The Malta Stock Exchange (MSE) is working on a product which will encourage small- and medium-sized enterprises to access capital markets which, subject to all the relevant regulatory approvals, should be implemented during this year.

Although SMEs can currently access capital markets through the Main Market and the Alternative Companies List, the Exchange believes that there is scope for the introduction of a more flexible and cost-effective market that will be a good fit for the issuing company while still ensuring transparency and good corporate governance for the benefit of the investor.

“For initial public offerings over €5 million, equity and bond issues on the main market remain a feas-ible solution, and come with a prospectus for shareholder information and protection,” MSE’s business development manager Cliff Pace said.

“However, there are many ­reasons why the main market for the issue of equity and bonds may not be the right solution for SMEs that want to raise amounts lower than that.”

The first reason is the cost involved, since compliance and marketing costs could add up significantly. The MSE is therefore proposing to set up a new market targeted at SMEs which might want to raise between €1 million and €5 million.

There is also the issue of control as the current IPO regime requires that at least a quarter of the equity is made available – something that SMEs, many of which are family-owned, might baulk at.

“The new market would not set a minimum threshold of equities in public hands, so SMEs would be able to raise equity capital without relinquishing a significant percentage of their shareholding,” Mr Pace said. The new product will also cater for the issue of corporate bonds and other types of instruments.

A significant challenge for SMEs to get investors interested in their products and raise finance is often the lack of an instantly-recognisable brand name. The new market also brands the relevant company through its robust infrastructure for admission to ensure investor protection – and hence builds up investor confidence in the products available.

The new product will certainly help with the under-capitalisation rife among SMEs, a prevailing situation that has been highlighted by everyone from bank chairmen to Central Bank governors. But it will also help in other ways, Mr Pace explained.

“This new market would be a very important tool in succession planning, particularly for family businesses. Companies in the second or third generation stage often have family members who want to sell part or all of their shareholding, but at the moment they have limited avenues.

We are looking at a sector that would very often not be able to get a loan from the banks

“The problem becomes particularly acute by the time you get to the third generation as the shareholding by then has become much more diluted. Prospects would create the opportunity to sell that share-holding on the market, as they can be freely traded on the Exchange, particularly if the shares are put on to the market by the second gener-ation, creating a market ready for the next one,” he said.

He was also quick to point out that this new initiative was not necessarily a rival for bank lending.

“We are looking at a sector that would often not be able to get a loan from the banks. We welcome the participation of the banking sector in this process because the product has been designed in a way which would allow a bank or an auditor to be recognised as the SMEs’ corporate adviser.

“And in contrast to the role of the sponsor during an IPO on the main market, the corporate adviser would not be dispensed with after the IPO but will need to stay on afterwards. This would not only bring the SMEs’ corporate governance up to scratch and ensure robust due diligence, but will also ensure that these are retained and maintained to ensure transparency and investor protection,” he said.

He believes that there is another reason why SMEs should consider Prospects: there is plenty of evidence to show that listed companies outperform non-listed ones, in terms of turnover, employment and profitability.

“There is no doubt that the transparency and corporate governance imposed on a company by going public brings about more scrutiny of decisions and more awareness, both of which reflect positively on a company’s performance,” he said. “The return on equity of listed companies averages over 11 per cent, and their market capitalisation value has mostly increased signific-antly over the years.

“This initiative will be a new opportunity for SMEs to access the capital markets in order to grow, and will allow investors the opportunity to participate and benefit from their growth to the extent that they are comfortable with.”

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