The Hindu Business Line : ‘Cos wanting to tap AIM must be prepared to make full disclosure’

Companies wanting to tap AIM for funds must be prepared to make full disclosure to their investors, remark Mr Mike Edwards, Director, and Mr Daniel Mackelden, Head of London Operations of international law firm Cains, in an interview with Business Line. The law firm advises companies that incorporate in the Isle of Man, a tax-effective destination for overseas companies listing in London.

Excerpts from the interview:

What has led to the junior market in London - Alternative Investment Market (AIM) becoming a popular destination for raising funds?

AIM is becoming a very popular junior exchange. Since the inception of the AIM market in 1995, 2900 companies have joined the exchange. AIM was originally started as a secondary market to UK businesses typically small and medium enterprises (SMEs). The composition of AIM underwent a change about four-five years ago when companies around the world saw that London was emerging as a global financial capital. They recognised they could raise large sums of money if they wished to do so in London. AIM gradually stopped from being an exchange with a UK focus to one with an international focus. I think if you talk to the exchange authorities now, they might tell you that the rest of the world is more important to them than the UK is now, in terms of companies that they wish to attract.

We help in that process. We found that for a number of projects raising funds in AIMs, Isle of Man is the preferred jurisdiction (through incorporation). Many companies use Isle of Man as a tax-effective platform for global expansion plans. So of all the Indian companies listed in AIM something like 75 per cent by market capitalisation were incorporated in the Isle of Man.

The companies listed in AIM had a relatively small market capitalisation until about five-seven years ago. Fifty million sterling for an AIM company was considered big.

We have now worked on Indian projects in the last couple of years with companies with market capitalisation of $700-800 million. Clearly there are also big companies that tap AIM.

They choose AIM because it has a good combination of the right set of regulations coupled with sensible rules. The implementation of Sarbanes Oxley Act was also a major boost to the AIM.

Mr Daniel Mackelden

It is usually believed that companies listed in AIM require lower disclosure and this goes with higher risks. So should unsophisticated investors be wary of investing in AIM listed companies?

It is risky. But we don’t think AIM has ever been marketed as an exchange that is suitable for retail investors. The stock exchange figures would probably show that there has actually been an equivalent amount of failures on the main markets.

In terms of the actual quality of companies on AIM, they are not failing any more than companies in any other exchanges. But the securities of these companies may not qualify to be offered to retail investors (in the main market) under the regulations, reason why a good number of the companies tap the AIM.

People who are buying these shares in the secondary market (AIM) are coming in with their eyes wide open. Yes, some of the companies in AIM have done spectacularly well and others not so well. So in terms of making investments in AIM you need to exercise due diligence.

Almost all the projects that we work on have big institutional investors. These investors are capable of carrying out a thorough due diligence process before they make an investment. If you look at Indian companies such as KSK Power Venture, which is also one of the most successful Indian companies on AIM, their share prices have consistently gone up but again some of the property funds have not done so well in recent times.

AIM companies have the choice to comply or explain. What do they opt for?

There are some broad principles that apply to listed companies. Many of the bigger companies listed on AIM seek to comply, where they canwith the principles that would be applicable if they were listed on the main market – the LSE. So while issues such as corporate governance and codes on takeovers don’t apply to AIM companies, some of them may choose to disclose them so as to provide comfort to the institutional investors who are the major investors. In that sense they become similar to a main market listed company.

It’s all about institutional investors. If you are trying to encourage institutional investors to make an investment there has to be full disclosure because they won’t settle for anything less. Anybody approaching AIM have to do so on the basis that they are going to make full disclosure of all relevant facts to potential investors.

Are the compliance levels different for companies coming from different sectors?

I do not think there are such differentiators imposed by the exchange. But they can be imposed by investors. For instance those (institutional) investors having expertise in a specific sector say oil and gas will have analysts looking at the prospects in terms of reserves, exploration and so on.

Some of the early companies that came to AIM came with plans and the money was raised based on the business plan. But the markets appear to have toughened and matured now. Companies that are getting successfully listed now in AIM in the last six months had a strong underlying existing business.

For instance, an investor might look for an incredible record for a real estate company say in India, presence of strong strategic partnership and reputation of people running the company and success they have to date. So in that sense, investors now look for a strong underlying business and not merely plans.

Some of the big names such as Hiranandanis and Unitechs were not short of funding options in India. What could have led them to seek listing in AIM?

There is no doubt that the capital markets in India have been very healthy for a very long time. The banking system here has been good. AIM is just an alternative. London is regarded as the financial centre of the world and has unrivalled liquidity in terms of raising funds. It is probably not the right place to go for every single project but for some projects it may be the right place to go.

Have you seen any trend in the sectors that tap AIM?

The initial interest was obviously on the commercial property. Very big funds have listed at the back-end of 2006 including Hirco and Unitech from India.

Power is now the ongoing theme; so also oil and gas, Indian media companies. What we haven’t seen today but could be an occurring theme appears to be infrastructure.

Companies from this sector are looking to raise significant amount of capital abroad to build infrastructure in India.

With increased difficulty in getting economical funding locally, has there been an increase in Indian companies tapping AIM?

It has remained fairly consistent. The nature of projects seeking capital has changed. Real estate was very popular a couple of years ago. There are far fewer real estate projects being talked about now. But the flow is still there. At the moment we are working on something like six potential-AIM listing companies from India and that’s pretty much the same story for couple of years now.

We have PEs and VCs flocking India. So why AIM?

For companies that may have looked at AIM but lack the right background may not find AIM to be a compelling story because it is not cheap in terms of raising the money. There has been an increase in private equity play especially in the $20-50 million investment range. You can see that happening now but in a 2-3 years time line there could be potential for listing these companies. AIM listing is not the beginning of the window, it’s a stage that a company will get to.

Has there been a slowdown in listing post the recent bout of corrections?

There have been 40 or 50 listings in the last four-five months. Twoother Indian companies are very close to listing. The pipeline is still there especially for companies that have underlying zealous businesses.

It has been a tough six months and we see that continuing in the short to medium-term. A lot of companies are looking for the correct window of opportunity to list. Some companies have seen other forms of financing see them through. There has been a fair amount of private equity placements.

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