The Johannesburg Stock Exchange (JSE) revealed this week that it busy setting up a township exchange for very small entrepreneurs. Given that few SME exchanges prove successful, will it attract the necessary capital?
Business Day reported that JSE CEO Nicky Newton-King told a parliamentary committee on Wednesday that the JSE is currently working on the eligibility criteria and building technology for the proposed bourse.
The exchange will exist alongside the main board, which has 325 company listings (11 of them black-owned), and the AltX for SMEs, which has 56 listed companies.
In October last year Gauteng Premier David Makhura said the exchange was expected to be operating by February this year and would help township businesses to raise R10 billion ($730m) a year.
But a 2015 World Bank report, which draws on the experience of seven exchanges, argues that few SME exchanges have succeeded.
The authors, Alison Harwood and Tanya Konidaris, point out that SME exchanges in such countries are challenging to run largely because emerging market countries have a shortage of larger sized and fast-growing SMEs that are best suited to listing.
For example South Africa’s Johannesburg Stock Exchange AltX, established in 2003, with 106 companies listed since the exchange began now has 56 listed companies
The authors says while the exchange raised over $2bn from launch until the end of 2013, listing and market capitalisation have declined in the wake of the 2008 financial crisis.
They add that tax incentives for investors, typically as part of a broader SME finance programme, might also help.
They point to the publication in 2014 in Brazil of a tax exemption for investors acquiring stocks of SMEs directly or through funds investing a minimum of 67 percent in SMEs.
This should boost Brazil’s BM&FBOVESPA Bovespa Mais, launched in 2005 which has suffered from a lack of investor demand.
Harwood and Konidaris single out the Warsaw Stock Exchange’s (WSE) NewConnect as a rare success. Established in 2007 it listed 442 SMEs as of March 2014 and 508 SMEs since its launch (68 percent of companies with a market capitalization below $5 million).
Poland has dynamic SMEs and a large number of knowledgeable retail investors comfortable with risk taking, who were already active traders in the derivative and foreign exchange markets.
It also has reduced entry requirements and a lower cost than main market along with well-regulated authorised advisors.
Harwood and Konidaris recommend that SME exchanges focus on firms that have a fairly sizable growth rate, as they will have capital demands and be most willing to use an exchange to obtain it.
Say Harwood and Konidaris: "It is generally accepted that micro-companies are not suitable for capital markets, because costs such as prospectuses, annual general meetings, and advisors are too expensive and the personnel requirements to meet ongoing listing requirements are not available."
Are authorities then fooling themselves? Will a listing for such small enterprises then really work?
Timm is a South African who writes on small business in emerging economies. Follow Small Business Insight on Twitter at @Smallbinsight and on Facebook.
Stephen Timm is a