A new alternative: Efforts are under way to encourage small businesses to list

In a bid to stimulate more activity and to encourage a broader range of businesses to engage with the Ghana Stock Exchange (GSE), an alternative exchange was launched in May 2013 with the aim of helping develop small and medium-size enterprises (SMEs). The Ghana Alternative Market (GAX) has fewer requirements, faster procedures and additional incentives for businesses considering it as a means of funding.

LOWER REQUIREMENTS: The minimum capital requirement to list on the GAX, post-floatation, is GHS250,000 ($128,525), compared to GHS1m ($514,100) on the GSE. Prospective companies will only be required to present one year of audited accounts, and this requirement can be waived if they can present a three-year business plan spelling out the viability of the company and showing that it is profitable by the third year. On the main exchange, companies must present audited accounts for three years.

GAX companies are required to have a minimum of 20 shareholders, which is less compared to the minimum requirement of 100 on the main exchange. Businesses must underwrite the initial public offering (IPO) to the minimum of the offer.

The stock exchange has also started a revolving fund to cover listing costs for companies on the alternative market, until those listed firms are profitable enough to pay. The African Development Bank has contributed $600,000 to the fund. Ghana’s Venture Capital Trust Fund, which was created by the government in 2004 to help stimulate private sector growth, is giving $500,000 while GSE will provide $50,000.

SME GROWTH: The African Development Bank included the successful launch of the alternative market as part of its strategy for public sector growth in Ghana from 2012 to 2015. Its goal is to see 17 SMEs listed on the GSE by 2015 and at least 10 companies listed on the alternative market. “The alternative market is meant for companies with the potential for growth, whether they be small, medium-sized or even start-up company,” said Ekow Afedzie, the GSE’s deputy managing director. Afedzie is hoping to see at least two companies listing on the GAX before the end of 2013, and believes it is vital to educate entrepreneurs about the benefits of listing through organisations such as the Association of Ghana Industries.

The GSE is hoping it can persuade business owners that they can retain 75% ownership of their business, but use equity investment to fund long-term growth rather than relying on short-term loans from banks.

However, many small businesses appear to believe that public scrutiny of their finances is a high price to pay for listing on the exchange. “People are not comfortable about governance and are not open about their books and they don’t see any reason to open them up to the stock market,” Moses Ageyman, senior economist at the Private Enterprise Federation noted.

Desmond Nartey, executive director at CDH Securities, believes the GAX has potential, because the majority of companies in Ghana are small. He thinks listing may be a particularly attractive option for some of the country’s 136 rural and community banks. “They are public but unlisted, and if you could give them a mechanism to raise money it would help them, but there needs to be some prodding from the government, because they are regulated by the central bank and there would be continuing compliance and listing expenses.”

CHALLENGES: However, for some financiers, the issues inherent in preparing smaller, less formal companies for listing as part of a transaction that might only be worth GHS500,000 ($257,050) have limited appeal when compared to preparing a GHS5m ($2.57m) initial public offering for a well-structured larger business.

An additional concern is that even if SMEs and startups do begin to list their companies on the GAX, the businesses will not be a particularly attractive option for investors. “In my opinion, the minimum threshold at GHS250,000 ($128,525) is too low,” said Carol Annang, CEO of New World Securities. She also wonders how much information regarding these small businesses will be clearly disclosed to potential investors.