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The Securities and Exchange Commission of Pakistan (SECP) has eased the eligibility requirement for the investors of the GEM board companies. A GEM board allows companiesthat do not meet the direct listing requirements of PSX to raise cash (through an IPO) from investors with fewer restrictions. These companies can be startups or other companies with high liquidity and investment risk than the mature companies on the bourses.

SECP - earlier towards the end of 2021 - formally launched the Global Enterprise Market (GEM) boards to enable Small and Medium Enterprises (SMEs), Green field projects, Not for Profit and other companies to raise capital through capital market but that do not fulfill the tedious conditions for listing on the main board of PSX.

The main objective of the move was to provide a conducive regulatory environment to smaller firms and equity listing than the main board. Its main conditions included a public limited company to have audited accounts for the last two financial years with a post issue paid up capital of at least Rs25 million. Also, the minimum listing fee was fixed at Rs50, 000 versus Rs200, 0000 on the main PSX board. Other incentives for small companies to list and raisefunds in the capital market have been the relaxed post-listing requirements of GEM board like the submission of half yearly progress report instead of quarterly.

The recent relaxation comes in the regulation of net assets by the investors. Previously, the investors needed to have Rs5 million in ‘net assets’ to invest in GEM-listed companies which involved declaration as well as verification by the broker. The modified condition is now that there is no need for broker verification. Moreover, ‘net assets’ (also known as net worth) of Rs5 million are replaced with ‘assets’ worth Rs5 million – meaning gross assets before paying off liabilities.

While the concept of eligible investor has been introduced to address the liquidity constraints, the GEM board since its inception has only been able to list a couple of companies with dull trading volumes. It is hoped that the relaxation in the eligibility of investor (as highlighted above) will create the much needed liquidity. It is reported that another 5 companies have applied for listing on the GEM board.

Global example of GEM board in Hong Kong is not inspiring. While GEM board of Pakistan is still in its nascent stage, some readings from what’s happening in Hong Kong can be drawn here. The fate of the GEM board launched in Hong Kong about 22 years ago has been plagued with scandal. The New York’s NASDAQ style financial hub has not been attracting trading activity, and the returns have been negligible. Why? Investors blame liquidity issues and lack of sell-side research. In 2022 so far, there have been no listings on GEM board Hong Kong, with only one listing in 2021. Experts say that where there is a clash of interests: where GEM board aims to provide a platform for small firms with “relatively weak quality financials to list, the investors look for companies with high quality financials. GEM board of Pakistan also identifies eligible investors as all institutional and individual investors registered with NCCPL that have financial strength or expertise. Are these investors willing to invest in small companies?

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