Issuer Booklet Option 24Jun13

8/20/2019 Issuer Booklet Option 24Jun13

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A guide to listing on the

ColomboStock Exchange


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Introduction

Inviting public ownership into your company demonstrates your commitment to the highest standards corporate governance and transparency. This, in turn, helps enhance the growth trajectory of your companythrough multiple mechanisms. Access to a deep pool of international/domestic capital and facilitatestrategic partnerships are but two of the myriad bene ts you could gain through a public listing.

The Colombo Stock Exchange (CSE) is committed to ensuring it is the preferred choice of value and wealthcreation for both listed entities and investors. Together with the regulatory authority, the Securities ExchangCommission (SEC), the CSE continues to ensure an appropriately regulated, transparent and liquid market thatoperates to bene t all stake holders. Furthermore, recognizing the inherent advantages of ef cient and welldeveloped capital markets, the Sri Lankan government is enacting a number of measures to further incentivizeall market participants and foster growth.

This benign environment, as well as the post-war surge in economic growth, has helped establish the CSE asone of the best performing markets regionally and globally since 2009. The CSE continues to attract signi canforeign capital with the result that fundamentally strong companies are rewarded with higher valuations. Yet, thereis further room for growth; the current market capitalization to GDP ratio is only 30%, compared to a regionaverage of 48%. The measures undertaken currently should help the CSE scale up towards the average in themedium term.

Obtaining a public listing is a major milestone in the life of a company and the decision to list, which may well bthe most signi cant business decision you make, is one that must be initiated only after careful assessment ofall relevant factors. Through this booklet, we hope to guide you through the journey of listing and to provide yowith a glimpse of what life is likely to be as a public company.

We hope you nd this booklet useful and wish you success in your new venture.


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Contents

A Listing on the CSE: A Mark of Distinction ........................ ......................... ........................ .....................5Rewarding excellence in large and small companies .................................................................................................7

LKR157bn raised in debt and equity capital over the past ve years .........................................................................9

Further listings an important source of funding ........................................................................................................ 10

Three IPO-backed Success Stories ...................... ......................... ......................... ........................ .......13Odel – A Stunning Makeover ............................................................................................................................... ..... 15

Hemas – The Transformation into a Conglomerate ................................................................................................. 16

LAUGFS – Leveraging Stability for Growth .............................................................................................................. 17

requently Asked Questions ...................................................................................................................21

Going Public: Pre -considerations ..........................................................................................................28 Advantages of a public listing ................................................................................................................................... 31

Concerns you may have .......................................................................................................................................... 34

Is your company ready to go public? ....................................................................................................................... 35

t’s the Right Time to Go Public: Be a Part of Sri Lanka’s Growth Story ........................ .....................39Sri Lanka – South Asia’s fastest-growing economy ................................................................................................. 41

Strong fundamentals underlie higher growth trajectory of CSE indices ................................................................... 41

The government’s 2013 budget introduced measures to stimulate capital market growth ...................................... 46

Debt – An Emerging Listing Option ........................................................................................................49Overview of the Corporate Debt Market ................................................................................................................... 51

Advantages of a Debt Listing .............................................................................................................................. ..... 55

The IPO Process .......................................................................................................................................59Eligibility for Listing ............................................................................................................................................ ....... 61

Preparing for an IPO .......................................................................................................................................... ...... 62

Parties Involved in a Listing ................................................................................................................................ ..... 64

The IPO Process .......................................................................................................................... ............................ 65The Costs of Listing ........................................................................................................................................... ...... 66

The Regulatory and Legal Framework ..................................................................................................................... 67

The role of the SEC and the CSE ...................................................................................................................................67Legal/regulatory requirements to be considered .............................................................................................................67

Accounting requirements to be considered .....................................................................................................................68

ife as a Listed Entity ...................... ........................ ......................... ......................... ........................ ........71Regulatory requirements .......................................................................................................................................... 73


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A Listing on the CSE A Mark of Distinctio


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A Listing on the CSE – A Mark of Distinction

Home to 287 companies as at 15 th May 2013, with a combined market capitalization of about U(LKR2,400bn), the Colombo Stock Exchange (CSE) is one of the region’s most dynamic stock exchanges. TheSri Lankan capital market continues to attract investor attention with long-term performance well exceeding thof most global and regional indices, which in turn provides companies an opportunity to access a deep pool o

international and domestic capital. Furthermore, a listing on the CSE is a hallmar k of prestige – an af rmation of a company’scommitment towards ensuring the highest standards of corporate governance and transparency.

Rewarding excellence in large and small companies At the CSE, there is a place for all entrepreneurial companies that aim to be the best in their respective elds – the organization’ssize is irrelevant. The Main Board is for larger corporates, familiar names such as John Keells, Ceylon Tobacco, Nestle andCommercial Bank are listed here. Equally well-known names such as Odel, LAUGFS, and Vallibel One are found in thealternate Diri Savi Board. In fact, 57 of the total 287 companies listed on the CSE are listed on the Diri Savi Board, withmarket capitalizations ranging between LKR316m and LKR30bn.

Exhibit 1: Some of the names seen on both Boards

Board Issuer Listed Year Sector Market Capitalizati

Main John Keells Holdings Plc 1986 Diversi ed Holdings

Main Ceylon Tobacco Company Plc 1955 Beverage, Food and Tobacco

Main Nestle Lanka Plc 1983 Beverage, Food and Tobacco

Diri Savi Vall ibel One Plc 2011 Diversi ed Holdings

D ir i S av i L au gf s G as Pl c 2010 Power & Energy

D iri S av i Od el Pl c 2010 Footwear & Textiles

Source: Colombo Stock Exchange

Following the rejuvenation of the capital market in post-war Sri Lanka, the CSE has witnessed a signi cant increase in thenumber of listings. Large conglomerates such as Vallibel One, Softlogic Holdings, and Expolanka Holdings raised equity whilst

nancial institutions such as Sampath Bank and Seylan Bank carried out public listings of debt securities.


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Exhibit 4: IPOs predominated during 2010 – 12

5 5

3 3

1 1 1 1 1

0123456

D i v e r s

i f i e d

h o

l d i n g s

P o w e r a n

d

e n e r g y

B e v e r a g e , f

o o

d

& t o b a c c o

H o

t e l s & t r a v e

l

I n f o r m a

t i o n

t e c

h n o

l o g y

L a n

d & p r o p e r t y

M a n u

f a c

t u r i n g

C o n s

t r u c

t i o n

a n

d e n g

i n e e r i n g

F o o

t w e a r &

t

t i l


Note: Does not include the nancial sector since most were listed through Introductions

LKR157bn raised in debt and equity capital over the past ve yearsSince 2008, the CSE has supported the raising of around LKR157bn in debt and equity, through primary and further listings.Spectacular growth was reported in both 2010 and 2011, with total funds raised increasing to a record LKR60.5bn in 2011.This positive momentum continued in 2012, albeit at a slower pace, given the sluggish economic conditions worldwide. Atotal of LKR29.5bn was raised in 2012.

Exhibit 5: Fundraising at the CSE gaining momentum

7.02.3

19.3 20.2

14.2

5.18.4

25.2

40.3

15.3

0

10

20

30

40

50

2008 2009 2010 2011 2012

LKR Bn

Initial listings Further li stings


Exhibit 2: Recent listings

Issuer Listed Year Sector Equity/ Debt Funds Raised (LKR. m)

People’s Leasing& Finance Company 2011 Banks, Finance & Insurance Equity 7,020

Laugfs Gas 2010 Power & Energy Equity 2,505

Expolanka Holdings 2011 Diversi ed Holdings Equity 2,408

Sampath Bank Plc. 2012 Banks, Finance & Insurance Debt 1,500

Seylan Bank Plc. 2013 Banks, Finance & Insurance Debt 2,000


n total, 34 companies listed either equity or debt in 2011, as did 23 in 2012. The majority of these entities operate inigh-growth sectors such as hotels and travels, construction and engineering, power and energy, and manufacturing. In010, the Central Bank of Sri Lanka (CBSL) mandated a public listing for all Finance Companies in order to promote goodovernance and supervisory oversight of these institutions. Following this rule during the 2010-12 period, 26 Licensedinance Companies listed on the CSE.

Exhibit 3: Over 80 listings on the CSE since 2008

63

10

14

9

2 1 2

20

14

0

5

10

15

20

25

2008 2009 2010 2011 2012

No. of new listings

IPOs Introductions


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Further listings an important source of fundingListed entities returning to the capital markets (further issues and private placements, etc.) accounted for a signi cantproportion of total capital raised. About LKR15.3bn was raised through further listings in 2012, providing a clear indication ofhe ongoing bene ts of going public.

Corporate debt issue gaining in viabilityThe relatively higher cost was one of the factors that had previously deterred companies from issuing listed debt securities,constraining the growth of the Sri Lankan corporate debt market. With the aim of growing the corporate bond market toUSD10bn by 2016 from less than USD1bn presently, the government now offers incentives to promote corporate debtistings. Measures such as removing income tax and withholding tax on interest earned on new publicly issued debt listed

after the 1st of January 2013 (previously 10%) are helping debt gain popularity as an investment option. This is in turn

helping to make the issue of publicly listed debt a more viable option for corporates. As a result, capital raised through debtssues soared to LKR10.5bn by end April 2013, compared to LKR12.5bn in 2012, and LKR1.0bn in 2011.

Exhibit 6: LKR12.5bn worth of debentures issued in 2012

1.5 1.2

4.3

19.2

1.7

5.5

1.1

15.0

1.0

12.5

0

5

10

15

20

25

2008 2009 2010 2011 2012

LKR Bn

Equity -IPO Debt-IPO


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Three IPO-backeSuccess Stories


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Odel – A Stunning Makeover Odel management recalls the listing decision

ODEL’s eventful journey is a story of how a family business grew from a single store to a large company that currentloperates 17 stores, tripled in market size, and enabled its original shareholders to increase their overall wealth.

In 1989, the company’s CEO Otara Gunawardena founded ODEL by selling export excess garments from t he boot of her car. After gradual growth over the next two decades, in 2009, using internal cash ows, additional equity injection from ownersand bank debt, ODEL embarked on a rapid expansion spree and increased its number of stores to 12. With the intentionof raising equity for further growth, the company instigated the process of a public offering and in August 2010, ODEL waslisted on the CSE. The company offered 11.5% of its shares to the public at LKR15 per share for a listing of LKR250.5m.ODEL’s shares were oversubscribed 63.8x, the highest ever over-subscription recorded at the CSE, and the company’sshares opened trading on the aftermarket at LKR30 per share.

Exhibit 7: Market capitalization and NAV (LKR m) Exhibit 8: Revenue and gross pro t (LKR m)

FY2009-FY2012

01,0002,0003,0004,0005,0006,0007,000

At Listing as at 4 August 2010

1 year fromlisting

As at 31December 2012

Net Asset Value (LKR m) Market Capitalization (LKR m)

0

1,000

2,000

3,000

4,000

5,000

FY2009 FY2010 FY2011

Revenue Gross Profit

Source: Bloomberg Source: Company reports

The management believes that pricing the IPO at LKR15/share ensured that there was something left on the table forinvestors, and that this helped to increase the company’s share price signi cantly in the aftermarket, leading to a highlysuccessful IPO. As aftermarket trading carried the share price up to highs of LKR43-44, the owners’ stake received asigni cant boost in value in spite of the reduction in their shareholding percentage. From owning 100% of a company with anet asset value of LKR1.5bn, the Gunawardena family went on to own 84.3% of the listed company valued at LKR4.7bn, analmost threefold increase in their net worth. ODEL utilized part of the proceeds to increase its store numbers by 25% to 15and the oor area by to over 140,000 ft², leading to a sales growth of 37% and a 43% growth in gross pro t over FY2010-FY2011. ODEL also added private-label brands LUV SL and Backstage at several stores in premium city locations.

To facilitate its next phase of growth, ODEL’s senior management and majority shareholders decided to dilute their personalholding and enter a tie-up with an international retail player. The controlling shareholders sold a 41.8% stake to ParksonRetail Asia Pvt Ltd for LKR1.4bn. Parkson Retail Asia owns and operates 52 department stores in Southeast Asia andParkson Retail Group, a related entity, a further 49 stores in 31 major cities in China. This transaction was followed by a 1:1rights issue that raised LKR2.9bn, with the majority shareholders all taking up their full allocation.

By taking the bold step of yielding control, management increased the company’s potential to extend and grow the ODELbrand, realized a part of their investment at a signi cant yield, and simultaneously increased the value of their holding inthe company. Presently, the Gunawardena family’s 44.6% stake in ODEL is valued at about LKR3bn, more than double thevalue of their original holding before the IPO three years ago.


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Hemas – The Transformation into a ConglomerateHemas CEO Husein Esufally recalls the journey so far

t the time of its listing in 200 3, Hemas Holdings PL C (Hemas) had been in existence for over half a century. The group’success story provides an engaging example of how conversion to a publicly listed company enhances the pro le of therganization and its owners, facilitates succession planning, and sets the stage for accelerated growth.

Hemas was founded in 1948 as Hemas (Drugs) Ltd. In the decades that followed the Hemas expanded in to diverseusinesses including travel and tourism, exports, industrials and apparel manufacture. A reorganization and consolidation ofhe business activities in the 1990’s led to the formation of Hemas Holdings as the parent company under which the FMCG,

Healthcare, Leisure, Transportation and Power sectors are organized.

Exhibit 9: Revenue and gross pro t (LKR m):FY2003- FY2012

Exhibit 10: Hemas share price chart (LKR):FY2003 -FY2013

0

5,000

10,000

15,000

20,000

25,000

F Y 2 0 0 3

F Y 2 0 0 4

F Y 2 0 0 5

F Y 2 0 0 6

F Y 2 0 0 7

F Y 2 0 0 8

F Y 2 0 0 9

F Y 2 0 1 0

F Y 2 0 1 1

F Y 2 0 1 2

Revenue Gross Profit0

10

20

30

40

50

60

Oct - 0 3 J ul - 0 4 M a r -05 Nov- 05 Jul- 0 6 M ar -07 Nov- 07 Jul- 0 8 M ar -09 Nov- 09 Jul- 1 0 M ar -11 Nov- 11 Jul- 1 2 M ar -13

Hemas Holdings Price Chart (LKR): From listing date –March 2013

Source: Bloomberg Source: Bloomberg

he shareholders decided to obtain a public listing for the group in October 2003 with the issue of 8m shares at LKR50/hare. This raised LKR400m to help fund its entry into the power sector and existing shareholders also realized part ofheir stake by selling 4m shares for LKR200m. The public listing served many purposes: rstly it gave the shares anbjective valuation and created liquidity in the shares to enable an orderly exit for existing shareholders. This helped

Hemas to grow as a Group, and prevented fragmentation. A secondary, but equally important, objective was to bringn fresh senior management into the company, as part of the group’s process of succession planning. Finally, the IPOnitiated access to capital markets; the Group subsequently returned to the market to raise funds to list Hemas Power Plc

which raised LKR626m in September 2009.

s a public company, the group’s revenue increased fourfold to about LKR21bn in 2012 from around L KR5bn in 2003 andro tability threefold to over LKR1.3bn. As of March 2012, the Esufally family held a stake of about 72% and institutionalnvestors around 12%. The ESOP schemes further facilitated the entry of high quality managers into the group. Today,

Hemas is one of the largest conglomerates in the country.

LAUGFS – Leveraging Stability for GrowthManagement believes timely listing paved the way towards sustainable growth

LAUGFS Gas PLC (LAUGFS) is a success story of innovation and strategic positioning to bene t from emerginopportunities. It is also a story of how the adroit use of a public listing helped stabilize a rapidly growing company, and howthe company used that stability as a foundation for further growth and diversi cation.

LAUGFS was established as Gas Auto Lanka Pvt Ltd, an auto gas conversion company that pioneered the use ofliquefied petroleum gas (LPG) as an economical alternative fuel for petrol-driven vehicles. This humble yet profitabbusiness set the stage for management to position the company as a competitor to global giant Shell, following theliberalization of Sri Lanka’s LPG industry in 2001. Over the years that followed, the company expanded rapidly anacquired significant market share in all segments of the downstream LPG business: domestic LPG, auto gas, andindustrial LPG.

To support growth in its gas business, the company established an LPG storage facility, a cylinder lling plant and anisland wide distributor network, all of which led to accelerating revenue and pro t growth; LAUGFS reported an operatingpro t of LKR527m in 2010. The company also initiated diversi cation into other businesses such as leisure and property.The downside of such rapid growth was the escalation of debt to LKR1.7bn, and debt/equity ratio to 60%.

Exhibit 11: Market capitalization and NAV (LKR m) Exhibit 12: Revenue, operating pro t (LKR m)FY2010-FY2012

0

5,000

10,000

15,000

At Listin g as at 8December 2010

1 year fromlisting

As at 18February 2013

Net Asset Value Market Capitalization

0

2,000

4,000

6,000

8,000

10,000

FY2010 FY2011 FY2012

Revenue Operating

Source: Bloomberg Source: Company reports

Management decided to carry out a public listing of the company in 2010, with dual objectives of funding growth anreducing its debt burden. LAUGFS Gas PLC listed on the Diri Savi Board to raise LKR2.5bn. The company issued 75mordinary shares at LKR23 per share and 52m non-voting shares at LKR15 per share. The LAUGFS IPO set a recordfor the largest ever retail participation for an issue, with over 60,000 applications received and resulted in the issuebeing oversubscribed by about 22x. The market attributed a capitalization of LKR8.9bn to the company over an NAVof LKR6bn.

LAUGFS used part of the proceeds to pay down around LKR1bn of debt. The remainder was used to expand and diversify.The company spent LKR500m on the LPG segment; the leisure segment received LKR500m to construct a four-star, 100-room hotel in Chilaw; two star class hotels in the Eastern and Southern coasts are also on the drawing board. LKR425mwent to the property development segment to build 72 serviced apartments in Colombo 6.

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n the rst full year after listing, the company posted a 30% increase in revenue to LKR9.2bn and a 21% growth inperating pro t to LKR968m. Presently, the parent company owns 68% of the listed entity and Sri Lanka’s Employeerovident Fund is the second largest shareholder with a 17% stake.

hrough an astute decision to list at the right time when the stock market was experiencing signi cant growth, LAUGFSwas able to bring in external equity to strengthen its balance sheet, consolidate operations in its core businesses, and layhe foundations for diversi cation into other lucrative segments – accelerating its growth from humble beginnings to theKR10bn corporate it is today.

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Frequently AskeQuestion


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Frequently Asked Questions

Will I be able to realize a fair valuation for my company?

The valuation attributed to your company will re ect the current consensus among market participants of riassociated with it and the growth outlook. Although past performance is not necessarily considered an indicatoof future pro tability, a historical track record of consistent revenue and pro ts would create positive sentimeand set the stage for an optimistic outlook.

A company may also command a higher valuation when there is an impending change in the outlook for the company/industry, heralding a signi cant increase in revenue and earnings. Of course, there should be high certainty of such anin ection point in the near future. Such companies on the cusp of signi cant growth and pro tability would initially be listeon the Diri Savi Board where track record requirements are less stringent.

The establishment of the IPO offer price is an iterative process between you, the investment bank managing the listing, andkey investors. After conducting due diligence on your company, the investment bank will carry out a valuation, usually basedon or a combination of several standard methods:

• Relative valuation multiples: This approach is often used to value young and high-growth companies with lihistorical accounting information. The value of your company is considered relative to other listed companies in thindustry that are comparable in size and nature. The company is valued on a multiple of the earnings per share gene rated(price/earnings) or on enterprise value to earnings before interest, tax, and depreciation and amortization (EV/EBITDA).Your company would be valued at a premium if it has superior earnings growth potential, competitive advantagesgreater cash ow generating ability, more liquidity, etc., than its peers.

• Discounted cash ow valuation : This approach is usually applied to mature compan ies that generate steady free cow. The company is valued as a sum of forecasted future cash ows discounted back at a rate commensurate with the

cost of capital and risk associated with the company.

• Sum of the parts valuation : This method is usually applied to companies that have distinct business segments wdifferent outlooks for pro tability and growth that need to be valued separately. The value of the company would be thesum of the separate segments minus debt.

Once a valuation has been established, the inve stment managers would approach potential key investors to get an indicationof the level of interest for price and size. Just as in any other business transaction, the nal price would be a mid-pointbetween your asking price and the investors’ offer price. To create a win-win situation for all parties and ensure that you will beenthusiastically welcomed when entering the market, the price should ideally be set at a level at which there is over-subscriptionand the share price performs well in the after-market.


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Will my company be expected to pay regular dividends?Whether your policy is to pay out dividends or to re-invest in projects that generate returns higher than the cost of equity,he critical need is to clearly convey your dividend policy to shareholders. The company’s ability to pay a regular stream ofividends is the key factor controlling the dividend decision, and therefore, it is mature co mpanies with steady and predictableash ows that usually choose to create shareholder returns via dividends.

ompanies in the high-growth phase of the business cycle generally choose to re-invest and create shareholder returns viahare price growth and capital gains. A dividend is usually not expected from such companies; if a company wishes to payut a dividend to share the bene ts of a speci c gain (for example, pro t from a disposal of a segment), it could be paid inhe form of a special dividend.

here is no legal requirement to pay out dividends to ordinary shareholders. However, there are certain compelling factorso consider in determining your company’s dividend policy:

Steady dividends usually indicate strong performance and sound management to all stakeholders, including investors,debtors, suppliers, and the media. A company that pays out a steady growing dividend would be rewarded with a highervaluation.

Capital gains are in uenced by investor sentiment. Hence, in times of share price volatility and low interest rates,investors may favor steady dividend-paying stocks that provide predictable returns.

Will the share price fall if my company misses earnings estimates?Market participants form expectations of future earnings based on indu stry conditions and the business prospects companies

isclose during regular investor updates. Estimates formed by sell-side analysts (research analysts at investment banks/rokerage houses) are widely disseminated, and a summary of these forecasts are collated into consensus estimates.

xceeding these estimates usually causes a surge in the share price, while minor misses are rarely disastrous sinceeasoned investors understand cyclical variations in business. At the same time frequent missed estimates do establishnegative precedent that could adversely affect the share price. It is un-communicated declines in earnings that surprise

nvestors and precipitate share price collapses.

ompanies can mitigate the risk of such an occurrence by:

Attracting shareholders with long-term investme nt horizons who are less swayed by temporary blips in results. Short-term investors are usually sentiment-driven, and a larger proportion of such shareholders create undue pressure onmanagers to focus on meeting or beating estimates, often at the expense of strategies bene cial to the company in the

long run.

Establishing a policy of honest and transparent disclosure to shareholders. Whenever management identi es a riskof missing earnings targets, it should immediately convey that information to shareholders and outline the steps beingtaken to rectify the situation. This will earn the trust of the investment community, and, in turn, result in markets acceptingthe predicted decline with equanimity.

What would attract high-quality shareholders to my company at the IPOand thereafter?Investors who buy company shares with the intention of participating in the risks and rew ards of its long-term growth would beconsidered high-quality shareholders. These investors usually include institutional investors (for example, asset managers,pension funds, long-only hedge funds, and insurance companies) and strategic stake holders. Their investment horizons areusually a few years, in contrast to the hours/days investment horizons of day-traders and short-term investors.

High-quality shareholders usually focus on factors that drive a company’s strategic direction and long-term growth. Theylook for businesses with competitive advantages in their industry, and potential to derive strong growth using that advantage.

Another key attribute these investors look for is stable man agement focused on investing in projects that generate returnshigher than cost of capital. There are several other factors that could attract such an investor:

• Innovation

• Super-normal growth

• Price/Volume leadership

• Strong cash generation

• High-return ratios (ROA/ROE) compared with its peers

• Steady dividends

In terms of qualitative criteria, high-quality shareholders prefer:

• Management with a proven track record and substantial equity interest in the company

• Brand leadership in business segments

• A de ned corporate strategy and business plan

Is it correct to consider that there is no cost to equity?There is a widely-held misconception that equity is equivalent to zero-cost debt. In fact, the cost of equity is usually greaterthan the cost of debt as an equity investor demands an additional premium to account for the risk of holding the share insteadof debt that generates de ned and certain interest payments.

The return a shareholder expects is the company’s cost of equity and is re ected in the valuation of the company. We canillustrate this using an example: Company A has a share price equal to 10x net pro t per share (EPS) while its peer company

B trades at 15x EPS. Company A has higher cost of equity than peers’, that is, investors believe that holding company A’sshares is riskier. The impact of this is practically illustrated at a further listing. To raise the same amount of funds, Company

A would have to issue more shares and suffer greater dilution to EPS.

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Are there any advantages to a public listing versus a private placement?Raising equity through a private placement of a stake with a private equity rm or a high net-worth investor is an alternativeo an IPO. However, private placements suffer from several inherent disadvantages relative to a public listing:

Easy entry, dif cult exit: A stake sale is certainly much less complicated than the IPO process. Howe ver, there are limitedexit options except for a buy-out or an IPO at a later date. An IPO, on the other hand provides a mechanism for orderlyexit of existing shareholders.

A one-time event: A private placement is a one-off event. Fundraising for the next phase of growth requires a repe titionof the same process. On the other hand, an IPO paves the way to a very deep pool of capital, both debt and equity, towhich the company can subsequently return repeatedly for fundraising through a less onerous process.

Low visibility: Private placements do not offer the bene ts of increased visibility, investor interest, media coverage etc.,

which a public listing can bring to a company.Decreased control: Presence on the Board of Directors or involvement in management may be conditions allied with aprivate equity placement, unlike in the case of a public listing, where the majority shareholder generally retains control.

What is the relationship between the free oat and valuation?verything else held equal, the company with greater free oat will command a higher valuation than the company

with a lower free oat. A low free oat leads to a vicious cycle where your company will not fall within the investmentniverse of most institutional investors due to the dif culty of entry and exit. This leaves the majority of the company’sublic holding in the hands of retail investors, who generally have shorter investment horizons. As a result, the sharerice is subject to high volatility, further discouraging longer-term investors, leading to lower demand for the shares andence, a decreased valuation.

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Going Public:Pre-considerations


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Going Public: Pre-considerations

For some companies, a public listing represents a zenith, the ultimate recognition of their achievements in terms ofgrowth and prestige; other businesses view an IPO as a necessary evil, to be embarked upon only if unavoidable.We advocate a more sanguine approach – that an IPO should be viewed as a natural step in a company’s growthtrajectory, a strategic business decision to be implemented at an opportune moment.

While a public listing confers numerous advantages on a company, it is also essential to consider the potential drawbacks,since life as a listed company is a paradigm shift – a transition from a private existence to life in the public eye. It is also

crucial to critically evaluate if the company itself is ready to be a public entity. Consideration of these issues well ahead ofembarking on the listing process is a prerequisite for the smooth ow and successful conclusion of an IPO.

Advantages of a public listingAttract long-term capital for growth investments

To go public or not to, that is a question that arises when a company is well-established and is contemplating the next phaseof growth. Being pro table, stable and well reputed by this stage, your company may well be able to access bank debt atfavorable terms; however, the question remains if you should. Fundraising at this stage is for long-term projects: to expand,diversify, acquire or merge. While bank debt is a low-cost option suitable for working capital purposes, for projects where thepay-back period is long, it is best to have a mix of equity and long-term debt capital to ease the strain on a balance sheet.Raising equity through a listing provides a company the ideal option of partnering with a set of capital providers willing toshare in both the risk and reward of the project.

Achieve an optimal capital structure

Using debt as the sole funding source inevitably results in the loss of future nancing exibility resulting in a decline in thecompany value. Conversely, an optimal mix of debt and equity in capital structure maximizes a company’s value. Raisingequity capital through a listing can help a company achieve this optimal capital structure.

By listing shares on the CSE, a company can gain access to a deep pool of equity from institutional and retail investors, bothdomestic and international. Therefore, unlike a private company, the growth of a listed company is not constrained by theowners’ capacity to inject capital into the business.

Return to market to fund next phase of growth

Furthermore, it has been our experience that for a successful IPO, and, once listed, for a share price to command a premiumvaluation, a company should not view a listing as a one-time event. As seen in the above diagram, management has theoption to access share markets to raise capital throughout the business cycle. A successful listing where the issuer receivesa fair price for the shares and at which the investor generates solid returns, coupled with a good relationship between thetwo parties, often translates into the company being able to raise fresh capital for the next phase of growth at later dates ata higher valuation multiple (through rights issues, further listings and listed debt, etc.). Returning to the market is usually aspeedier and less onerous process.


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unding choices through the business cycle

Source: Aswath Damodaran

nhance the corporate pro le

ompanies listed on the CSE receive regular media coverage. International and local nancial publications usually coverach stage of the listing process (announcing intention to oat, publishing the prospectus, local/international road shows,tc.). This heightened awareness of a company’s activities, together with the pro ling of key shareholders/managers,rovides what is effectively below-the-line advertising, and it enhances a company’s visibility, brand image, and prestige.

Once listed, the media covers a company’s reg ular updates to its shareholders, and this he lps to improve brand recall amongey stakeholders: customers, suppliers, nancial service providers, potential employees, etc.

Attract strategic investors

High visibility, transparency, and enhanced liquidity enable a listed company toattract high-quality shareholders, such as institutional and strategic investors,on to its shareholder register. Building relationships with such potential strategicpartners helps the company to take on investments beyond the capacity ofinternally generated free cash ow, enabling growth at an unprecedented paceand perhaps in directions not previously envisaged.

Attribute an objective value to the company

A private company’s valuation suffers a discount owing to illiquidity and perceivedrisks due to the limited availability of information. A listing at the CSE leadsto an independent market valuation of the company. Your company’s superiorattributes – such as its potential for high growth, revenue and pro t generation,

competitive advantage and cash generation ability – would likely attract dem andfor its shares, resulting in a premium valuation for the company. The highervaluation, combined with the company’s growth through the funds raised,would in turn enhance the value of your holding. Although your percentage ofownership in the company is lower than before, the increased valuation for theentity could likely result in a signi cant increase in the value of your stake.

Align shareholder/management/employee interests

A public listing of shares simpli es and facilitates the process of share-basedremuneration for employees, which can serve to attract and retain talentedstaff. Stock-based compensation provides employees an opportunity to sharethe bene ts of a company’s pro tability and growth, which in turn helps alignemployee interests with that of management and shareholders.

Stimulate liquidity in shares

Management of private companies consider private equity/venture capital asalternatives to an IPO. However, these measures have a prima facie disadvantagecompared to a public listing in that they constrain the liquidity of a company’sshares. Improved liquidity is not only a mechanism to facilitate an orderlyexit/stake sale for existing shareholders; it is also a mandatory requirementto attract high-quality shareholders with longer investment horizons, enablingmanagement to instigate measures bene cial to a company’s long-term growth.

Alternatively, poor liquidity tends to attract day-traders and short-term investors,and as a result, the company’s share price and valuation become subject tounwarranted volatility.

Alternative currency for mergers and acquisitions

A publicly listed company can use its common shares in conjunction with or as analternative to additional capital to carry out acquisitions, mergers, or other buyoutactivities. This could prove to be a more viable option than using available cash orraising debt and can facilitate the company’s inorganic growth process.

Advantageof a publiclisting

• Attract long-termcapital for growtinvestments

• Achieve an optim

capital structure• Return to marke

fund next phase growth

• Enhance the corppro le

• Attract strategicinvestors

• Attribute an objevalue to the com

• Align shareholdemanagement/employee interes

• Stimulate liquidishares

• Alternative currefor mergers andacquisitions

Page 32

Revenues/Earnings

Time

Externalfunding needs

Internal

financing

Externalfinancing

Growth stage

Revenues

Earnings

FinancingTransactions

High, butcons trained byinfrastructure

Negative orlow

Owner’s EquityBank debt

Stage 1Start -up

Accessing private equity Initial publicoffering

Seasoned equity issue Bond issues

Stage 2Rapid expansion

Stage 3High g rowth

Stage 4Mature growth

Stage 5Decline

High, relativeto firm value

Moderate,relative to firmvalue

Declin ing, as a percentage offirm value

Low, asprojects dryup

Negative orlow

Venture CapitalCommon Stock

Low, relative tofunding needs High, rela tive to funding

needsMore thanfunding needs

Common stockWarrantsConvertibles

DebtRetire debtRepurchase stock


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Concerns you may haveotential loss of control

Once listed, duties take precedence over rights; controlling shareholders and directors are entrusted with the responsibilityf protecting minority shareholder interests. Does this mean you would be unable to steer the company in the direction ofrowth and pro tability you would want to? Not at all, in fact, one criterion that high quality shareholders with long-termnvestment horizons look for in stock-picking is the continued presence of key shareholders at the helm of the company,nsuring that its growth momentum is maintained. A private company typically allows in outside shareholders in one of two

ways. The rst and less common occurs when existing shareholders monetize their investment at the IPO and completelyxit ownership of the company. This, in our experience, is usually not looked upon favorably by the investment community.

n the second scenario, a minority stake in the company is made available to the public. The company’s majority sharehold ersontinue to exercise day-to-day control over the business and act in a duciary capacity towards minority shareholders, who

may or may not be represented by outside directors. What ceding control translates into in practical terms is that you mayequire shareholder approval for certain material transactions as required by the Companies Act.

he rewards of ceding a certain amount of control are manifold. Injecting external capital into your business, not only at thePO but through returning to the market for judicious investments, could likely facilitate signi cant gains in your company’srowth trajectory. The presence of strategic investors could lead to business partnerships, tie-ups, mergers, or acquisitionshat are critical to remain competitive. Your company’s heightened pro le, once listed, would not only increase its standingnd reputation within the industry, but also improve perceptions of your business and nancial strength. Delivering stronghareholder returns and protecting the interests of minority shareholders is usually rewarded by a higher valuation beingttributed to the company’s shares, increasing the value of your stake.

oss of con dentiality

he higher degree of disclosure and transparency required of a public company,ombined with the requirement for regular shareholder communication, raises theear of loss of con dentiality. However, this is a misplaced concern as there is noequirement to disclose trade secrets or con dential information, such as clientdentities or potential acquisition targets. On the other hand, educating investors

with generic information – for example, the order book size, business pipeline,ricing potential, and expansion/acquisition plans – helps investors to assesshe quality and quantum of future earnings potential. This in turn translates intoncreasing demand for the company’s shares and a rising share price.

The possibility of a future takeover

ypically, the possibility of being subjected to a takeover bid is a major

rgument against ceding control. The possibility of a takeover depends onhe shareholding percentage the original owners retain; the required minimumublic shareholding is 25% of total shares if listed on the Main Board and only0% of total shares if listed on the Diri Savi Board. However, it is critical to

maintain a suf ciently high free oat as limiting share liquidity in order to retainontrol leads to a vicious cycle, contrary to company and majority shareholdernterests. A low free- oat results in a company’s shares being shunned by high-uality investors as being too illiquid; this leaves public shareholding in theands of short-term, sentiment-driven retail investors and leads to high volatility

Concerns youmay have

• Potential loss of control

• Loss of con dentiality

• The possibility of a futuretakeover

• Costs of compliance

• Costs of listing andremaining listed

• Share pricesusceptibility to externalconditions

in the share price, further alienating high-quality investors. Certain companies also invoke other forms of takeover defenses,such as issuing several classes of shares with different voting rights, etc.

Costs of compliance

A listed company must comply with the legal and regulatory requirements of the CSE and the Securities and ExchangeCommission of Sri Lanka (SEC), including the requirement for regular shareholder communication. As such, a listed companywould likely have to allocate additional management time and invest in establishing reporting systems and complianceprocedures. These regulatory requirements are a hallmark of developed markets and are in place to ensure the protection ofinterests of all parties engaging in the share market transaction, including issuers and investors. Rather than viewing these asan onerous process, we advocate considering adherence to these requirements as it provides an opportunity to implement andstreamline transparent procedures and good governance processes that lead to the company being a better corporate citizen.

Costs of listing and remaining listed

The planning process for an IPO – including building advisory teams, due diligence, and ensuring the company is ready fora public listing – may take between 6 and 12 months, and execution of the IPO process a further 6-12 months. Once listed,compliance with regulatory requirements is mandatory. These conditions require substantial investments, both monetary(advisory fees, legal, banking, accountant audit, underwriting fees if applicable, listing fees, and process implementationcosts) and in terms of management time and attention. As discussed earlier, these costs come as prerequisites to enjoy themultiple advantages of being a publicly listed company.

Share price susceptibility to external conditions

In addition to the company’s performance, its share price is also affected by general econ omic and market conditions, factorsthat may be beyond its control. However, markets are ef cient instruments, and the subdued share price of a well-managedand pro table company will generate interest from value investors, prompting an uptick in the price.

Is your company ready to go public?Once you have assessed the ad vantages of a public listing and d iscussed your concerns with an advisor, it is crucial that youcarry out a candid appraisal of your organization to assess if your company has the infrastructure, management bandwidthand most importantly, a culture that is necessary for life as a public company. Here are some of the questions you shouldconsider before embarking on the IPO process.

Is the long-term strategy I have for my company compatible with a public listing?

You need to consider the company’s long-term goals and strategies and whether they are compatible with a public listing.For example, if you have a key objective of retaining sole control of the organization, it is possible that listing on the Main Board,where a 25% free oat is required, may not be the best option for you. Alternatively, if the main reason you seek to go publicis as a mechanism of exit from the business, such an offering may not be well received by the investment community. Early

consideration of the impact of an IPO of all key stakeholders of the company is also essential to ensure a smooth IPO process.

Is management ready?

The organization’s leadership will de ne its future strategic direction. A listed company should be headed by a seniormanagement team that can convince investors of their vision and strategy to grow the company. The second layer ofmanagement should have the capacity to conceptualize the plan to implement these growth objectives and achieve thestipulated targets while managing an expanding organization. A strong management team will increase the company’s credibilityand increase investor con dence, which in turn would likely bring in a higher valuation. Furthermore, the company’s board ofdirectors and senior management should be prepared to deal with increased regulatory, media, and public scrutiny of its affairs.

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Do we have the operational and nancial capacity to cope with lifen the public eye?

n preparation for the IPO and once listed, the company should make aomplete disclosure of its affairs to the CSE as applicable, as well as todvisers, accountants, lawyers, and bankers. An organization should haveelatively sophisticated operational and management information systemso enable this disclosure. Once a company is listed, meeting the regulatoryequirements would consume signi cant amounts of senior management’s timend also incur costs, and an organization should plan for these eventualitiesefore venturing on an IPO.

Do we have an investment case that can appeal to investors?

clearly de ned and articulated vision, a track record of consistent reven ue

nd pro t growth, a solid balance sheet, a comprehensive business plan, anancial model to quantify the plan, and a viable plan for the use of proceedshould be presented to investors. You should be able to convince investorshat your business has the potential to stand out from its peers and that yourompany presents the best opportunity for solid returns on their investment. Arehe company’s products and services in the growth stage or are they maturing?s there potential for innovation or can the company penetrate new markets inrder to grow? Is the company versatile and able to adapt to market environmenthanges? These are some of the questions that the company should be ablenswer. Although your company may well have these positive attributes by now,takes time and planning to articulate them into a compelling investment case.

s my company a good corporate citi zen?

he company should organize its corporate affairs in a manner that demonstrateso its multiple stakeholders that it is a responsible corporate citizen. A company’sommitment to socio-economic as well as ethical practices can play a great role innhancing its value in the eyes of the public. Instilling good corporate citizenshipnto its core values will also bring about long-term bene ts to the company.

Are there any pending nancial, legal, or governance issues?

ny legal, tax, nancial, or governance issues that are pending should beesolved before proceeding with the IPO. Simplifying the corporate structure isnother factor that can help optimize the value realized for your company.

s it the right time to list on the market?

iming is critical for a successful IPO. Ideally, an IPO should be exec uted duringn uptick in the market. It should also be highlighted that the time l apse betweenlanning and implementing the IPO process could see markets shift in eitherirection. Key determinants to analyze include factors such as the public’sppetite for IPOs, the market’s overall performance and prospects, and theountry’s economic outlook.

Is yourcompanyready to gopublic?

• Is the long-termstrategy I have for mycompany compatible

with a public listing?

• Is management ready?

• Do we have theoperational and

nancial capacity tocope with life in thepublic eye?

• Do we have aninvestment casethat can appeal toinvestors?

• Is my company a goodcorporate citizen?

• Are there any pendingnancial, legal, or

governance issues?

• Is it the right time to liston the market?

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It’s the Right Timto go Public

Be a Part of Sri LankaGrowth St


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It’s the Right Time to go Public – Be a Part ofSri Lanka’s Growth Story

The ideal time for an IPO is when the stock ma rket is gaining momentum and there is strong investor demand. Typicallya country’s stock market performance tracks its economic conditions. Backed by the country’s unprecedenteeconomic growth, the Sri Lankan capital market is well set to offer attractive returns to companies that list on theCSE, allowing them the opportunity to channel the impetus from booming markets to share price growth.

Sri Lanka – one of South Asia’s fastest-growing economiesSince the end of Sri Lanka’s three-decade civil war in 2009, the country’s economy has been on an upward trajectory,buoyed by sound scal and monetary policies conducive to growth and well-executed development plans. Sri Lanka’smedium-term GDP growth forecasts, as provided by the CBSL rank it as one of South Asia’s fastest-growing economiesand following the end of the war, the country’s economy has grown at an impressive average rate of 7.5% per annum.The country’s fiscal and monetary policies aim to rein in inflation at mid-single digit levels and maintain rupee’s stability.

Sri Lanka’s scal de cit has steadily declined since 2009 and prudent debt management strategies have strengthenedthe country’s balance sheet. The country’s sovereign credit ratings have improved since 2009, and in a direct voteof investor con dence, foreign direct investments have also grown to LKR1bn over the same period. The governmenttargets a continuation of the growth trajectory over the medium term, resulting in a USD100bn economy by 2016, upfrom USD59bn in 2012. Growth in the tourism, transportation, and export-oriented sectors are set to be the key driversof this increase.

Strong fundamentals underlie higher growth trajectory of CSE indicesThe CSE has had a bull run unmatched by most other markets since 2009

Since the end of the war, the CSE has witnessed remarkable growth, with the benchmark All Share Price Index (ASPI)peaking at 7,800 in February 2011, compared with 3,700 one year before. Given the bourse’s unprecedented growth levels,Bloomberg named it one of the best-performing stock markets in the world for the years 2009 and 2010.

Further, the ASPI on average performed better (over June 2009-December 2012) than most global indices (Exhibit 13) andsome of the best-performing regional indices (Exhibit 14), such as the Bombay Stock Exchange 500 Index (S&P BSE 500)and the Thailand Set Index (SET).


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Exhibit 13: ASPI has signi cantly outperformed global market indices

0

100

200

300

400

Jun- 09 Jan- 10 Aug -10 Mar -11 Oct -11 May -12 Dec- 12 All Share Price Index Dow Jones FTSE 100 MSCI World DAX

Source: Bloomberg

Exhibit 14: ASPI has also outperformed some of the best-performing regional indices

0

50

100

150

200

250

300

350

400

Bombay (BSE 500) Jakarta (JCI) Philippines (PASHR) Thailand (SET)

Hanoi (VNINDEX) Dhaka (DHAKA) Colombo (ASPI/CSEALL)

Source: Bloomberg

CSE’s market capitalization has doubled since 2009; further room to grow

The CSE’s market capitalization has almost doubled since 2009 and stood at LKR2,168bn (approximately USD20bn)as of 31 December 2012 (Exhibit 16). Nevertheless, we believe there is further growth potential since the CSE’s marketcapitalization/GDP of 30% is still low compared to that of most other emerging markets in the region, such as Thailandand the Philippines (Exhibit 15).

Exhibit 15: CSE’s market capitalization/GDP ratio low compared to emerging markets (2012)

17%

29% 30%

43%

53%

77%

Vietn am Ban gladesh Sri Lanka Indonesia Ind ia Th ailand Ph

Source: Colombo Stock Exchange, Bloomberg

Exhibit 16: Authorities anticipate positive momentum to continue

489

1,092

2,211 2,214 2,168

0

500

1,000

1,500

2,000

2,500

2008 2009 2010 2011 2012

LKR BnCSE Market Capitalization (2008-2012)

Source: Colombo Stock Exchange, Securities and Exchange Commission and Central Bank of Sri Lanka

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ositive sentiment and conducive regulatory environment driving market recovery since mid-2012

ollowing growth in the immediate post-war period, the market eased after mid-2011 due to a market correction. However,market fundamentals remain strong, with most companies performing well in the wake of the country’s booming economy.

he market had grown 17% by the end of 2012 after it bottomed out in May 2012; improved market sentiment and the easingf market liquidity drove this growth.

ncreased foreign investor con dence in the market; net foreign ow turned positive in 2012

n 2012, the market witnessed a positive ow of foreign investments, epitomizing foreign investor con dence in Sri Lanka’sconomic prospects. Net foreign in ows in 2012 reached LKR39bn, improved from net foreign out ows of LKR26bn in 2010nd LKR19bn in 2011 (Exhibit 17).

oreign turnover levels remained at 2011 levels, despite low overall turnover for 2012, the latter was mainly due to the

quidity crunch faced by local investors during the early part of the year. Foreign turnover for 2012 was LKR53bn comparedwith LKR59bn in 2011 (Exhibit 18).

Exhibit 17: CSE saw net foreign buying in 2012

-50

0

50

100

150

2009 2010 2011 2012

LKR Bn

Purchases Sales Net Foreign Flow


Exhibit 18: Foreign turnover remained stable despite low overall market turnover

0

100

200

300

400

500

600

2009 2010 2011 2012

LKR Bn

Foreign Domestic


IPO oversubscriptions indicate strong investor appetite

Companies that have recently listed on the CSE have seen healthy investor demand, with most equity and debt listings in2012 being oversubscribed. This trend has continued in 2013 and we believe the current environment should be conduciveto companies listing on the CSE as they can price deals at the higher end of the range and achieve optimal valuations.

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The government’s 2013 budget introduced measures to stimulate capitalmarket growth

he government has identi ed the development of capital markets as a critical requirement for economic growth, and theountry’s regulatory policies are committed to providing incentives for investors in order to stimulate activity in capital markets.

he government’s 2013 budget proposals introduced a number of measures aimed at stimulating market participation atifferent stakeholder levels, such as:

Pro ts and income from investments made on or after January 1, 2013 in quoted corporate debt securities are exemptfrom income tax. Accordingly, no withholding tax would apply on such interest.

The tax rate applicable on the pro ts and income (other than any pro ts and income from the sale of any capital asset),of any company which lists its shares on or after April 1, 2013 but prior to April 1, 2014, in the CSE and issues by wayof initial public offering not less than twenty per centum of its shares to the general public, shall be reduced by fty percentum for the year of assessment in which such shares are listed and for another two years of assessment immedia telysucceeding that year of assessment subject where such company after listing continues to maintain not less than twentyper centum of holding of its shares by the general public.

VAT exemptions are effective from January 1, 2013 on services by unit trust management Companies to any unit trust.

Where any plant, machinery or equipment is acquired and used on or after April 1, 2013 in any stock broker companyfor the upgrading of information technology infrastructure to be in compliance with the requirements of the CSE licensedby the SEC, in relation to the risk management system, the depreciation allowance shall be one hundred per centum ofthe cost of acquisition.

A reduction of the tax rate on unit trust management companies to 10% from the previous 28%.

Exemption of stamp duty for transferring shares to and from margin trading accounts.

Permitting direct investments in foreign currency in unit trusts without a Securities Investment Account (SIA).

The appointment of a Presidential Task Force to implement a Capital Market Development Master Plan to oversee thedevelopment of the country’s capital market.

Promoting institutional investments by allowing private pension funds and provident funds to access capital marketinvestments in listed equity and debt up to a maximum of 20% and through Unit Trusts that invest exclusively in listedequity and debt, up to a maximum of 20% of such Unit Trust funds.

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Deb An Emerging Listing Option


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Debt – An Emerging Listing Option

Overview of the Corporate Debt Market

Volatile equity markets and structural changes in credit markets, following the global nancial crisis during 2002008, have brought about a global increase in debt trading. Domestically, policy changes are being implementedto reduce constraints previously prevalent in the debt market. Moreover, the tough credit restrictions are noslowly beginning to ease helping debt emerge as a viable sou rce of funding. The CSE regards the softening of the

regulatory regime as an encouragement to issuers and is committed to support corporates to make use of this opportunity toraise long-term debt capital. Long-term trends favorable to growth in corporate debt markets.

Long-term trends favorable to growth in corporate debt markets

The Sri Lankan debt capital market is dominated by sovereign issuances, while the corporate debt market is still at a nascentstage. However, the development of the domestic debt capital market is high on the agenda of policy makers, and based onsuch policy change plans, the CBSL expects the volume of corporate bonds outstanding to increase tenfold to LKR 1,000bnby 2016. A number of encouraging long-term trends support this view:

• A mature sovereign debt market has paved the way towards an appropriate legal and regulatory framework focorporate issuances.

• Tightening government yields, combined with historically low interest rates in the global markets, are fueling investdemand for Sri Lankan corporate debt.

• A reliable long-term benchmark government yield curve helps accurate valuation of corporate debt issues.

2013 budget incentives along with new debt market initiatives to set domestic corporate debt market ona growth trajectory

Since the government’s rst sovereign bond issuance in 2007, policy makers and legislators have gradually implemented theappropriate policy framework for the development of a solid corporate debt capital market.

• The government announced that it would exempt withholding and income tax on interest income earned on corporatedebt securities listed on the stock exchange on or after 1 January 2013, as part of its 2013 budget proposals. Many listedentities are using this window of opportunity to raise capital as this concession is applicable during the entire duration ofthe debt. The funds raised can be utilized for future capital needs of these companies. Many companies have lined upseveral debenture issues as a result.

• In December 2012, the Sri Lankan debt capital market witnessed the launch of its rst bond index, which measured theperformance of the country’s government securities. The benchmark, NDB Investment Bank and CRISIL Limited’s BonIndex for government securities, will enable foreign investors to compare the performance of their investments againstother markets and, ultimately, foster the development of index-based xed income funds.

• In 2013, the CSE implemented a number of operational improvements to facilitate the trading of xed income securities,including migration towards an automated trading platform and adequate custody and settlement of services.


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Historically low interest rates driving global investor demand for corporate bonds

ince 2008, central banks across the globe have cut interest rates in an attempt to lower banks’ short-term borrowing costsnd spur economic growth. In Sri Lanka, the CBSL eased the country’s monetary policy by reducing repurchase rates to.5% and reverse repurchase rates to 9.5%, both by 25 basis points in December 2012, compared with 10.5% and 12.0%,espectively, in January 2009. In a historically low-interest rate environment, in developed nations in particular, institutionalnvestors – including pension funds and insurance companies – are becoming increasingly adept at investing in emerging

market corporate debt in search of higher yields.

Exhibit 19: Historically low interest rates driving investor demand for corporate issuance

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Jan- 09 Jun- 09 Nov- 09 Ap r -10 Sep -10 Feb- 11 Jul- 11 Dec- 11 May -12 O ct -12 Mar -13

ECB refinancing rate US Federal Reserve target rate

CBSL repo rate CBSL reverse repo rate

Source: European Central Bank, US Federal Reserve and the Central Bank of Sri Lanka

Tightening domestic sovereign debt yields underlie demand for corporate bonds

Sri Lanka rst entered the international sovereign debt market in 2007, with a USD500m ve-year bond issue priced at8.2%. Since then, the interest rate of domestic borrowings has declined signi cantly, supported by improved macroeconomicindicators and controlled in ation. Further, a positive assessment of the government’s scal position by credit rating agencies,such as Standard and Poor’s upgrade of the country’s long-term foreign currency rating to ‘B+’ from ‘B’, has contributedto narrowing spreads. The downward shift in the yield curve is expected to continue owing to CBSL’s strategy to attaininvestment grade status within three years. In the backdrop of tightening sovereign bond yields, demand for Sri Lankancorporate debt issuance is expected to increase, as investors search for robust, risk-adjusted returns.

Exhibit 20: Sri Lankan sovereign yields tightening

0.0

5.0

10.0

15.0

20.0

25.0

Jan- 09 Jun- 09 Nov- 09 Apr -10 Sep -10 Feb- 11 Jul- 11 Dec- 11 May -12 Oct -12

US SovC

Sri Lankan Sovereign

Yield Curve ( %)

S ri La n ka S ov er eig n C ur ve 1 Ye ar U S Tre as ur y A ct iv es C ur ve 1 Yea r

Source: Bloomberg

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A reliable benchmark government yield curve provides pricing guidance

Meanwhile, subsequent sovereign debt issues have contributed towards the creation of a long-term benchmark government yieldurve. The existence of a liquid and default-free government yield curve, regarded as a proxy for a nominal risk-free rate, is aritical factor for the development of a corporate debt market as it is fundamental for correct pricing. The sovereign’s USD1bn 10-ear issue in October 2010 extended the government’s yield curve beyond 5 years for the rst time and established a benchmarkor private sector issuers willing to nance long-term projects. Further, a transparent government yield curve has fostered strongomestic and international investor demand, with government issues enjoying robust oversubscription; for instance, the USD1bn0year issue in July 2012 was oversubscribed 10.5x, while the government’s debut issue in 2007 was oversubscribed 2.5x.

Exhibit 21: Reliable benchmark yield curve helps accurate pricing of corporate debt

0.0

5.0

10.0

15.0

20.0

25.0

Jan- 09 Jun- 09 Nov- 09 Apr -10 Sep -10 Feb- 11 Jul- 11 Dec- 11 May -12 Oct -12 Mar -13

Sri Lanka Sovereign Curve 1 Year Sri Lanka Sovereign Curve 5Y

Sri Lanka Sovereign Curve 10Y Sri Lanka Sovereign Curve 15Y

Benchmark yield curve(%)

ource: Bloomberg

Advantages of a Debt ListingFor companies in the maturity stage, with well-established revenue streams, listing debt on the CSE can be the optimal

nancing transaction to access a deep pool of capital. We examine a number of favorable factors a company may considerbefore proceeding with a debt listing on the CSE.

Finance long-term projects

A company listing debt on the CSE can gain access to long-term nancing as bonds often bear longer maturities – betw een1 to15 years – compared to corporate loans, which typically bear terms between 1 to 5 years. Therefore, a debt listing onthe CSE can be the optimal nancing tool for companies planning to fund projects that signi cantly exceed the current scopeof the business, such as strategic acquisitions, or for entities operating in industries with long pay-back periods such astelecommunications, power and energy, and construction engineering sectors.

Achieve the optimal cost of capital

A company can gain rapid and unrestricted access to funds at competitive rates by listing debt on the CSE. A successfullisting often leads to a well-rated company paying lower rates than the interest rate paid on long-term bank loans. Further,listing debt with the CSE helps a company to achieve its optimal costs of capital since the cost of debt is typically lower thanthe cost of equity, due to lower exposure to risk for the debt investor.

Advantaof a Deblisting

• Finance longprojects

• Achieve the ocost of capita

• Diversify souliquidity

• Lower nancin subsequen

• No collateralrequired

• Hedge againsinterest rate r

Diversify sources of liquidity

A company can diversify its sources of debt nancing by listing debt with the CSEsince it provides access to an alternative to the corporate loan market. A debtlisting can, therefore, be valuable for companies willing to reduce heavy relianceon nancial institutions, particularly in a credit-tightening environment.

Lower nancing cost in subsequent issues

Prior to a public debt listing on the CSE, a company will be required to obtaina credit rating indicating the credit worthiness of the entity. Once listed on theCSE, a company that demonstrates the strength of its credit quality and builds astrong reputation will often achieve higher credit ratings. Therefore, a highly ratedcompany often enjoys lower borrowing rates when the company returns to themarket for subsequent debt listings.

No collateral required

A well- establis hed c ompany may b e abl e to access bank loans at co mpetiti verates. However, most banks and nancial institutions will require debt to be

collateralized by the company’s assets or trade receivables. In contrast, apublic debt listing on the CSE does not require a company to provide any formof collateral, and therefore is a valuable source of nancing for companies withlighter balance sheets.

Hedge against interest rate risk

A company listing debt on the CSE will have the choice to issue securities bearin goating or xed interest rates. From our experience, the majority of debt issued at

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he CSE bears xed interest rates, an d therefore helps the company to hedge against interest rate risk. In contrast, corp orateending is often at oating rates as nancial institutions seek to limit the risk on their loans.

Advantages for nancial institutions

here are a number of compelling reasons why a debt listing on the CSE may be advantageous, particularly fornancial institutions.

Meet expected credit expansion: Financial institutions will nd debt listing a means to expand their loan book. If anancial institution expects demand for credit to increase or grow in the near future, they may prepare for this by issuing

debentures so as to ensure they have suf cient funds to meet this growth.

Debenture issues will assist an institution to expand its tier II capital base and maintain capital adequacy ratios at healthylevels in the light of CBSL’s Basel II capital adequacy directives.

Reduce interest rate risk: Debt can be issued at either a xed or oating rate, allowing nancial institutions to match theloan repayments they receive with the payments they have to make on their borrowings. This will reduce the risks facedby these institutions from uctuating interest rates.

Reduce maturity risk: Financial institutions can meet long-term commitments, in terms of the loans they have given tocustomers, by raising long-term debt from the market. They can also raise short-term debt in order to match loans thatare expected to expire in the short term, allowing them to eliminate maturity risk.

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The IPro


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The IPO Process

Eligibility for ListingMain criteria for listing

Equity Main Board Diri Savi Board

Fully paid, freely transferable, and issued for cash alone(for offer of subscription and offer for sale)

Stated capital Minimum of LKR500m at the time of listing Minimum of LKR100m at the time of listing

Pro tabilityNet pro t after tax for three consecutive yearsimmediately preceding the date of application

Assets

Positive net assets as per the consolidatedaudited nancial statements for the last two

nancial years immediately preceding thedate of application

Positive net assets as per the consolidatedaudited nancial statements for the nancimmediately preceding the date of applica

Operating historyOf at least one year immediately precedindate of application.

Minimum publicholding

25% of total shares 10% of total shares

Number of publicshareholders

At least 1,000 public shareholders owning notless than 100 shares each

At least 100 public shareholders owning than 100 shares each

Debt Main Board Second Board

Fully paid, freely transferable, and issued for cash alone(for offer for subscription or sale) and introduction

Requirements Please refer Section 2.2.1.c. and d. of the listing rules available on the CSE website

Please refer the CSE website for detailed listing rules


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Preparing for an IPOhe successful listing of a company on a stock exchange is the culmination of a long and time-consuming process ofareful planning and execution. The groundwork needs to be laid well ahead of the actual listing process as it involves

much more than merely ensuring compliance with a list of rules and regulations. Preparation for an IPO is the preparation ofmanagement, employees, company structure, nancial and operational procedures, and the very culture of the organizationor a sea change.

he journey to a successful listing can be considered in three phases: rst is the pre-IPO preparatio n. Next comes the stagef preparation for listing, which is carried out in private with the CSE, advisors, and, thirdly, the public phase of the listingnce announced.

Once management has decided to proceed with a public listing, the process of preparing the organization for life as a publicsted company begins. This phase should include re viewing the strategic business plan, building a stro ng management teamnd board, strengthening the corporate and business infr astructure, enhancing the corporate governance team, and initia tinggood communications policy with the public and with investors. Such advance planning will enable the smooth ow of the

PO process, and even more critically, enable successful timing of the IPO to take advantage of favorable market conditions.

Building the company management team

rofessionals with the business acumen to conceive a long-term strategyor growth, proven experience of executing such plans, and ability toonvincingly convey the growth story of the company to investors are vitalo the management team. The company’s senior executive managementsuch as the CEO and CFO) should drive the IPO process, and the companyhould admit non-executive independent directors to the board, in order toain investor trust and con dence.

ngaging the external advisory team

uilding a cohesive team of advisors – investment bankers, bookrunners,egal counsel, independent auditors, accountants, public relations advisors,ompany registrars, etc. is a critical factor for success. An experiencedxternal advisory team, together with management, could greatly facilitatehe successful completion of the IPO process.

Developing a long-term strategic business plan

he company should prepare a comprehensive business plan, which outlineshe strategic direction of the organization over the mid to long term. The

usiness plan is effectively a roadmap setting out how the o rganization’s growthbjectives would be achieved using the IPO proceeds and should present aompelling story of growth and pro tability. Experienced management teamslso have contingency plans in place, in the event the IPO process is derailedue to unforeseeable circumstances.

Reorganization/restructuring of the group

nvestors require that the listed entity/group owns the assets, businesscenses, intellectual property rights, contractual rights, etc. required to

Preparing foran IPO

• Building the companymanagement team

• Engaging the externaladvisory team

• Developing a long-termstrategic business plan

• Reorganization/restructuring of thegroup

• Corporate governancerequirements

• Public relationsand investorcommunications

continue business operations. Furthermore, convoluted holding structures intertwined with family interests could cloud theclarity of the story the listing entity is attempting to sell. Before initiating the IPO process, the company should considerestructuring/reorganizing in order to achieve an optimal group structure and to enable disposals of units/businesses/holdings that are not intended to be part of the listed entity.

Corporate governance requirements

The company should appoint independent and non-executive directors and also change the audit and remunerationcommittee compositions in order to meet corporate governance requirements of the CSE Listing Rules. This can be anew experience for the company as most privately held companies do not have non-executive directors. The presence ofindependent and non-executive directors on the board would give comfort to the investing public. These directors would alsoensure that industry standards are adopted by the company in terms of compliance and governance.

Public relations and investor communications

The company should engage a public relations (PR) team to liaise with the media. If the company does not have a separatepublic relations unit, best practice requires that the senior management should be equipped to handle the added mediascrutiny following the listing. The PR team will ensure the company’s strategic objectives, growth story, managementeam, etc. are communicated in a way that would enhance the organization’s pro le in the eyes of the general public.The PR team could also be engaged to communicate with the media on an on-going basis and advise the company onimproving its public image.

As best practice in this process, a company should include an investor relations section on its website, which will host pressreleases, lings, and annual reports, and share information as well as contact details of the investor relations department.

A user-friendly and attractive website is important to communicate with the investing pub lic and analysts, both locally andinternationally. A sound investor relations section on the company website will help sustain market interest in the companyand attract new investors.

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Parties Involved in a Listingnvestment bank/issue managers

he investment bank will be the principal advisor to the issue and will advise the company on the timing and pricing of thesue together with a feasible capital structure that the listing company should adopt. The investment bank will also help theompany prepare and submit the relevant application documents to the exchange. The principal advisor would also managehe IPO marketing campaign (road shows) and optimize the distribution of shares/debt securities to institutional investors.

xternal auditors

he audit rm will prepare the accountants’ report and the audited nancial statements required for the listing a pplication. Theccountants could also help the company analyse the IPO’s tax implications and help the organization make the necessarynancial disclosures in its prospectus.

egal counselhe lawyers will advise the company on all legal matters falling under the purview of the listing. They could also assist theompany in compiling the documents relating to the listing, advise the company on its restructuring, conduct due diligence,nd advise the company’s directors on their responsibilities. The lawyers would also review all legal documents that mightnclude ‘change of control’ clauses, and, if necessary, draft new agreements in this regard. Legal counsel should also beought to settle existing litigation involving the company.

Registrar

company would usually appoint a registrar to create and maintain a list of shareholders. The registrar will oversee thellotment of shares and also liaise with banks, in relation to payments made for the issue, and the CDS, in relation toodgment of shares in respective CDS accounts.

Rating agency

f the company plans to raise debt, it will have to obtain a rating from an institute as speci ed in the CSE listing rules

ndependent valuer

s part of the listing process, an independent valuer may be required to su bmit a valuation report. The independent valuermay also be used in the event the company carries out a revaluation of its property, plants, and equipment.

Banks

anks accept applications submitted for the issue and forward them to the registrar during the allotment process.

Broker rm

roker rms also accept applications and will forward them to the registrar during the allotment process.

Underwriters

Underwriters could be engaged to guarantee, for a fee, that a certain share of the IPO value will be taken up in the event theffer is not fully subscribed.

The IPO ProcessOnce management and advisors are con dent that the company is ready to be a listed entity, the next step in the listingprocess is contacting the CSE. Early contact with the bourse would help avoid undue delays. The CSE then works togetherwith the management on the issue.

Before public announcement

Finalizing preparation of documents

Once due diligence procedures have been completed, the company’s legal and nancial advisers and auditors, along with itsissue managers, would have helped the organization prepare for a public listing. All of the CSE’s Listing Rules requirements,such as the amendment of Articles of Association to incorporate certain speci c provisions, and any restructuring andreorganizing, should be completed by this stage. The draft prospectus should be nalized once the business plans, the

investment case, and the use of proceeds have been decided upon. At

Documents

Issuer Booklet Option 24Jun13