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GEM Board – A Real Gem of the Pakistan Stock Exchange

There was a time when small to medium sized companies found it cumbersome to list on Pakistan Stock Exchange. The pre-requisites were tough and the post-listing requirements were not easy to follow. However, lately, a lot has changed for the better. The Securities and Exchange Commission of Pakistan (SECP) has approved listing regulations of the Growth Enterprise Market (GEM) Board to enable and facilitate small and medium enterprises (SMEs), greenfield projects, tech start-ups and other companies to conveniently get listed on the Stock Exchange and access capital thereupon.

Small to medium enterprises make up a big chunk of business enterprises in Pakistan. SMEs constitute nearly 90%* of all enterprises in Pakistan. They contribute about 40%* to the annual GDP and employ about 80%* of the non-agricultural labour force. The growth enterprises play a major role in a country’s economy. They provide a large number of jobs and contribute significantly to the GDP of a country. It is not only the government’s job to provide employment but also that of the private sector. Companies which are successful not only provide jobs but also provide diversified products, invest in R&D, create supply chains, increase market outreach and penetration, add to their infrastructure, and increase their production capacity. They also add value to their products and services so that their goods are exportable as well.

Such successful companies can be as diversified as service providers like media production houses & digital media houses, agro-based companies like fruit packagers & exporters, dairy-based companies such as packaged milk producers, and b2b companies such as textile units & IT companies etc. For such companies to succeed in their respective businesses, sufficient funding is necessary. However, the resources of funding while being diverse are costly at the same time.

This is one of the reasons that Pakistan Stock Exchange is incorporating the GEM Board as it not only helps such enterprises in expanding, diversifying and raising capital but also helps the development of the Capital Market of the country which is important for increasing trade, commerce and industry. This (GEM Board) platform will encourage investors to invest in strong, growing and successful companies. By investing in Growth Companies, investors will get the opportunity to benefit from their growth. Investors invest in these companies for capital gain and/ or dividends while the companies receive the much needed capital. In other words, this activity completes an important part of the economic cycle whereby investors get an opportunity to invest and companies get capital to grow.In order to facilitate companies for listing on the GEM board, Pakistan Stock Exchange has outlined regulations governing listing and trading of equity securities of SMEs. This step will specially pave the way for medium sized enterprises, growth enterprises and even start-ups to get listed on the Stock Exchange.

Before we explain how listing has become accessible for a Growth Company, it is essential to explain why it is beneficial for such companies to get listed or why should companies get listed at all. There are numerous advantages for a company to get listed. It is basically a source of raising long term low-cost capital. Capital is necessary for all companies, specially medium-sized and smaller ones, to set up, diversify their products, carry out growth & expansion, enhance their current capacity, increase their operational capabilities, invest in new projects, add value to their products, export their goods and meet working capital requirements.

The resources generated through listing has far-reaching and broad benefits for the listed companies. Not only can substantial funds be generated through listing, but also the said funds come at a low cost. This is specially true given the high price of borrowing from other sources of funding nowadays. The interest rate environment is not very conducive to borrowing from banks and financial institutions as that carries with it the onus of servicing debt at a high rate on a monthly basis. Furthermore, in most cases, the financing is collateralized in that the borrowing companies have to submit substantial collateral against the said financing. As against this, captial raised from the stock market is economical or reasonably-priced and can help the companies avoid the high cost of short term or long term borrowing from financial institutions in Pakistan.

The raising of capital from the Stock Exchange also allows for an enhanced image and profile for a company leading to its greater visibility amongst the public in general and the investors & portfolio managers in particular. This is all the more significant given that this increased visibility allows the public and investors outside the country, as well, to track, monitor, and invest in these listed enterprises. So even if it is a B2B type company and doesn’t have exposure in the consumer market, yet its listing on the Stock Exchange brings about increased noticeability and attracts investor interest locally as well as internationally.

Not only does a company attract public and investor interest by going public or getting listed, it also adds to a level of prestige for that company in that it follows the minimum requirements that make for a company that bears an international standard and follows international best practices of operations & performance. Listed companies are regarded as industry leaders in their respective sectors. Such companies adhere to the regulatory, compliance and corporate governance guidelines outlined for listing. Hence they enjoy a level of prestige amongst local investors, market analysts, researchers, and fund managers.

Furthermore, through prospective private placement and listing, such companies attract media attention and interest which brings them in the limelight engaging public and investor interest. This brings in added marketing for the said companies by default.

A major advantage of listing on the GEM Board of the Pakistan Stock Exchange is that companies will have tax benefit of 20% on tax payable in the first and second years of listing and 10% on tax payable on each of the subsequent two tax-years i.e the third and fourth year respectively. This is a key benefit that a company can derive in monetary terms by listing on PSX.

Another advantage that a company can have by listing is that the matter of legacy or succession becomes streamlined wherein the rules of smooth transfer of management powers are outlined beforehand. In family-owned companies and businesses, the transfer of management powers are usually not clearly defined, leading to much strife and discord amongst the subsequent generation(s) vying for control of the company. This is done away with by way of following the rules & regulations inherent in listing.

Last but not the least is that such enterprises can attract and retain the best available human resource from the talent pool of the country because individuals/ employees like to work for a company that enjoys high esteem, good reputation and is well known.

As mentioned earlier, we will now discuss why it has become easier for companies to list on the GEM Board. As per current regulations, in the GEM Board, all licensed security brokers are eligible to act as Advisors, allowing for a greater choice of advisors and consultants for SMEs to choose from. Currently, the minimum free float of shares requirement is 10% which is a nominal percentage of the shares to be listed. This allows for a strong majority of the shareholding to be retained by the owners and directors. At present, it is also possible to offer equity at premium. Also, there is no restriction of minimum number of shares, adding to greater liquidity for the shares trading of the SME. The fees for listing is also quite nominal. The initial listing fees is capped at a maximum of Rs 50,000 only which is a drop in the ocean compared to the benefits a company can reap by listing. The annual listing fees is Rs 50,000/- on Paid-Up Capital up to Rs. 50 Mn, Rs 100,000/- on Paid-Up Capital between Rs 50-100 Mn, and Rs 200,000/- on Paid Up Capital exceeding Rs 100 Mn. This shows that a maximum annual listing fee of Rs 200,000/- (against a Paid-Up Capital exceeding Rs 100 Mn) is a nominal amount that a company of such a size has to pay compared to the huge amounts of capital it can raise in the equity market.

There are a few mandatory requirements for listing on the GEM Board. The company must have audited financial statements of the last two preceding years (or of shorter period if it has been less than two years since commencement of business) wherein the financial accounts should be audited by Quality Control Review (QCR) rated agency. An Information Memorandum (IM) must be prepared in case of a private placement wherein the IM must be shared with interested institutional investors who would like to invest in the privately placed issue. The company must publish its financial statements on their website whereas the website must contain basic company information, Information Memorandum (IM), and half yearly progress providing status of commitments mentioned in the IM.It is pertinent to mention that the companies going public on the GEM Board have fewer compliance and regulatory bindings. Keeping this in view, only Institutional Buyers and NCCPL registered eligible investors will be able to invest in shares of GEM Board listed company.

There are a few pre-listing requirements regarding the Information Memorandum. The IM shall be circulated to institutional investors and eligible individual investors, they shall be placed on the website of the Growth Company, the Exchange and the Advisor/ Consultant to the Issue. The IM should contain the minimum information/ disclosures as contained in the Schedule I of Chapter 5A of PSX Rule Book.

For post-listing, there are a few compliance requirements such as the issuer is required to disclose and disseminate Price Sensitive Information, the CEO of the Issuer responsible for regulatory compliance must submit compliance report at the end of each half-year.

Briefly, the process for listing on the GEM Board of the Exchange is as follows:-

  • Your company chooses a consultant who does the initial due diligence with regards to financials, corporate structuring, legal and regulatory requirements etc., and formulates your company’s business plan moving forward.
  • The business case is evaluated by the consultant using different methodologies and its demand is gauged for the “Final Offer Structure” to get maximum value for the shares to be offered.
  • The Central Depository Company (CDC) checks for eligibility and induction into their virtual share depository system.
  • Submit requisite regulatory documents for PSX and obtain the necessary approvals.
  • Conduct road-shows, investor presentations and other marketing and sales events to create awareness about the upcoming private placement.
  • The company’s equity securities can be traded on the GEM Board.

The listing on the GEM Board of the Stock Exchange is an ideal way forward for Growth Companies to list on the Exchange in their efforts to secure long term low-cost financing.