The Alternative Investment Market is perhaps less regulated than other exchanges, but fits a niche for early-stage growth firms like few others can.

What to do if you are an Indian company hoping to raise cash abroad through a listing? The choice of venue has generally been more straightforward than you'd think. Luxembourg and Singapore have been the traditional venues for the listing of Global Depository Receipts for India-listed firms — while primary listings have been spread across the globe. However, over the years, one of the most prominent destinations for Indian firms has been London's Alternative Investment Market (AIM).

Set up in 1995, AIM was one of a handful of listing venues catering to small or early-stage companies in search of investors, especially those willing to shoulder the levels of risk they could entail, in the hope of reaping significant benefits. And unlike some other similar exchanges, such as Germany's Neuer Markt and EASDAQ, which fell in the wake of the dotcom boom of the early 2000s, it has survived, attracting both British and foreign firms.

CRUCIAL ROLE

There are currently 27 India-related companies listed on the market (mostly via entities domiciled in places like the Isle of Man, Guernsey, or the Cayman Islands as a result of Indian regulations). The first to list, Great Eastern Energy Corporation, moved up to the Main market in 2010, demonstrating to the AIM's proponents, the crucial role the exchange could play in furthering a firm's fundraising and growth agenda.

AIM's regulatory system is often seen as one of the factors behind its success: suited, its proponents say, to the level of scrutiny that the kind of small growth businesses listing there can cope with and require. The market isn't directly overseen by the British regulator, the UK Listing Authority (part of the FSA), but by the London Stock Exchange, enforced by Nominated Advisors (better known as NOMADs), private firms that guide companies through the listing process and are subsequently responsible for making sure they comply with AIM rules.

Some other differences include no minimal market capitalisation, no minimum free float requirement (though effectively it is treated as being 10 per cent and above), limited corporate governance demands, and no requirement for a trading history. Requirements with respect to shareholders are also less demanding: only requiring consent for major transactions. While less onerous than some other exchanges, the system worked “well for both investors and for the companies whose shares are traded on AIM,” a 2007 London School of Economics report concluded.

But AIM does have its critics, who question if efforts to entice companies from home and abroad have resulted in an insufficiently rigorous system of regulation and scrutiny. John Thain, the former CEO of the New York Stock Exchange, provoked an outcry in Britain when he warned in 2007 that the AIM could damage London's reputation as a financial centre because it “didn't have any standards at all and anyone could list”, while a former US Securities and Exchange Commission member compared it to a “casino.”

SURVEY REPORTS

Meanwhile, a 2008 survey-based report by PricewaterhouseCoopers concluded that governance standards across AIM firms varied “widely”, arguing it could have broader consequences for a company's success. “Simply meeting the minimum level of regulatory requirements is unlikely to satisfy the investor community and some other key stakeholders,” the report warned.

A subsequent report in 2010 suggested that the rigour of its market rules was “tougher than many think,” but companies might have to go further to assure investors “by acting and being seen to act like main market companies.” A report published last year by British think tank the New Economics Foundation last year went one step further, criticising AIM for pursuing a strategy of “winning new business by driving down standards of transparency, governance and investor protection” and being a “regulatory laggard” encouraging a “race to the bottom.”

Critics point to some of the lapses that have occurred in the NOMAD system: in December, British investment bank Seymour Pearce was fined 400,000 pounds for breaching NOMAD rules when working for two clients, including for relying too heavily on the word of one of the companies it was helping list. However, it is only the third NOMAD to be fined in the exchange's history, and AIM supporters further argue that the identification of lapses showed that the scrutiny system was adequate.

“The underling purpose of AIM is still completely sound for smaller companies,” says Geoffrey Owen, one of the authors of the LSE report, who argues that AIM guidelines are “constantly being tightened.” Ross Bryson, a partner at London law firm Mishcon De Reya, argues that the NOMAD system works well. “They are the LSE's policeman but are also there to advise you on a day-to-day basis.”

However, a banker, who advises Indian companies on international listings, was less complimentary, describing the AIM as one of the “least regulated markets.” While a good option for early stage companies, particularly in the resources sector, liquidity constraints (resulting from the market-maker-driven system) made it a “destination of last resort for primary listing” with many seeing their share prices fall well below net asset value. He pointed to a number of Indian companies that had delisted following share price falls or had become an acquisition target.

DELISTING

In January, the India Hospitality Corporation announced that it would be delisting after six years on the exchange, citing less liquidity, little prospect of raising further funds, and the costs of the listing (interestingly, it also blamed AIM's rule that shareholder approval be sought before a reverse takeover, which it said would compromise its ability to “effect a significant acquisition quickly.”)

In November 2010, the Indian Film Company, whose share price fell 22 per cent in the first year alone, delisted from the exchange, just three years after joining, after Viacom18 acquired more than 90 per cent of the firm.

A number of property firms that listed at the height of the property boom, pre-2007, have also struggled, the banker said. “The AIM has become a playground for activist funds,” he added. Hirco, for example, faced pressure from a major investor Laxey Partners on a number of issues, while Trikona Trinity Capital tussled with investor Carrousel Capital, regarding appointments to the board and strategy.

A report by chartered accountants UHY Hacker Young, in January, noted that the Euro zone crisis continued to hit AIM, with 24 firms leaving in the last quarter of 2011 alone. And while many departures were the result of acquisitions by private equity houses, it was often because of fund-raising problems. “Those companies that were unable to raise funds needed through secondary issues may have been more likely to succumb to takeover bids,” it concluded.

The past troubles also don't seem to have fully dented the draw of AIM for Indian companies: in 2010, five firms listed, and a further 2 in 2011, including sustainable energy firm Nandan Cleantec. A number of firms in this sector were exploring AIM opportunities, say lawyers at Mishcon De Reya. “Before there was hesitation but confidence is returning.”

Whatever its problems, it seems the AIM fits a niche for early-stage growth companies that few other markets appear to be able to.

(This article was published on March 11, 2012)
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