CSE says too few tech firms in the market
View(s):The number of technology and IT Business Process Outsourcing (IT-BPO) companies on the Colombo Stock Exchange (CSE) is “low”, according to a CSE presentation made recently to the IT-BPO sector.
A part of the recently-held “Unlock the Value of Your Company – Listing Forum for IT BPO Industry” event, which was organised jointly by the CSE, the Securities and Exchange Commission of Sri Lanka and local IT-BPO body SLASSCOM, the presentation also put forward the case that a CSE listing “[supports] the process of obtaining an objective value for the company, according to market demand”. At the same time, the presentation also noted, “[listed] companies attract a higher valuation due to market demand and attribution of future growth potential to the company value”.
Further, the event also highlighted the following points, stating they were additional advantages of listing a company on a stock exchange; “Reduce reliance on debt capital helping to increase the company’s financial flexibility”; “Listed companies can use its shares as currency in a merger or an acquisition”; “Ability to raise equity capital through further issues, which may not be an alternative when compared with private equity”; “Hedge against interest rate risks since debt can be issued at fixed interest rates”; “No collateral required”; “Lower financing costs in subsequent issues due to credit rating obtained through listing”; “Creates liquidity for private equity by providing an exit mechanism”.
Also, the presentation additionally revealed that the CSE had hosted 100 new listing since 2010, raising Rs. 124.24 billion from new listings and Rs. 131.31 billion from post listing share issues. It was noted that foreign turnover in the CSE grew by 36 per cent in 2013, with the overall representation by foreign and institutional investors in the CSE currently standing at approximately 65 per cent.
Meanwhile, a presentation made at the event by research and analytics firm Copal Amba cited Indian- and US-based trends in terms of IT-BPO sector funding, opining that “[equity] is a preferred medium of financing for tech companies”. Elaborating further, it was also explained that “[unlike] equity financing, raising debt through financial institutions requires collateral”. Also added; “Compared with traditional businesses technology businesses have relatively less tangible assets… They also lack assets that can be salvaged in the event of a disruption to the business”; “Remuneration forms a large portion of the investments”; “Any tangible and intangible assets built over the course of the business likely have become redundant with the failure of the business”.
As a result of all of the above factors, Copal Amba stated that there was a higher cost of borrowing for tech companies, since “[tying] the businesses to periodical mandatory cash outflows can increase the risk of financial distress given the inherent volatility in the cash flows… A culture of listing, will reduce the liquidity risk faced by the early stage investors. This will reduce the required rate of return by early stage investors reducing the cost of funding and increasing the availability of funds”.
(JH)