Listing Kit for the SME Board February 2017 IMPORTANT NOTE: This booklet has been prepared with the intention to create awareness about the benefits and procedure of listing at PSX s SME Board. The booklet does not describe the entire regulatory framework and compliance requirements.
Table of Contents Introduction 1 What is SME Board? 1 Why get listed on the SME Board? 1 Eligibility 2 Getting Listed 2 Consultant to the Issue 3 Documentation Requirements 3 Methods of Offering 4 Listing Fee 5 Tax Incentives for New Listed Companies 5 SME Website 6 Post Listing Requirements 6 Exit and Migration from the SME Board 7 Contact us 7
1. Introduction Small and Medium Enterprises (SMEs) are the backbone of our economy. According to the Pakistan Economic Survey (FY 2014), the SME segment constitutes nearly 90 percent of all the enterprises in Pakistan. It employs 80 percent of the non-agricultural labor force, and its share in the annual GDP is 40 percent approximately. There are many studies, which suggest that lending to SMEs in Pakistan is still a problem as banks often shy away from lending to SMEs and as a result banks have put in place strict credit criteria requiring a lot of detail and documentation. Lending criteria is very strict besides having a condition of provision of collateral. To increase access to equity finance for SMEs, a growing number of developing countries are creating specialized equity markets or boards, differentiated from the main exchange or board. Pakistan Stock Exchange (PSX) has also developed such specialized segment for listing and trading of shares of SMEs and named it as the SME Board. This document has been developed by PSX to help SMEs understand PSX s SME Board and how they can obtain funds through the SME Board. 2. What is SME Board? One of the main features of a security is its liquidity. Liquid securities are more attractive for the investors as compared to illiquid securities. In order to make the shares of SMEs attractive for investors, these are required to be tradable. SME Board is a platform developed by PSX for trading of shares of SMEs. The investors may trade in the shares of SMEs on this platform after listing. Capital market is one of the prominent avenues of fund raising. SMEs can raise capital from the capital market, against offer of shares, to fund their growth and expansion needs. To get funding, SMEs are required to get listed on SME Board. In simple terms, Listing is a process through which an SME raises funds from eligible investors and shares of the SME can be bought or sold on PSX SME Board. 3. Why get listed on the SME Board? Following are the advantages to SMEs for listing on the SME Board: Listing on the SME Board of PSX will provide SMEs with equity financing opportunities to expand their business and operations Access to equity financing will lower debt burden of SMEs leading to lower financing costs and healthier balance sheets. Enhancement of visibility of SMEs by listing on the SME Board of PSX will in return increase their credibility and profile, thus leading to increase in their share value. P a k i s t a n S t o c k E x c h a n g e L i m i t e d Page 1
Expanded investor base will enable SMEs in attaining secondary equity financing through private placements. Venture capitalists and other strategic investors can provide financial capital to SMEs with provision of exit option. Upon getting status of listed company, SMEs can avail tax incentives announced by the Government from time to time. 4. Eligibility So far we have understood what is the SME Board and its benefits are. The next question that arises is, Who is eligible to get listed on the SME Board? You will be eligible for listing if you are a public limited company, incorporated under the Companies Ordinance, 1984, having a post issue paid up capital ranging between Rs. 25 million (2.5 crore) and Rs. 200 million (20 crore). Further, your Memorandum and Articles of Association authorizes you to raise capital through the stock exchange. No SME is eligible for listing if: (i) it is an associated company of a listed company which has violated the Listing Regulations of the Exchange and is still in default of any Listing Regulation; (ii) its promoters, sponsors and controlling directors are a. promoters/ sponsors/ controlling directors in another listed company which is in default of any Listing Regulation of the Exchange; and b. have not remained promoters/ sponsors/ controlling directors of a company which has been delisted during the last 5 years due to non-compliance with any Listing Regulation; (iii) its CEO has violated any provision of Chapter 5 of the PSX Rule Book, while serving as the CEO of any other company listed on the Exchange. 5. Getting Listed Below is the brief process of getting listed at SME Board. In subsequent sections, we will explain these steps in more detail. Step 1 Step 2 SME appoints Consultant to the issue [Please refer to section 6 below for details] Consultant to the issue submits listing application to PSX s Companies Affairs Department (CAD). [Please refer to section 7 below for details] Step 3 CAD performs due diligence process and discusses queries with SME / Consultant to the issue. P a k i s t a n S t o c k E x c h a n g e L i m i t e d Page 2
Step 4 Step 5 Once all queries are addressed, CAD submits the listing application to PSX s Listing Committee for final approval. The SME can offer shares through fixed price method or through Book Building method. [Please refer to section 8 below for details] Step 6 Initial subscribers subscribe SME shares and SME gets listed on PSX s SME Board. Timeline for listing After submission of all documents to the Exchange, the Companies Affairs Department would take approximately 4 weeks for performing necessary Due Diligence and obtaining 6. Consultant to the Issue (Consultant) SME is required to appoint a Consultant to the issue. Your Consultant can be a corporate brokerage house, a chartered accountant firm, an investment bank, etc. [Note: in April 2017, SECP issued the Securities and Future Advisers (Licensing and Operations) Regulations, 2017. Hence, any entity that wishes to perform the functions of a Consultant/ Adviser must obtain a license under these Regulations as a securities adviser from the SECP. A fee of only Rs. 20,000/- needs to be paid at the time of applying for the license of a securities adviser.] The Consultant appointed by SME has three major roles: Submits to PSX a Feasibility/ Appraisal Report containing Financial Plan (Five year financial projections) Assists the SME in drafting Information Memorandum Assists the SME in preparing/arranging various info / documents required by PSX Pitches the SME shares to investors and assists the SME in raising funds 7. Documentation requirements PSX requires following four major sets of Forms / documents / Information: Info / Document required Application Form Description It is the form of application for seeking listing of an SME on the SME Board of PSX. You will submit listing application to PSX with a copy marked to SECP. Annexure Annexure I of this Listing Kit contains specimen of the listing application form. P a k i s t a n S t o c k E x c h a n g e L i m i t e d Page 3
Miscellaneous Documents Information Memorandum [IM] Feasibility Report These documents are required to be submitted along with the listing application. Information Memorandum (IM) outlines the salient features, risks and terms of SME shares offered/issued to eligible investors. IM is used to market the sale of shares of SME to the prospective investors. Your Information Memorandum shall be designed by the Consultant to the issue for circulation to eligible investors. The Consultant to the issue appointed by the SME will prepare a Feasibility/ Appraisal Report containing five year financial projections. Annexure II of this Listing Kit contains list of these documents. Annexure III of this Listing Kit contains Minimum information/ disclosures required in the Information Memorandum. All of the aforementioned information i.e. listing application form, miscellaneous documents, Information Memorandum and Feasibility Report should be submitted to Companies Affairs Department of the Exchange. 8. Methods of Offering To offer its shares to eligible investors, an SME can use fixed price method or book building method. Fixed Price Method Under fixed price method, SME in consultation with the Consultant to the issue, sets the offer price. Price may be at par (Rs. 10 per share) or at premium to face value set on the basis of SME s own valuation based on the company s financials. Book Building Book Building is the process of price discovery of a share issue. It is a process by which the SME attempts to determine, at what price to issue / offer the shares of the SME based on demand from institutional investors and High Net-worth Individuals. SME will set a floor price. Investors bid for a specific number of shares at various prices. Bids from eligible investors are collected during the bidding period and entered into the book building system of PSX. A book is built by arranging all the bids in descending order i.e. highest bid is placed on the top, then second highest, then third highest and so on. Demand for the shares is also displayed both bid wise and accumulative. Strike Price is determined by the System at the end of the bidding. Bidders who have made bids at or above the Strike Price will be allotted shares at the Strike Price. This method shall only be allowed if: Your post issue paid up capital is at least Rs. 100 million and Your offer size is at least 2 million shares and 20% of the post issue paid up capital. P a k i s t a n S t o c k E x c h a n g e L i m i t e d Page 4
9. Listing Fee To encourage SMEs to get listed on the SME Board, the Exchange is charging minimal fees. There are two type of fees to be paid by SMEs to the Exchange: Initial Listing Fee Annual Listing Fee Particulars Initial Listing Fee Annual Listing Fee Fee Payable At the time of Listing Annually Fee range Rs 12,500 Rs. 50,000 Rs 20,000 Rs. 40,000 Fee calculation 0.05% Post Issue Paid-up Capital of SME Paid up Capital Up to Rs. 50 m Rs. 20,000 Above Rs. 50 m and Up to Rs. 100 m Rs. 30,000 Above Rs. 100 m Rs. 40,000 10. Tax Incentives for newly listed companies The Government of Pakistan, under the Income Tax Ordinance [ITO], 2001, has provided incentives to the newly listed companies and the companies that undertake projects through equity financing. These incentives include the following: Tax Incentive 1. 20% tax credit on tax payable by a newly listed company for two years i.e. the year of listing and the following year. 10% tax credit granted for the following two years. 2. Tax credit, for five years, in line with the investment through equity on tax payable by an industrial undertaking set up with at least 70% equity. Provided such industrial undertaking is setup during the period from July 01, 2011 to June 30, 2019. 3. Tax credit on investment for expansion of the plant and machinery already installed or undertaking a new project provided such industrial undertaking is established before July 1, 2011 and the plant and machinery is installed during the period from July 1, 2011 to June 30, 2019. 4. 10% tax credit of the amount invested in purchase of plant and machinery for the purposes of extension, expansion, balancing, modernization and replacement of plant and machinery already installed provided such installation is undertaken during the period from July 01, 2010 to June 30, 2019. Relevant section of ITO 2001* 65C 65D 65E 65B * For detail, Sections 65C, 65D, 65E and 65B of the Income Tax Ordinance, 2001 may be consulted. To be benefitted of these incentives, the companies may raise equity through the capital market for financing equity portion of their projects. P a k i s t a n S t o c k E x c h a n g e L i m i t e d Page 5
11. SME Website SMEs listed on the Exchange must maintain a functional website. Their website must disclose: Basic information about the SME and its business; Information Memorandum; Annual, half-year and quarterly accounts; Monthly progress report on implementation of the project (where required). 12. Post listing Requirements Trading Minimum Order Size Minimum Free Float Financial Statements Ongoing Compliance Obligations Code of Corporate Governance Trading in the SME Board shall take place through PSX s electronic trading system extended to brokers, known as Karachi Automated Trading System (KATS). In the secondary market, the minimum order size for trading the shares of an SME would be Rs. 100,000. Free float refers to the amount of shares freely available with the public for trading. The SME must maintain a minimum free float of 20% of its post issue paid up capital at all times. In other words, sponsors cannot own more than 80% of the shares of their company. After you get listed on the SME Board, your shareholders, prospective investors, suppliers, customers and other stakeholders shall be interested in viewing your financial statements to assess your operational and financial performance. Hence, to cater to their need, you must prepare your periodic financial statements as follows: For the first quarter (neither reviewed and not audited by external auditors) For the half year (reviewed by external auditors) For the nine months (neither reviewed and not audited by external auditors) For the year (audited by a Quality Control Rated (QCR) accounting firm) Annexure IV gives a list of the 114 accounting firms that have a satisfactory QCR rating. The list has been released by Institute of Chartered Accountants of Pakistan as at May 02, 2017. ICAP frequently updates this list of practicing firms having a satisfactory QCR rating and the updated list can be found on their website, http://www.icap.org.pk. Your Chief Executive Officer (CEO) / Managing Director (MD) shall be responsible for ensuring compliance with PSX Regulations, and all other regulations issued by the Commission and the Exchange from time to time. Your CEO/ MD shall be responsible for submitting a compliance report to the Exchange at the end of each half year. SME will not be subject to compliance with the Code of Corporate Governance. P a k i s t a n S t o c k E x c h a n g e L i m i t e d Page 6
13. Exit and Migration from the SME Board Your company will no longer be a part of the SME Board in the following events: Voluntary Delisting Compulsory Delisting Migration from the SME Board to the Main Board You can choose to voluntarily exit from the SME Board. There is a specific prescribed procedure for this which you need to follow. PSX shall have the prerogative to de-list an SME from the SME Board if: SME has violated the SME Regulations and has failed to rectify the default for a sustained period. The SME s auditor has given an adverse opinion on the financial statements of the SME. The preferred way for you to exit the SME Board would be to grow substantially and, hence, seek a listing on the Main Board of the Exchange. You shall seek listing on the Main Board if you have grown substantially while listed on the SME Board, such that: Your paid up capital exceeds Rs. 200 Million or your equity (excluding surplus on revaluation of fixed assets) exceeds Rs. 300 Million; and You have been listed on the SME Board for at least 3 years Migration to the Main Board shall be beneficial for you as the Exchange shall waive off your initial listing fee and your first annual listing fee. Moreover, the Exchange may also waive any other listing requirement(s) with prior approval of the Commission. 14. Contact us Telephone UAN (92-21) 111-011-122 Karachi 4532, 4539 Lahore 4653 Islamabad 4666 Email Website sme@psx.com.pk http://sme.psx.com.pk/ P a k i s t a n S t o c k E x c h a n g e L i m i t e d Page 7
DISCLAIMER This booklet has been prepared with the intention to create awareness about the benefits and procedure of listing at PSX s SME Board. The booklet does not describe the entire regulatory framework and compliance requirements. The contents of the booklet are circumstantial and may vary under different situations. The information contained herein is subject to change without prior notice. PSX gives no guarantee and assumes no liability for any errors or omissions of the information contained in this booklet. No one can use the information provided in this booklet for any claim, demand or cause action. If the reader is in a doubt while dealing with any specific issue, it is recommended to refer to Chapter 5A of PSX s Rule Book and allied laws and consult professionals of the relevant field for seeking advice. In case of any query, please contact us at the below address or e-mail us at sme@psx.com.pk Pakistan Stock Exchange Limited (formerly: Karachi Stock Exchange Limited), Stock Exchange Building, Stock Exchange Road, Karachi-74000, Pakistan Fax: (92-21) 3241 0825; (92-21) 3241 5136 P a k i s t a n S t o c k E x c h a n g e L i m i t e d Page 8
Annexure-I FORM OF APPLICATION FOR SEEKING LISTING OF AN SME ON THE EXCHANGE UNDER SECTION 9 OF THE SECURITIES AND EXCHANGE ORDINANCE, 1969 To: The Secretary, Pakistan Stock Exchange Limited, Karachi. Dear Sir, 1. We hereby apply for the listing of our (Name of the SME) on your Stock Exchange. 2. Necessary information and documents as required under the Regulations and mentioned at Annexure- I to Form I are enclosed herewith. Yours faithfully, SIGNATURE & ADDRESS C.C. to: The Securities & Exchange Commission of Pakistan ISLAMABAD - as required under Sub-Section (1) of Section 9 of the Securities & Exchange Ordinance, 1969.
Annexure-II A Listing Application and Documents Related to Company 1 Memorandum and Articles of Association, along with copy of certificate of incorporation and copy of the certificate of commencement of business. 2 A brief history of the SME since incorporation. Names of sponsors/ promoters/ directors. Details of its activities e.g. reorganisation, changes in capital structure, borrowings, etc. 3 Names and addresses of directors and persons holding 10% or more of any class of equity securities (as at the date of application). Number of shares and any other securities convertible into ordinary shares held by each. 4 A statement showing cash dividends and bonuses paid during the last 3 years. 5 Particulars of the security listing of which is sought. 6 Copy of the resolution passed by the Board of Directors of the SME with respect to issue and listing of the shares. 7 Copy of the application submitted to CDC for declaration of the shares of the SME as an eligible security for its CDS. 8 Pay Order/ Bank Draft/ Cheque in favour of the Exchange for payment of initial listing fee, annual listing fee and service charges. B Undertaking 9 An undertaking by the SME. (Form II) C Feasibility Report & Information Memorandum 10 Copy of the Feasibility/ Appraisal Report prepared by the Market Advisor and Consultant to the Issue. 11 Copy of Information Memorandum. D Financial Information 12 Auditors' Certificates on the SME's latest Balance Sheet, five years' Income Statement containing EPS, paid up capital and breakup value per share on the basis of latest audited accounts. 13 Copies of audited annual accounts of the SME for the last 5 years. 14 CIB Report confirming that the SME, companies in which SME directors are holding directorships and the SME's promoters/ sponsors/ controlling directors are not in the Defaulter's List of SBP, either in their individual capacity or in the capacity of directors of other companies. E Agreements and Material Contracts 15 A statement containing particulars, dates of and parties of all material contracts and agreements together with a brief description of the terms of such agreements.
Annexure-III CONTENTS OF INFORMATION MEMORANDUM The Information Memorandum (IM) prepared with respect to issue of shares for listing under this Chapter shall contain at least the following information/disclosures: i. On cover page, the following shall be disclosed: a) A disclaimer in bold letters stating that, This is not a prospectus for issue of shares to the general public but a document prepared for the purpose of offering shares of an SME only to Qualified Institutional Buyers(QIBs) and High Net Worth Individual Investors (HNWIs). This IM has not been approved by the Securities & Exchange Commission of Pakistan (the Commission) or the Pakistan Stock Exchange Limited (the Exchange) ; b) A disclaimer in bold letters stating that, This is an IM by [Name of the issuing SME which is an SME. SMEs being small capital based companies exposed to the risk of high volatility in its share market price at the Exchange after listing. The investors are strongly advised to evaluate their risk tolerance and sustainability capability prior to investing in the equity of this company. PSX or SECP shall not be held responsible for any direct or indirect losses incurred due to investment in the equity of this SME. c) A statement in bold letters stating that, The SME Board is designed primarily for emerging of small capital based companies. Companies listed at SME Board are comparatively exposed to higher investment risk as compared the companies listed at the main Board of the Exchange. The prospective investor should, therefore, be aware of the risk of investing in such companies and should make the decision to invest only after careful diligence of the issue and consideration. It is advisable to consult any independent investment advisor before making investment in the equity of this SME. d) A statement in bold letters stating that, The Board of Directors of (Name of the issuing SME) accepts responsibility for accuracy of the information contained in this document ; and e) Name of the SME, name of the entity that has prepared the IM and date of the IM. ii. iii. iv. Table of contents, Executive summary by the entity that has prepared the IM, purpose of preparation of the IM and their scope of work; Glossary of technical terms and acronyms should be provided after the table of contents; The capital structure of the SME. v. Information about the SME like its name, date of its incorporation, registration number, addresses of its registered & head offices, names of its sponsors, major shareholders and associated companies/undertakings etc.;
vi. vii. viii. ix. Organization structure of the SME and its principle business; Latest pattern of shareholding of the SME. Names of the directors of the SME and their directorships in other companies; Profile of the management of the SME including all the members of the Board of Directors excluding the nominee directors, the Chief Financial Officer and the Company Secretary; x. Future outlook/ business strategy of the SME. xi. xii. xiii. xiv. xv. xvi. xvii. xviii. xix. xx. xxi. Highlights of major restructuring, if any, like merger, demerger, amalgamation, acquisition, reorganization, financial restructuring etc.; Five years financial highlights relating to cash flows and financial & operating position of the SME including key financial ratios like debt/equity ratio (pre & post issue), current ratio, return on equity, return on assets, earning per share, Break-up value per shares (pre & post issue) etc. in tabular form; Salient features of the Issue like issue size, face value of share, offer price etc. Justification for premium, if any; Terms & conditions for investment in the SME s shares; Rights of the shareholders like right to vote, dividend etc.; Purpose of the issue & breakup of the utilization of the proceeds of the Issue; In case the proceeds of the Issue are to be utilized for project financing, detail of such project like project cost & means of financing (i.e. Financial Plan), project implementation schedule, latest status of the implementation of the project, expected date of completion of the project, expected date of trial & commercial production etc.; Five years financial projections (i.e. Balance Sheet, Income Statement, cash flow statement and statement on changes in equity) including key financial ratios; All the risk factors associated with the investment in the shares of the SME and their mitigants; Basic information about the industry the SME belongs to, key players in the industry, basic raw material used by the SME, if any, and list of supplier thereof, main clients of the SME, competitors of the SME, etc.;
xxii. xxiii. xxiv. xxv. xxvi. Summary of all the material contracts relating to the Issue and the project, if any; Any other material fact, information and disclosure as required under any agreement, rules, regulations or the law for the time being enforced which may affect the investor s decision to invest; Names of all the stock exchange(s) where the SME will be listed; Tentative subscription dates; Tentative date of allotment of shares to the investors.
Annexure IV List of Practicing Firms having Satisfactory QCR Rating (As on May 02, 2017)
Annexure IV List of Practicing Firms having Satisfactory QCR Rating (As on May 02, 2017)