Business News from Sri Lanka: In consultation with the Sri Lanka Securities and Exchange Commission (SEC), the Colombo Stock Exchange(CSE) is proposing to revise the legislative structure for initial share listing on the CSE. The aim of the practice is to extend the CSE listing rules to complement the quickly growing commercial landscape of Sri Lanka, which includes numerous new business models and sections.
The revisions also aim to improve the effectiveness of the listing method while providing more flexibility to CSE-listed businesses. In particular, the CSE is investigating changes to the eligibility requirements for original share listing on the Main Board and the Diri Savi Board, timelines for the IPO and the basis for allocating stocks. As part of the process, CSE has taken into account the opinions expressed by industry specialists and inventory exchange regulations/practices worldwide.
Alternatives to the Main Board Profit Requirement.
In terms of the Main Board, the proposed amendments to the initial listing rules would offer companies looking to list on the CSEan alternative to the three-consecutive financial year net profit after tax requirement which is currently applicable. Under the proposed amendments, an aggregate net profit after tax for three consecutive financial years immediately preceding the date of the initial listing application will also be acceptable, where companies would not be required to be profitable in each financial year in the three-year period.
For Main Board applicants that cannot meet the profit requirement, the proposed revisions would offer alternatives to meet the eligibility in the form of revenue or positive operating cash flow(one of either), if the company’s market capitalization is valued at Rs. 5 billion or above at the point of listing. The revenue-based option would require the company to demonstrate an aggregate revenue of Rs. 3 billion for three financial years immediately preceding the date of the initial listing application.
The positive operating cash flow option would require the company to demonstrate positive operating cash flows (after adjustment for working capital) for two consecutive financial years immediately preceding the date of the initial listing application. These options offer potential issuers greater flexibility in terms of meeting listing eligibility, which presently restricts non-profitable companies with growth potential from listing on the Main Board of the Exchange.
An alternative to the Diri Savi Board’sPositive Net Asset Requirement
The eligibility criteria of the Diri Savi Board presently requires positive net assets for the financial year immediately preceding the date of the initial listing application. The proposed new revisions offer a revenue-based alternative to companies that cannot meet this requirement. If the company’s market capitalization is valued at Rs. 1 billion or above at the point of listing, demonstrating revenue of Rs. 350 million for the financial year immediately preceding the date of the initial listing application will be an acceptable alternative to the positive net assets requirement.
Addressing going concern uncertainty
With the objective of safeguarding investor interests, the proposed revisions will also require the Independent Auditors Report in the Audited Financial Statements of the entity for the financial year immediately preceding the date of the initial listing application to not contain an emphasis of matter ongoing concern. This requirement applies to both the Main and Diri Savi Boards.
Flexibility when allotting shares in larger IPOs
As part of the exercise, CSE is also proposing to revise the basis of allotting shares mini pos above Rs. 3 billion. In such instances, the issuer will have the flexibility to determine the basis of allotting the shares in a fair and equitable manner, in consultation with the CSE, as opposed to the present framework, which details minimum requirements on allotments to retail individual investors. However, the present requirements will remain the same for IPOs that are less than Rs. 3 billion.
IPO Process Efficiency and Flexibility
Changes in the IPO process have also been proposed with a view to offering potential issuers flexibility in the IPO process. These revisions are set to offer issuers greater flexibility in terms of timing a listing and obtaining an optimum price for an issue. Under the proposed rules, the issue will not be required to mention the issue price or the price range (in the event of book building)at the point of publishing the soft copy of the draft Prospectuson the CSE website.
The issue price determined by the issuer may then be informed to the public by way of an announcement to the market through CSE, 7 market days prior to the date of opening the subscriptions. According to the current IPO Procedure, the issue price must be informed to CSE in advance, at the point of obtaining in-principle approval for the initial listing application.
The issuer will also be given the opportunity to open the subscription list within a period of 6 months from the date of obtaining in-principle approval from the CSE. The period of 6 months is a considerably extended period in comparison to the present rule, which states that the subscription list must be opened within 20market days from the date of receiving in-principle approval from CSE.
Open for Public Comment
In a bid to further enhance the adequacy and suitability of the proposed amendments, especially in the context of the local market and practical implications, the proposed amendments are open to the public for comments. The Consultation Paper containing the complete set of amendments could be accessed via www.cse.lkand comments could be submitted via post, fax and email. Clarifications and queries on the proposed amendments could be directed at the Chief Regulatory Officer via E:firstname.lastname@example.orgT: 0112356540OrF:0112448925