The Colombo Stock Exchange (CSE), in consultation with the Securities and Exchange Commission of Sri Lanka (SEC), is proposing to revise the regulatory framework governing the initial listing of shares on the CSE. The exercise is aimed at broadening the CSE Listing Rules to complement Sri Lanka’s rapidly developing commercial landscape comprising of multiple new business models and segments. The revisions are also directed at improving the efficiency of the listing process while offering greater flexibility to companies listing on the CSE.
Specifically, the CSE is exploring revisions on the eligibility criteria for initial listing of shares on the Main Board and the Diri Savi Board, IPO timelines and the basis of allotting shares. As part of the process, CSE has considered the views expressed by industry experts and the regulations/practices of stock exchanges around the world.
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 CSE an 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 cashflow (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 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’s Positive 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 on going 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 in IPOs 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 offer 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 issuer 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 Prospectus on 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 20 market 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.lk and 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.org T: 0112 356 540 Or F: 0112 448 925