In Malta at the end of 2009, we had some 48,520 companies and partnerships registered with the Registry of Companies. The number of companies registered in Malta has been rising steadily over the past few years, rising by an average of some 2,800 each year since 2005.
Thus, when one considers that there are only 19 equities listed on the Malta Stock Exchange, it becomes immediately apparent that there is a great disparity between the number of "targets" and the actual "hits". When one further considers that the number of Maltese companies which can be legally defined as "public" account for only a fraction of total registrations, then it becomes clear that the main reason for the lack of listed equity is not the Exchange with its rules and disciplines, but rather the reluctance of our family companies to go public. In fact, once a company actually takes the plunge and goes public, the decision to list is almost regarded as a natural consequence.
So any discussion related to the paucity of companies listing their shares on our market must inevitably first consider the reasons why our family companies show such a strong reluctance to go public.
Going Public
Why would a private company want to go public, what are the advantages, as well as the disadvantages, that come with going down this path? Can it be beneficial for smaller companies to go public, or is this only territory for the large, well-established firms? Small, family run companies are such a common feature in Malta, that we can consider them as one of the pillars of our economy. Indeed this is not a phenomenon unique to Malta. The Small and Medium Sized enterprises are a very important feature in the Gross Domestic Product of all EU countries. Clearly what is considered as small or medium-sized in Italy, Portugal or Spain is not necessarily of the same size as a small or medium sized company in Malta. However, the general profile is still that of a small family-run company producing essentially for domestic consumption.
If we look at the relatively small number of companies that have come to the Exchange's Alternative Company List (ACL) which has been available since 2001, it is evident that such companies have been generally reluctant to consider listing as a viable solution. And yet, going to the market may be the ideal vehicle for a lot of these companies, enabling them to invest, to grow and to compete. By going public, companies can gain enough strength to reach the size required to enable them to keep up with today's dynamic and fiercely competitive business environment.
But let us move step by step. One of the reasons for listing is the need for fresh, relatively low cost capital. A Stock Exchange is essentially a marketplace, where people buy and sell financial instruments such as shares and bonds. It is a regulated marketplace, and all parties involved, be they the investing public, the brokers, or the listed companies themselves, know they can deal with both the Listing Authority (the Malta Financial Services Authority) as well as with the Malta Stock Exchange with a high degree of confidence. This is vital for a healthy and vibrant market.
By listing on the Exchange, a company acquires a much wider public exposure of its brand and operations. It may nearly be considered as extra advertising that comes with listing and with being associated with the Stock Exchange. Furthermore, as a listed company, it may find it much easier to obtain funding from the more traditional sources due to its superior profile. This type of funding could even be obtained at a cheaper cost because of the higher profile as a listed company.
To be listed on the Stock Exchange, a company has to meet a certain set of standards as laid out by the competent authorities, the Listing Authority at the MFSA in Malta's case. The disciplines involved can only be perceived as positive by the company, as it adds credibility to its business, both in the eyes of its clients as well as in those of possible investors. Essentially listing creates a general feeling of confidence around the company itself, and a more positive customer awareness.
Advantages and Disadvantages
The high level of service provided by our Stock Exchange can play a critical role in providing alternative solutions to our companies. The fiscal advantages enjoyed by holders of shares listed on the Stock Exchange, namely the exemptions from stamp duty and capital gains tax, can certainly lend a hand in mitigating any possible tax liabilities arising on the disposal of shares. Another advantage tied to listing is the valuation of shares which is constantly provided by the open market. Again, the marketability provided by listing provides an easy exit route for those shareholders who would prefer cashing in on their holdings rather than staying on in the business. This benefit applies especially to a lot of our family-owned companies, many of which are today in their third and fourth generation with shareholders suffering a constant dilution in their holdings. Furthermore, the marketability of the shares in the secondary market makes it much easier for a listed company to issue new shares in the primary market. One of the biggest concerns of these companies when considering whether to go public or not, is the potential loss of control resulting from bringing in outside shareholders. However, this is not necessarily the case because the company can choose to sell only a percentage of the company, which as a rule, is set at a minimum of 25%.
Other concerns which are often mentioned by companies thinking of coming to the market are the actual costs of listing and ongoing compliance. Listing costs are mainly made up of sponsor and professional fees, advertising and marketing expenses in connection with an offer for sale, initial fees payable to the Listing Authority and annual fees payable to the Exchange.
Conclusion
Capital Markets play a vital economic role since they provide a very important channel used by these companies to raise capital. Exchanges offer companies a possible avenue to access funds through a public listing which, of course, is one choice amongst other traditional channels of financing such as going to the banks or seeking venture capital. Of course, the individual companies must assess the advantages and disadvantages of the different channels according to a number of different criteria. There are difficulties, not least the size and structure of the vast majority of business firms in Malta and their traditionally inward-looking culture. However, this mentality is slowly changing and, in fact, it was very encouraging particularly during the past year to see an increasing number of companies coming to the market. This is good not only for the companies themselves, but it is good for the Exchange, it is good for our financial services industry and it is good for Malta.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
