Business News Wed, 19 Jun 2013

Have you considered the Ghana alternative market (GAX)?

Just as every steering wheel needs grease, every business needs financing in order to stay in business. Finance in the form of cash flow to cater for business expansion, administrative expenses, procurement of raw materials and other financial obligations as they fall due, are needed to keep businesses running.

What Financing Options are Available?

Financing options are the different categories of funding available to every business. These include equity finance, debt finance or any hybrid instrument such as convertible loan, and are means by which businesses obtain finance for smooth running. Businesses are encouraged to use a financing option based on their business life cycle. Most often, debt financing is not good for business start ups as the company may not be in a position to service the debt instrument. The need to match financing options to business life cycle is essential since it is a key determinant of the success or failure of any business entity. In view of that, equity financing would be ideal for business start-ups or Small and Medium Scale Enterprises (SMEs).

Manufacturing, construction and mining companies need equity financing because they have a lead time ranging from 1- 3 years to breakeven. Short term loans are good for retail businesses with fast moving goods. This goes to suggest that, even though different financing options are available to entrepreneurs, the right option should be selected in order to help the business grow naturally.

When Should Entrepreneurs Invite New Investors?

Most entrepreneurs invite new investor(s) only when the business is distressed and they want to cash out. This is not strategic enough since it tends to reduce the business’s bargaining power. Investing in a distressed company comes with so much risk; so many investors would only invest in it when there are prospects for growth. Accordingly, it is more appropriate to invite new investors when the business is doing well, and when the price per share is high. Inviting new investors means that, you are relinquishing a portion of your shareholding to someone who is bringing in equity capital or you can issue new shares for the prospective investor(s).

Most business owners are not comfortable with reducing their shareholding to someone else. But would you want to be 100% owner of a business worth GHS 100,000.00 or you want to own a 60% stake in a company worth GHS 1,000,000.00 –whereby you can still maintain your majority stake, with your worth valued at 600,000? If you allow other investors into the business, you share the risks and the returns with them. They can also contribute their quota not just in capital injection but such investors bring on board their mostly-vast expertise and other business contacts.

In times when interest rates on loans are skyrocketing in an economic environment and business activity is not too brisk, the best financing option is equity investment. This investment option is long term and has no short term obligations like interest and principal repayment on debt instruments. Contrary to the short term interest obligations, equity financing may only reward shareholders when profits are made.

If your business has the potential to make profit in the long term but you have no funds to run it, you will soon be out of business. The Ghana Stock Exchange (GSE) has created an alternative market that can help you rebuild your business to making it profitable and sustainable. This market is the Ghana Alternative Market (GAX). It focuses on businesses with high potential for growth. The GAX accommodates companies at various stages of their development, including start ups and existing enterprises, both small and medium.

The GSE is not the first in the world to introduce an alternative market, the New York Stock Exchange (NYSE), London Stock Exchange (LSE) amongst others have introduced such markets that have helped many small businesses that cannot list on the main exchange to raise funds for growth and later move their companies to the main list. AIM (formerly the Alternative Investment Market) is a sub-market of the London Stock Exchange, allowing smaller companies to float shares with a more flexible regulatory system than is applicable to the main market. AIM was launched in 1995 and has raised almost £24 billion for more than 2,200 companies.

NYSE’s Alternext is also a tailor-made market for small and medium sized companies seeking simplified access to the stock market. Its streamlined listing requirements and trading rules are suited to the size and business needs of small and medium capitalized firms while ensuring investor transparency. The Japan Stock Exchange being the third biggest stock exchange in the world also has such a facility.

The platform has been created in Ghana. It is now the responsibility of Ghanaian businesses to take advantage of this platform to grow their businesses into bigger companies to enable them compete internationally. The model has worked on other markets and I believe it would work on the GSE too.

What are the listing requirements?

? The issuer should be a publicly listed company that is duly incorporated under the companies Act 1963 (Act 179). This is because once the company is listing, it has to convert from a private company to a public company.

? Shares should be transferable.

? The issuer of the securities should accept the continuing listing obligations which apply to the admission of its securities to the GAX.

? A company applying to the GAX should have a Stated Capital of GHS 250,000.00 at the time of listing.

? The public float of the applicant must constitute a minimum of 25% of the total number of shares issued.

? Minimum number of shareholders shall be twenty (20).

? Your company should have existed for at least one year and must have filed account in accordance with Companies Act 1963 (Act 179) for at least one year.

? The management of the company should posses the requisite expertise in the core business of the GAX Company.

? At least 50% of the Board of Directors shall be composed of non-executive directors and 25% independent directors.

What are the benefits?

You will agree with me that the listing requirements for the GAX are even lower than the loan requirement from some financial institutions.

You will have an easy access to long term capital—Listing on the GAX will enable a business to raise long term capital to expand your business and increase your ability to compete.

The cost of listing on the GAX is far cheaper than listing on the GSE. The cost of listing has been waived and a GAX listed company only pays an annual fee of GHS 2,000.00.

A GAX listed company would have a solid balance sheet and improved profitability given the injection of substantial equity capital into the business.

Listing on the GAX would help the company to reduce its risk and improve liquidity because the market exposes the business to the world which would help to broaden its investor base.

Incentives to companies that want list on the GAX

The mandatory underwriting of the minimum offer directly or indirectly by the sponsor would ensure there would be no failures on the Initial Public Offer (IPO).

GAX- SME Support Fund

Companies who wish to list on the GAX can apply for funds under the GAX-SME listing support fund to pay fully or partly for cost of advisory service.

Method of Listing on the GAX

Securities may be brought to the market through Introduction, Public Offer and Private Placement. Introduction is suitable for a company that does not need to raise the initial capital of GHS 250,000.00 and has a minimum of twenty shareholders. A pre-listing statement containing salient information about the company shall be required.

A company getting on the GAX through a Public Offer may offer its shares for sale or for subscription. This would mean an invitation to the general public to subscribe for the un-issued shares (offer for subscription) or to subscribe for a portion of the issued shares (offer for sale as the existing shareholder(s) sell part of their current holding(s) to the new investor(s). The proceeds from the offer will accrue to the offering company or to the shareholder(s) that sold off all or part of their holding(s). In this case, the public must be served with a prospectus that must be approved by the Securities and Exchange Commission (SEC), and the Ghana Stock Exchange as the company will be listed.

If the Private Placement option is adopted, then the issuing company would offer its shares to private persons which could be corporate institutions or individual(s) after private negotiations.

What are the procedures for application?

The company would need the services of a lead arranger or a sponsor and other groups of advisors such as valuators, lawyers, reporting accountants, auditors and media. The lead arranger would submit the document on behalf of the listing company to the regulators (SEC & GSE).

If it is through introduction, the applicant company requires approval. The shares would then be credited to the GSD and listed on the GAX after approval is received.

However, if the listing is through a public offer or private placement, the applicant will prepare an offer document, seek approval, and undertake the offer. Upon a successful offer, the applicant will receive confirmation from the GAX Committee and the shares are credited to the GSD and listed on the GAX.

Continuous listing obligations

The listed company would have to comply with the entire membership requirement in the GAX rule book. These rules are set by the GSE and SEC to protect both the investing public and the listed company. The listed company must publish its accounts periodically (mostly half yearly). This is because when a company gets listed, it has a wider scope of shareholders who would want to be informed of the company’s performance, hence this statutory requirement. As costly as this may be, it may so serve as a marketing tool as this may attract potential investors in the long term. The listed company would need to hold Annual General Meetings.

The Directors and management of the company should ensure continuous trading in the stock and must ensure good corporate governance at all times, for the mutual benefit of the investors and the listed company itself.

In conclusion, financing options would always come with some advantages and disadvantages and every entrepreneur is encouraged to carefully choose an option that would enable his/her business to keep running for future generations. The GAX is here to help small businesses raise equity funds to grow their businesses. This would imply that your shareholding structure may change but it is all for your good. Take advantage of the GAX and expand your business to enable your business grow and compete globally. Talk to any of the Investment banking firms such as HFC Investments, among others. Alternatively, visit the Ghana Stock Exchange at the Cedi House in Accra for more information.

Kindly direct all comments and suggestions to skafuiteye@gmail.com, © 2013, Sophia Kafui Teye, Blog: www.skafuiteye.blogspot.com.

Source: Teye, Sophia Kafui