Company’s listing decision
Company’s listing decision
Most of the companies in the modern society have difficulties deciding on whether to float their shares or not to float them in primary markets. Floating of shares has its own advantages and disadvantages which a company should seek to understand before making their decisions. One of the major reasons which make companies float their shares is due to lack of sufficient funds to finance the expansion of a company. Floating or listing a company thus provides an avenue of obtaining funds required to sustain a company’s growth strategies. Listing of companies entails transforming a privately owned company and making it a publicly owned company or entity. Listing involves issuing of shares for public trading or for stock exchange trading. Though an easier and effective way to obtain funds, company listing is a procedural activity and may also be costly to the company. Listing also leads to loss of control of the business by the owners. However, it is essential for ensuring continuous growth of the company. In Australia, one of the primary financial markets is known as the Australian Securities Market which has over 1500 stocks trading it. For any company to be listed in this market, it has to comply with the pre-set rules regarding admission[1].
An overview of Australian Security Exchange (ASX)
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ASX is a primary stock exchange market in Australia which was officially began in 1987 though it had been in existence since 1861. Trading involves all listed public companies and the activities of this stock market are carried out using electronics. Australian Securities Exchange came to being though a merger between Sydney Futures Exchange and the Australian Stock Exchange in the year 2006. For any company to quality for listing in this market, it must be in one of the following categories. One category is the ASX Listing which forms the main category of admission. Under this category, a company must fulfill the requirements of the profit test or the asset tests. Under the assets tests, the company must satisfy either the market capitalization requirement or the net tangible asset requirements. The next category of admission is the ASX Debt Listing. Companies admitted under this category are those that seek quotations relating to debt securities alone. ASX Foreign Exempt Listing is the third admissions category involving companies which are foreign to the country. under this category, the company must meet the asset test which requires that the company should have a net tangible assets of A$2 million or it should satisfy the profit test which requires the company to have an after tax profit of A$200 million for each of the past three years following the date of applying for admission. However, foreign companies not meeting these requirements have an option of applying using the main category of listing or the ASX Listing[2].
General requirement for admission to the Australian Securities Exchange
For a company to be eligible for listing in the ASX market, it must various conditions which have been set by this market. One of the admission requirements deals with the intended number of holders of securities. A company wishing to be listed in this market must ensure that it have 500 securities holders holding securities worth $2000 each. If the company does not meet this requirement the alternative to this condition is it should have 400 security holders holding securities worth $2,000 and an addition of 25% of securities which should be held by parties unrelated to the company. Failure to comply or meet either of the above standards makes a company not to be eligible for admission to the Australian securities exchange[3].
The second requirement for admission to ASX deals with financial requirements and reporting requirements. A company should furnish the Australian security exchange with the financial statements for the previous three financial years and also for the last half year. In addition to the financial statements, the company should also present the reviewed pro forma balance sheets during application for admission. However, for newly incorporated companies which may not have the financial statements for the previous three years, these documents are not required. Only a reviewed pro forma balance sheet is required from such a company. The half years reports are supposed to be handed over to ASX within a period of 45 days of that particular accounting period. Required documents include the cash flow statements and also the financial positions of the company. The preliminary financial reports should comply with the accounting standards and audited and then handed out to the ASX after the end of an accounting period and within 75 days. However, auditing of the accounts may be done after they have been presented to the ASX. A company must agree to and meet these standards for it to be admitted to this securities market[4].
For a company to be listed in the Australia securities exchange, it must produce a disclosure document. This is usually a prospectus but in some instances ASX may agree to take an information memorandum instead of a prospectus. Under the disclosure rule, the company must agree to the various disclosures outlined by ASX and all other listing requirements under the listing rules of ASX. The information covered in the disclosure document also known as a prospectus includes the history and background of the company and also any future initiatives as identified by the company owners. It also includes details on the expertise and qualifications of top and key management staff. Also included in the prospectus is the company’s financial information both the forecasted and the historical figures. The forecasted figures are accompanied by a detailed explanation on how they are reached at and also any assumption that underlies such forecast. The document should also reveal any material contracts of the company during listing period. The company is also required to reveal all related parties which could have interest in the company[5].
Another requirement for listing under the listing rules of the ASX is that the company applying for admission must agree to commit or spend more than 50% of its cash and other assets which are readily convertible to cash. This however applies only to the assets and not to the company’s profit.
Also, upon application for admission to the market, a company is required to pay an initial admission fee to the ASX which is determined during application. The amount of fees payable during application for admission are dependent on the value of the organization applying for listing. Value of the company is determined by the amount capital a company has raised plus the company’s total market capitalization. While applying for listing, a company pays initial listing fees which are paid during listing. After the company has been listed, it is supposed to pay annual listing fees which is paid on an annually basis and it is meant to ensure that a company remains listed. Subsequent listing fees are also paid by already listing companies which raise an additional capital when they are already listed[6].
ASX profit test and asset test admission requirements
While applying for listing in the Australian securities exchange, a company must meet either the assets or the profit tests as outlined in the listing rules. The profit test requires that a company should have at least $ one million of aggregated profits for three financial years prior to application for admission. An alternative to this requirement is that a company should have a consolidated profit of more than $ 400,000 accruing form continuous operation of the past 12 months and the application should done within two months period since the time the profit was recorded. Another requirement under the profit test is that a company applying for admission should have a working capital of not less than $ 1.5 million.
Asset test is also another requirement which a company must satisfy before being admitted to the Australian securities market. The assets test provides that a company is only eligible for admission to ASX if it either has not less than $ 2 million net tangible assets during the time or admission or not less than $ 10 million worth of market capitalization[7].
Cost of listing a company in the ASX
Listing of a company to any primary market is not a costless exercise. There are both explicit and implicit costs which a company has to meet in order to comply with the listing rules and regulations of the market. All this costs arising from the listing company have different effects to the long tern and short term operations of a company. One of such cost includes cost incurred during admission process. While applying for listing, a company is required to pay listing fees which are determined based by the value attached to an organization. The value of an organization as stated above is calculated on the capital raised as well as the market capitalization. Inclusion of the market capitalization value makes the amount of listing payable to be very high. This affects the short term running of a company thus the liquidity. Also, subsequent payments paid after a company is listed are also very high thus lowering the liquidity of a company[8].
Complying with the listing rules to primary markets is also a very costly exercise. While applying for admission, a company is required to furnish the ASX authorities with audited financial reports and cash flows as well as reviewed balance sheet. Auditing of the financial accounts and ensuring that they comply with the international accounting standards requires involvement of experts and auditors. Private companies though they audit their accounts, this is usually done by internal auditors and it is not a requirement for the law to publish such accounts. Once a company decides to be listed in the stock exchange, auditing of accounts is carried out by external auditors thus increasing the costs to a company. Also, after listing has been successfully completed, a company is supposed to publish their audited accounts as well as sending financial statements to their shareholders which could be a costly exercise[9].
The listing process is usually monitored closely and strictly by many regulatory bodies since it requires many disclosures about a company. Directors of a company are supposed to make representation of the company during this whole process of listing. To ensure uncomplicated listing is carried out, a group of advisors who are usually experts in the stock exchange market are hired to ensure smooth listing of the company. This process is usually rigorous time consuming and very costly[10].
Listing of a company involves a costly process which has negative impact on the overall liquidity of a company especially in the short term. During the listing process, a company uses more cash thus making liquidity management ineffective. Low liquidity in the company is usually transferred to the shareholders in forms of lower dividend. At times debt may be used to finance this process weakening the liquidity of a company. Listing in ASX is costly than funding in other primary markets. To substitute such costs, a company may consider listing in other listing markets in the country[11].
Conclusion
As companies continue to grow, there is need for huge funding which the owners may not be in a position to raise to finance the growth. Company listing is one of the strategies which companies are using to ensure that the companies continue to grow. Listing may also be carried out so as to reduce the amount of debt of a company. Listing of a company is beneficial in that it creates avenues for obtaining finance necessary for financing growth strategies. However, it is a costly exercise which leads to more public scrutiny by the public, regulation by outside forces like the stock market, many compliance rules and loss of control. Where the cost of listing exceed the benefits, a company should look for other means of obtaining funds which may include debt financing, strategic mergers, partnerships and private equity funding.
Bibliography:
Australian Stock Exchange: ASX Listing Rules. Published by Australian Stock Exchange
Aitken Michael & Frino Alex: Execution costs associated with institutional trades on the Australian Stock Exchange. (1996). Journal article of Pacific-Basin Finance Volume 4
ASX Limited ABN 98 008 624 691: ASX Rules Framework. (2008). Retrieved on 19th March 2009 from,
http://www.asx.com.au/products/pdf/asx_aqua_rules_framework.pdf.
ASX Staff: Trading the Share market: The ASX Way. (2004). Published by John Wiley & Sons Australia, Limited. ISBN 0731401972
Australian Stock Exchange, ISI Publications & International Securities Institute: The Practitioner's Guide to the Listing Rules of the Australian Stock Exchange. (1996). Published by ISI Publications. ISBN 9627762229
Bertram William K.: An empirical investigation of Australian Stock Exchange data. (2004).
Physica A: Statistical Mechanics and its Applications, Volume 341
McNamara, Clark: Corporation law: Australian Stock Exchange listing rules. Retrieved on 19th March 2009 from,
http://au.findlaw.com/article/436.htm.
Saudagaran Shahrokh M. ; Biddle, Gary C.: Financial disclosure levels and foreign stock exchange listing decisions. (2007). Journal of International Financial Management ; Accounting, Volume 4
Soulier Jean-Luc ; Best Marcus: International securities law handbook. (2005). Published by Kluwer Law International. ISBN 9041122915
Stevens, Sebastian: To float or not to float– What do you need to know? Retrieved on 19th March 2009 from,
http://www.bdo.com.au/__data/assets/pdf_file/0014/5621/Finance-vp-float.pdf.
[1] Sebastian, Stevens: To float or not to float– What do you need to know? Retrieved on 19th March 2009 from,
http://www.bdo.com.au/__data/assets/pdf_file/0014/5621/Finance-vp-float.pdf.
[2] Jean-Luc, Soulier ; Marcus, Best: International securities law handbook. (2005) Published by Kluwer Law International. ISBN 9041122915
[3] Clark, McNamara: Corporation law: Australian Stock Exchange listing rules. Retrieved on 19th March 2009 from,
http://au.findlaw.com/article/436.htm.
[4] ASX Staff: Trading the Share market: The ASX Way. (2004) Published by John Wiley ; Sons Australia, Limited. ISBN 0731401972
[5] ASX Limited ABN 98 008 624 691: ASX Rules Framework. (2008). Retrieved on 19th March 2009 from,
http://www.asx.com.au/products/pdf/asx_aqua_rules_framework.pdf.
[6] Australian Stock Exchange: ASX Listing Rules. Published by Australian Stock Exchange
[7] Australian Stock Exchange, ISI Publications ; International Securities Institute: The Practitioner's Guide to the Listing Rules of the Australian Stock Exchange. (1996). Published by ISI Publications. ISBN 9627762229
[8] Michael, Aitken & Alex Frino: Execution costs associated with institutional trades on the Australian Stock Exchange. (1996)Journal article of Pacific-Basin Finance Volume 4
[9] William K. Bertram: An empirical investigation of Australian Stock Exchange data. (2004). Physica A: Statistical Mechanics and its Applications, Volume 341
[10] Shahrokh M. Saudagaran & Gary C. Biddle: Financial disclosure levels and foreign stock exchange listing decisions. (2007). Journal of International Financial Management & Accounting, Volume 4
[11] Michael, Aitken & Alex Frino: Execution costs associated with institutional trades on the Australian Stock Exchange. (1996) Journal article of Pacific-Basin Finance Volume 4
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