What entrepreneurs need to know on the preparation of IPOs
The Dar es Salaam Stock Exchange (DSE) has not had an Initial Public Offering (IPO) for some time. The DSE continues to have only 28 listed companies, six of which cross-listed from other stock exchanges.
The six are not domestic and did not raise capital in the local market prior to their listings. These were listed by introduction. The question is: why do we have so few firms that have done IPOs and listed on the stock exchange? Why is it that the stock market has such a small percentage of firms?
Despite the DSE establisheing the Enterprise Growth Market (EGM) about six years ago to enable start-ups and small and medium enterprises (SMEs) to access capital from public markets for their growth and expansion, the segment so far has only six listed entities.
Some of the entrepreneurs and business managers that we sometimes engage with, indicate that the process of completing an IPO and listing into the stock exchange is tough, too long, expensive and complex.
Most of them tend to cement their arguments by indicating that the sheer fact that the process involves many disciplines of accounting and financial reporting standards, capital markets and securities law, tax laws, etc. that means a small enterprise will struggle. They say the average entrepreneurs usually does not have expertise in all these areas.
My advice has been -- you do not need to have all these competencies and experiences to prepare and take your company public. The capital market regulator and the stock exchange have trained and licensed various categories of advisers and members for that purpose.
Then comes another question: who is going to pay for these services? My response is that the entity raising capital will pay. But most of these costs are not paid up-front, they get paid from the IPO proceeds on a success basis.
Therefore, it boils down not to the technical expertise or costs related to raising capital through IPO. Rather the fundamental issue is: there is no strong motive for raising capital by way of IPO.
I also understand issues on transparency, disclosure requirements, family-owned businesses (and the emotions attached into it), tax liabilities, etc., are some of the issues that run on top of entrepreneur’s mind as they contemplate the issue of going public.
However, it should be known that there are several benefits of considering raising sustainable capital by way of IPO versus the negative side – some of these benefits are: access to fairly priced long term source of capital, the potential for future capital raising from a diverse and wider investor base, a flexible capital repayments, the glamour and prestige and profiling of the company and its products, the positive sentiment to the company by its stakeholders – customers, suppliers, bankers, the government, etc.
And so, there are many sound reasons for going public. For instance, equity capital obtained from IPO is considered a permanent form of capital since there is no interest paid on equity, and this form of capital is not repayable like it is the case for debt financing.
Therefore, from an entrepreneur point of view – funds generated by a public offering are considered to be relatively ‘safe’ form of capital for a business.
It removes the entrepreneur from the pressure of periodical cash commitments, etc. This means capital obtained by way of IPO allows a company the freedom and flexibility to deploy and spend capital as it needs to finance growth and expansion of the company, while sitting on strong financial/capital base.
