Introducing ChiNext concept to promote SMEs
Friday, 1 October 2010
Sayed Javed Ahmad
AS a member of the Asia-Pacific Central Securities Depository Group (ACG) we participate every year in the Cross Training Seminar held in different member countries. Last year we hosted the seminar in Dhaka and this year it was held in Shanghai, China where some of us went to attend.
The idea and purpose of this seminar is to exchange ideas and experiences among the Central Securities Depositories (CSD's) of the member countries for mutual learning and development. Every year emerging new markets propel new ideas, needs and adjustments in the CSD's around the world, and at a seminar like this we get to learn and share those experiences with each other seeking support, advice and clarifications for improvement and mutual benefits.
This time Mr. Wenhua Dai, Deputy General Manager of the China Securities Depository and Clearing Company Limited, presented the idea and concept of the ChiNext that was launched last year. While digesting the concept I felt that this idea could also be implemented in Bangladesh capital market that might benefit our national economy. Hence my attempt is to discuss the concept in this article and to share what we have come to know about it.
ChiNext is the third and newest stock exchange for start-ups following the NASDAQ model which is hosted by the Shenzhen Stock Exchange, Shenzhen (close to Hong Kong) in China. ChiNext is designed to fund innovation and risk-taking with hopes to make funding of innovative start-ups much easier. The difference between ChiNext and the main board lies in their mechanisms of financing, investment and risk management for issuers at various stages of development rather than simply the sizes. It is also of remarkable significance for promoting small and mid-sized enterprises (SMEs) and creating sound interactions among independent innovators, venture capital and capital market.
It has taken China's government almost 10 years to launch the ChiNext market, but with little modifications in the concept we could launch it in Bangladesh in a much shorter time using our existing setup. Instead of setting up a separate stock exchange for SMEs we could just add criteria for them in our existing system and allow a category to float shares in the same manner as we normally do for other companies. Since SMEs are risky shares, we could give a different colour code (say, orange) to those company codes to readily identify them among the list of companies.
On the stock exchanges SMEs will, however, be listed as usual with the colour code indicating that the code belongs to a start-up company which is a risky investment. At the Central Depository Bangladesh Limited (CDBL), there will be no such distinction. CDBL would treat all shares equally when deposited or stored.
As the nature of the share demands, it could start under the "N" category, meaning the share is new and risky. After successful existence of the company for a few years (say five years) the company would move to a regular frame (provided it meets certain pre-set criteria) having the purple colour, indicating that the company has matured and is now relatively stable. And the category could also change as per the rating from "N" to "A" or "B" or "Z" depending on its performance. If the company fails to perform satisfactorily within this period then it could be de-listed sending it to "Over the Counter" (OTC) market.
The "orange"-coded companies would be treated in a different manner and go through a different but simpler listing process with nominal fees. The idea is to allow the promising entrepreneurs with a feasible business concept and plan to raise the needed capital from the market for a start. Allowing more entrepreneurs to come up with their business plans to start their enterprises would create jobs thus contributing to our national economy - the GDP. Since it is often very difficult for the fresh entrepreneurs to get bank loans to finance their projects, this mechanism would allow them to collect the needed fund for a successful start.
The success and failure of an enterprise would depend on the strength, expertise and experience of the management team and on the strength of the strategic plans of their business. There is always a 50-50 chance of success and failure of a start-up company. Therefore, some rules and guidelines are necessary to warn and protect investors' investment to some degree. ChiNext has framed some rules and regulations of its own which one may find browsing the Internet. Bangladesh too needs to come up with some rules and regulations to conduct this business. Some selection criteria could be on the basis of :
Strength, expertise and experience of the management team in relation to the business.
Newness and innovation of the business ideas/concepts to avoid multiplicity and saturation in the industry.
Must meet certain requirements for profitability, size and growth potential.
Issuer will be required to fully disclose risks. accountability mechanism of the management to the investors must be ensured.
Price and lot of shares should be low allowing an investor to have a choice to risk a smaller amount of capital.
All potential businesses interested in entering the capital market must come through proper channels - the respective ministries and government offices with proper approvals.
This option would allow a flow of new shares in the capital market that is needed to attract more investors and capital. The entrance fees at both the Dhaka Stock Exchange and the Chittagong Stock Exchange should be kept at a minimum for these start-ups to encourage them to enter the market to raise capital and succeed in their ventures. But after their tenure they would have to go through the upgrade process for their new status as standard issuers with the bourses when they mature changing their colour from, say, orange to purple and would be required to pay the standard fees.
Keeping the gambling nature of the investors' in the stock market in mind, some protective measures needs to be in place. For instance, ChiNext gets an investor to sign a declaration acknowledging the risks involved in a start-up company before allowing him to invest in start-up companies. It allows only the experienced investors to invest in such shares. Our government and the Securities Exchange Commission (SEC) could do their own research to check the viability of this project that has been a success story in China immediately after its launch. My feeling is, despite the risks involved in it, it will work well in our economic scenario as well. Therefore, it would be worth a try.
E-mail : javedahmad@yahoo.com
AS a member of the Asia-Pacific Central Securities Depository Group (ACG) we participate every year in the Cross Training Seminar held in different member countries. Last year we hosted the seminar in Dhaka and this year it was held in Shanghai, China where some of us went to attend.
The idea and purpose of this seminar is to exchange ideas and experiences among the Central Securities Depositories (CSD's) of the member countries for mutual learning and development. Every year emerging new markets propel new ideas, needs and adjustments in the CSD's around the world, and at a seminar like this we get to learn and share those experiences with each other seeking support, advice and clarifications for improvement and mutual benefits.
This time Mr. Wenhua Dai, Deputy General Manager of the China Securities Depository and Clearing Company Limited, presented the idea and concept of the ChiNext that was launched last year. While digesting the concept I felt that this idea could also be implemented in Bangladesh capital market that might benefit our national economy. Hence my attempt is to discuss the concept in this article and to share what we have come to know about it.
ChiNext is the third and newest stock exchange for start-ups following the NASDAQ model which is hosted by the Shenzhen Stock Exchange, Shenzhen (close to Hong Kong) in China. ChiNext is designed to fund innovation and risk-taking with hopes to make funding of innovative start-ups much easier. The difference between ChiNext and the main board lies in their mechanisms of financing, investment and risk management for issuers at various stages of development rather than simply the sizes. It is also of remarkable significance for promoting small and mid-sized enterprises (SMEs) and creating sound interactions among independent innovators, venture capital and capital market.
It has taken China's government almost 10 years to launch the ChiNext market, but with little modifications in the concept we could launch it in Bangladesh in a much shorter time using our existing setup. Instead of setting up a separate stock exchange for SMEs we could just add criteria for them in our existing system and allow a category to float shares in the same manner as we normally do for other companies. Since SMEs are risky shares, we could give a different colour code (say, orange) to those company codes to readily identify them among the list of companies.
On the stock exchanges SMEs will, however, be listed as usual with the colour code indicating that the code belongs to a start-up company which is a risky investment. At the Central Depository Bangladesh Limited (CDBL), there will be no such distinction. CDBL would treat all shares equally when deposited or stored.
As the nature of the share demands, it could start under the "N" category, meaning the share is new and risky. After successful existence of the company for a few years (say five years) the company would move to a regular frame (provided it meets certain pre-set criteria) having the purple colour, indicating that the company has matured and is now relatively stable. And the category could also change as per the rating from "N" to "A" or "B" or "Z" depending on its performance. If the company fails to perform satisfactorily within this period then it could be de-listed sending it to "Over the Counter" (OTC) market.
The "orange"-coded companies would be treated in a different manner and go through a different but simpler listing process with nominal fees. The idea is to allow the promising entrepreneurs with a feasible business concept and plan to raise the needed capital from the market for a start. Allowing more entrepreneurs to come up with their business plans to start their enterprises would create jobs thus contributing to our national economy - the GDP. Since it is often very difficult for the fresh entrepreneurs to get bank loans to finance their projects, this mechanism would allow them to collect the needed fund for a successful start.
The success and failure of an enterprise would depend on the strength, expertise and experience of the management team and on the strength of the strategic plans of their business. There is always a 50-50 chance of success and failure of a start-up company. Therefore, some rules and guidelines are necessary to warn and protect investors' investment to some degree. ChiNext has framed some rules and regulations of its own which one may find browsing the Internet. Bangladesh too needs to come up with some rules and regulations to conduct this business. Some selection criteria could be on the basis of :
Strength, expertise and experience of the management team in relation to the business.
Newness and innovation of the business ideas/concepts to avoid multiplicity and saturation in the industry.
Must meet certain requirements for profitability, size and growth potential.
Issuer will be required to fully disclose risks. accountability mechanism of the management to the investors must be ensured.
Price and lot of shares should be low allowing an investor to have a choice to risk a smaller amount of capital.
All potential businesses interested in entering the capital market must come through proper channels - the respective ministries and government offices with proper approvals.
This option would allow a flow of new shares in the capital market that is needed to attract more investors and capital. The entrance fees at both the Dhaka Stock Exchange and the Chittagong Stock Exchange should be kept at a minimum for these start-ups to encourage them to enter the market to raise capital and succeed in their ventures. But after their tenure they would have to go through the upgrade process for their new status as standard issuers with the bourses when they mature changing their colour from, say, orange to purple and would be required to pay the standard fees.
Keeping the gambling nature of the investors' in the stock market in mind, some protective measures needs to be in place. For instance, ChiNext gets an investor to sign a declaration acknowledging the risks involved in a start-up company before allowing him to invest in start-up companies. It allows only the experienced investors to invest in such shares. Our government and the Securities Exchange Commission (SEC) could do their own research to check the viability of this project that has been a success story in China immediately after its launch. My feeling is, despite the risks involved in it, it will work well in our economic scenario as well. Therefore, it would be worth a try.
E-mail : javedahmad@yahoo.com