Understanding the listing requirements and the marketplaces in which a company wishes to be listed is an important aspect of a company’s decision to go public. In the UK exchanges, for example, a company (UK origin or international) needs to select between the London Stock Market (main market) and Alternative Investment Market (AIM)[1] to start the listing process.

The main market is designed for companies with operating track records and larger funding aspirations. AIM, on the other hand, is built on a simplified regulatory framework specifically designed for small and emerging companies.

Both markets have key eligibility requirements for listing, but we have chosen the following four major criteria to zoom in and provide an overall view:

• Public floatation: A portion of the shares in the hands of the public. In the UK exchanges, a minimum of 25% of the shares must be floated on the main market; however, this rule does not apply to AIM.
• Financial information disclosure: The disclosure requirement in the main market includes historical financial information for at least three years prepared in accordance with International Financial Reporting Standards (“IFRS”) or other international accounting standards; an operating and financial review covering the issuer’s financial condition and operating result; and capitalization and indebtedness. The financial disclosure on AIM is limited to historical financial performance, and IFRS or international accounting rules apply.
• Corporate governance: The AIM requires the issuer to align and agree on the appropriate corporate governance measures with the nominated advisor. There is a more stringent requirement in the main market that requires the issuer to establish a board; have an independent non-executive director (INED); and maintain a sound risk management and internal control system in the board.
• Market capitalization: There is a minimum market capitalization requirement on the main market; however, there is no restriction or minimum requirement in the AIM.

On this side of the world, Ethiopia has begun the long journey of developing a robust and vibrant capital market, with authorities adopting best practices from emerging and developed markets while developing the regulatory framework. So far, three directives have been drafted on licensing and operating securities exchanges and trading platforms, recognizing self-regulatory organizations (SROs), and licensing and supervising capital market service providers.

In the coming months, we are expecting more directives[2] that would ultimately create the playing field for service providers, investors, companies, and the government. The IPO listing requirements are expected to demand a proper corporate governance structure, financial disclosure, and compliance and risk management system and tools at a bare minimum.

This demands a significant shift from existing practice, which takes a very high-level approach to financial disclosure and corporate governance obligations while ignoring risk and compliance requirements. Beyond setting up a board, corporate governance should involve the inclusion of non-executive directors in the board; building independence and integrity within the board; and including independent advisory member with industry expertise in the board. Ethiopia adopted the IFRS nearly ten years ago, but there is still a significant gap in the country’s financial disclosure and conformity to the standards. The country’s less than 1,000 certified accountants have played a role in improving the caliber of financial statements and audit reports over time, but there is still much work to be done.  

Marketing is essential aspect of the listing process. Marketing has caused concern among Ethiopians and the relevant government bodies[3] due to companies raising public capital making exaggerated and unrealistic return on investment promises. We anticipate that this will be monitored in upcoming directives, and regulators will scrutinize marketing materials and processes to safeguard the public from such activities.

Building a vibrant capital market will take time and learning from other countries will be an important part of the process. Stakeholders, including businesses, service providers, associations, and the government, will need to keep up the encouraging work laying the groundwork for the future.

[1] There is a third market, Professional and securities Market (PSM) but our focus is on the other two markets explained in the blog
[2] RiseAddis will publish a review when the Ethiopian Capital Market Authority issues the listing requirements in the next round of directives.
[3] https://www.thereporterethiopia.com/34620/