Mar 05, 2014 (LBO) - Sri Lanka's
information technology and outsourcing firms could unlock value for
their owners, draw capital and attract talent by a planned stock market
listing, officials said.
Colombo Stock Exchange Chief Executive Rajeeva Bandaranaike
said listing which will lead to a value being placed on the shares when
they are traded, unlocking the value of a company and generate wealth
for the owners, in addition to raising fresh capital.
"Shareholders can become wealthy, overnight," Bandaranaike said.
He was speaking at a seminar organized by the CSE, the Securities and Exchange Commission and the Sri Lanka Association of Software and Service Companies (SLASSCOM).
A stock market through secondary trading, values the future potential of a company which going beyond the current operational profits and cash flows that are generated.
Though IT firms have access to venture capital and private equity, Bandaranaike said a clear path to listing will make it easier to tap such capital, because a ready exit is provided.
"If a private equity investor has to find a buyer on his own and sell, it requires more time and effort and he will in turn demand a higher return for his investment," he said. By providing an easy exit path, an IT firm will be able to draw first round investor who may not be looking for very high returns, he said.
A stock market listing also provided a clear value to stock options and employee share ownerships plans (ESOPs).
SEC officer-in-charge Dhammika Perera said IT firms will be able to attract and retain top talent by giving stock options that were liquid if a company was listed.
He said the SEC was doing minimal regulation of ESOP, but some rules would be brought in to prevent them being used as back-door tools for others to exercise control.
In Sri Lanka no software developer was listed so far, though companies such as Virtusa which had development centre in Sri Lanka was listed in the US.
Renuka Wijayawahdhane, head of regulatory affairs at Colombo Stock Exchange said a company could list in the second 'Diri Savi' board selling only 10 percent of the capital and in the main board by selling 25 percent.
A company should have a stated capital of at least a 100 million rupees after the listing.
In the second board entry for new firms were easy as a company had to have only one year of operations or one year of audited accounts and need not even be generating profits as yet.
There were also opportunities to raise debt on the Colombo Stock Exchange.
Bandaranaike said the CSE was willing start a dialog with SLASSCOM and its member to structure a tailored instrument to help IT firms raise capital or even start a separate board with tailored guidelines.
Asanka Herath, vice president of Copal Amba, which analysed companies for Wall Street clients said in India, IT and service firms traded at forcast price to earnings multiples ranging from 17 to 20.
Investors valued firms with a geographically diverse clients and a broader portfolio of products higher he said, as revenue of those firms tended to be more stable.
Typically revenues of IT firms were volatile, and companies that had single products or depended on clients of one country were considered riskier, he said.
