Outdated regulations hamper liquidity, mid-caps say

Findings in today’s QCA/BDO Small & Mid-Cap Sentiment Index exposed the equity markets as a major concern for the mid-market. A striking 83 per cent of small and mid-sized businesses believe that equity markets have no impact – or are even hindering – their development.

The level of malaise regarding equity markets and liquidity gave the report’s conductors – accountants and business advisers BDO LLP and the independent membership organisation for small and mid-size quoted companies, the Quoted Companies Alliance (QCA) – reason for concern.

“Small and mid-caps are clearly sensitive to the economic context – we’ve re-entered recession and the instability in the eurozone is ongoing – so a confidence blip is to be expected, but there is a level of malaise regarding the equity markets and liquidity that is a cause for concern here,” said Scott Knight, a partner at BDO LLP.

Despite this negativity, 45 per cent of mid-caps would use public equity to raise capital if need be. Only 28 per cent would use bank finance – numbers pointing to a clear, new shift in preference.

Addressing the most common hindrance cited by companies, a lack of liquidity, respondents suggested that they should be allowed to raise the amount of share capital they can issue without having to provide a prospectus – from the current 10 per cent legal limit to an average of 24.8 per cent.

Mid-market businesses believe that all companies should be able to seek prior shareholder approval annually to dis-apply pre-emption rights to a maximum of 17.9 per cent of their share capital. Currently guidelines suggest this should only be 5 per cent.

Some 39 per cent of mid-caps think smaller public businesses shouldn’t have to hold AGMs. Poor attendance levels are explained by shareholder apathy and a lack of new information offered.

“There’s no silver bullet to solve the liquidity problem, but small and mid-cap companies have outlined a number of steps that could be taken to address the lack of buyers on the markets without posing a risk to private investors,” said Mr Knight. “The rules need to be brought into the 21st Century. The application of pre-emptive rights is antiquated – private investors don’t need this level of so-called ‘protection’; they are savvy enough to make well informed, rational decisions about share purchase.”

Businesses and advisors call for a focused debate on whether the current pre-emption and prospectus issuance rules are appropriate for small and mid-cap companies. Many believe that the mid-market would benefit from a greater level of liberalisation of regulations, to help them prosper.

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