New investment market for Bahrain's small and medium-sized enterprises

In October 2016 the Bahrain Bourse (BHB) obtained permission from the Central Bank of Bahrain (CBB) to establish the Bahrain Investment Market (BIM), paving the way for the exchange to open its much-anticipated market to small to mid-cap companies. Officially launched in March 2017, the initiative is in accord with the government’s broader target of boosting small and medium-sized enterprise (SME) activity in the kingdom, with the bourse having worked with government developmental organisations such as Tamkeen and the Bahrain Development Bank to ensure that this goal is reached.

RELAXED CONDITIONS: Like other parallel markets, the BIM features less onerous listing requirements, such as a lower minimum capital limit, as well as lower fees, in a bid to attract growing companies. In November 2016 the listing framework began to take shape, with the BHB publishing its fee structure. Companies listing on the BIM are required to pay a one-time listing fee of BD1000 ($2652), as well as an annual subscription that is equivalent to 0.3% of the business’ paid-up capital, with a minimum of BD1000 ($2652) and a maximum of BD6000 ($15,911). A more relaxed set of capital requirements for the BIM compared to the BHB have also been established. The new investment market offers a minimum paid-up capital level of BD250,000 ($662,950), compared to BD1m ($2.65m) for domestic companies and BD3.77m ($10m) for foreign firms on the main exchange. Businesses that wish to list on BIM must also have a minimum of three shareholders, as opposed to at least 100 on the main board, and the new regulatory framework does not contain any profitability requirement for participants, unlike the main market rules which require an applicant to have an annual turnover of more than BD500,000 ($1.33m). BIM’s admission requirements present a more straightforward, low-cost route to the bourse for smaller businesses. Moreover, the relatively modest charges levied on BIM candidate companies are mitigated by an agreement reached by BHB and Tamkeen, in which the development organisation will help to cover the costs associated with listing on the new market. Tamkeen will also support businesses with the expense of appointing a sponsor, which is a requirement of the BIM rules.

GUIDING HAND: The sponsor system established by the exchange authorities is one of the BIM’s more interesting features. Parallel boards such as the BIM are designed to attract companies that might not have previously considered a listing in the main market, perhaps due to insufficient capital or an inadequate record of financial disclosures. Some listing candidates will be unfamiliar with the prudential demands required of them, and therefore linking them with a sponsor, which is able to guide them through the listing process, eases the passage of new companies to the board. Adopting a sponsor system also serves to boost investor confidence, as a result of the oversight they provide, as well as mitigate the risk carried by the exchange in opening its doors to a wider range of institutions.

The BIM has struck a number of deals with professional advisory firms that will fulfil the role of sponsor for candidate companies, offering guidance in completing the documentation and fulfilling the financial disclosure requirements needed for approval by the BHB authorities. By early 2018 four professional services firms had been appointed as authorised sponsors for companies listing on the BIM.

The variety of domestic, regional and global sponsors provides candidates with wide-ranging knowledge of local and international markets: the Netherlands-headquartered KPMG is considered to be one of the “big four” global auditors; Bahrain-based Keypoint is a professional services provider with a focus on the GCC, with additional offices in Jordan and India; Belgium’s BDO is organised as a federation of independent financial services firms, with a presence in more than 150 countries; and the Manama-based investment firm SICO has been a prominent player in the region since it was first established in 1995.

The BHB authorities process listing applications within 30 days and have established a streamlined procedure for candidate companies. Listing applicants are encouraged to first approach the BHB to discuss their requirements and objectives and, after receiving guidance from the bourse authorities, the company can then move on to obtaining one of the approved sponsors. Once the tie-up with the sponsor is secured, the company and sponsor can undertake the due diligence process together. When that is complete, they can submit the application form and the listing document, which, among other things, specifies the type and amount of shares, the listing price, and the minimum and maximum subscription limits. Successful applicants will then receive the approval from the BHB for the sale of their shares, and admission to and listing on the BIM.

GROWTH PLATFORM: In March 2017 the BHB marked the official opening of its new market with a bell-ringing ceremony. The establishment of the BIM is another useful component in the financial ecosystem, which, thanks to its transparency and good governance, has earned Bahrain a top-twenty place in the annual Index of Economic Freedom since the ranking system was first introduced in 1995. Understandably, the bourse authorities were keen to highlight the continuance of this commitment at the launch of the new parallel market. “The BIM model is an integrated ecosystem, which is accessible to companies and equipped with the necessary safeguards to protect investors,” Sheikh Khalifa bin Ebrahim Al Khalifa, CEO of the BHB, said in a statement to the press. “We placed great importance on ensuring end-to-end transparency, from the initial listing documents to the audited financial reports after listing, to allow investors to quickly evaluate and benchmark the eligible companies.”

Within the domestic investment landscape, the BIM sits at the growth stage of the funding cycle, which is of principle interest to companies that have already secured their first tranches and completed their early stage expansion. The BHB seeks to ensure that the entrepreneurial spirit of markets approaching the BIM is retained after their listing: the stipulation that the founder and owners of a company keep possession of at least 30% of the company’s share capital is designed to prevent stakeholders from using the new market as a quick exit strategy. Furthermore, bourse authorities have expressed that, over time, some companies will graduate from the BIM to the main market. The BIM rules outline the manner by which a company can make the leap to the BHB main board: the eligible company must be listed on the BIM for at least six months, have a minimum share of 10% offered to the public and meet the higher capital requirements of the main market.

LOOKING AHEAD: In the shorter term, the market’s first test will be its ability to attract new listings. Parallel markets in relatively small economies generally face challenges in sourcing suitable companies in the early stages of their development. The BHB authorities will be compelled to balance their eagerness to secure candidate companies with their determination to maintain the best prudential standards. The fact that the new market has been made available to both institutional and retail investors may help the BIM to gather momentum during its crucial first year.

This approach differs from that taken by Saudi Arabia, which opened its Nomu market in February 2017 to the exclusion of retail investors. Indeed, the Saudi authorities restricted access to its new parallel market to qualified entities, including corporates, government-owned companies, GCC funds and companies, investment funds, and discretionary portfolio managers, as well as individuals who have at least SR40m ($10.7m) invested on the Saudi stock exchange, a portfolio size of more than SR10m ($2.7m) or who hold the relevant Capital Market Authority-recognised certificate.

Another positive factor is that the BHB is a multi-currency platform; though it is focusing on signing up domestic companies at first, it intends to seek listings from elsewhere in the region at a later stage.

Over the medium to long term, the dynamics of Bahrain’s economy are favourable to the growth of its small and mid-cap market. According to the Ministry of Industry, Commerce and Tourism, start-ups represent the largest and fastest-growing segment in the private sector. Between 2015 and 2016 the number of commercial registrations in Bahrain nearly tripled, from 9000 to almost 27,000. Prior to the arrival of the BIM, smaller firms seeking funds for development were restricted by private placement, an instrument that limited them to accredited investors. The addition of the BIM, therefore, is a welcomed one, with the new exchange filling an important gap in the market.