky assets and a SME platform could offer that.
“Ultimately, capital markets are here to address inefficiencies and if SMEs have capital needs that are currently not being efficiently matched with investors’ desire to invest in such assets, then this would make sense,” Bournet adds.
Apart from meeting the SMEs’ capital needs, the new market is also seen as a move to bring more listing activities to Bursa, which seems to be undergoing an IPO drought.
Munir says the new bourse will strengthen Bursa’s reputation as an innovative stock exchange and, hopefully, also attract more listings in what has been a very soft period for IPOs.
Meanwhile, Datuk Christopher Chan Choun Sien, a member of the executive committee of the Malaysian Mergers and Acquisitions Association, says the proposed new market will open up a new asset class for the market to invest in.
“In addition to SMEs, I believe this market can benefit profit-oriented social enterprises,” he tells The Edge in a phone interview.
“For markets, this asset class [SMEs] is still in its early stage. Even the ICAP Securities & Derivative Exchange, which is a London stock exchange, is actively promoting the listing of SMEs,” he says.
“It is a fantastic platform for socially-conscious investors to put money in such social enterprises ... because it will be regulated and more transparent,” he adds.
A social enterprise is an organisation that applies commercial strategies to maximise improvements in human and environmental well-being. This may include maximising social impact alongside profit for external shareholders.
Chan, an investment banker, says the new market could also serve as a platform for owners of SMEs to exit their businesses. A big issue facing many SMEs nowadays, aside from fundraising, is the lack of a successor when owners retire.
“It also provides an avenue for high-net-worth individuals to make private equity investments with enhanced transparency and liquidity,” he adds.
Listing expenses could be a deterrent if it costs RM1 million or RM2 million.
A merchant banker tells The Edge that the SMEs may not be keen to float their shares on the exchange given the high charges incurred during the pre-IPO period.
“An SME is normally family run and operates as a relatively lean business model,” the banker says, adding that the charges to hire an investment banker to prepare a listing prospectus can easily amount to at least RM2 million.
“Their [SMEs] financials are not as strong as big corporates. Where are they going to find the money to fund the exercise?” he asks, adding that some SMEs are small players serving only a specific region in the country.
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