The FT’s David Blackwell considers the operating environment for small UK companies listed on the Aim and Plus markets – where costs are set to rise by at least £460 this year.
That is the minimum levy to be imposed by the Financial Reporting Council, which regulates UK corporate reporting, says Blackwell, noting that in the next few weeks, the chairmen of every UK company on the two junior markets – about 1,500 – will receive a letter from the FRC detailing the charge.
Until now these companies have escaped the levy, which has traditionally been imposed only on companies on the main market. However, he notes, “the FRC has not shirked its duty of keeping Aim and Plus companies under surveillance”.
This week an Aim-listed company had to reissue its accounts for the year to June 2006 following action by the Financial Reporting Review Panel, the FRC arm charged with keeping quoted companies in compliance with the Companies Act.
According to the FRRP, Cambrian Mining’s accounts for that year contained “a number of errors and failed to comply with international financial reporting standards in significant respects”. The length of the review meant that Cambrian’s shares were suspended on December 11 because the company was unable to report its June 2006-07 accounts within the six-month time limit under the Aim rules.
The company is expected to report later this month. At the suspended share price of 76p, it has a market cap of £74m, putting it below the £100m level at which the levy for the FRC starts to increase.
The FRRP action will, at least, reassure critics of the level of regulation on Aim, notes Blackwell:
It cannot be pure coincidence that the FRC is finally pushing ahead with its plans to impose the levy at a time when the London Stock Exchange is getting perceptibly tougher over compliance with the Aim rules.
For it was three years ago that the FRC first published a consultation document on proposals to levy companies on Aim and Plus (then known as Ofex) in order to spread its costs. Even then smaller companies on the main list were complaining that they were in effect cross-subsidising Aim and Ofex companies.
The proposals met such a lukewarm reception that they were quietly forgotten in 2006. But in May last year, a further public consultation met with a largely positive response.
The FRC’s costs have continued to rise, adds Blackwell. It gains its income from three sources – the government, the accounting profession and quoted companies. The projected maximum fee for the top FTSE 100 companies in 2007-08 has been raised from £18,600 to £20,550. Fully listed companies with a market cap of £100m or less face a 10 per cent increase in the minimum levy to £920.
Companies on Aim and Plus gain a 50 per cent discount – which “reflects the fact that a small element of the FRC’s activities does not apply to them”. In Blackwell’s view, it is another reason why they should accept the levy without complaint. “They have been lucky to get away scot-free for so long”.
Speaking of Aim, Blackwell harks to his column a year ago that was headed “Why Aim is lucky to attract Chinese companies” and also reported that an Aim China index started by Seymour Pierce to measure the performance of the 45 biggest companies had doubled in two years.
For the whole of 2007, however, the index was flat. “But compared with the Aim 50, the FTSE Fledgling and the FTSE Small Cap, that was a good performance.”
Since then, Chinese companies have continued to list, says Blackwell. “But whether their love affair with Aim will continue is open to question if many more have a similar experience to BlueStar SecuTech, which in June raised £11.4m at 48p a share”.
On Monday the company, which specialises in digital video security products for Chinese banks, reported a rise in pre-tax profits from Rmb45m to Rmb53m (£3.8m). The shares ticked up, but remain well below the flotation price at 37½p.
Part of the reluctance of investors to back such companies can be attributed to worries about cultural differences in corporate governance. But sometimes these show to advantage. Of the $21m raised in June, $3m was used to repay a dollar loan and $3.6m went in listing fees. It took until October for an initial tranche of $3.8m to reach the company in Beijing.
The remainder of the money – about $10m – was held up by the Chinese State Administration of Foreign Exchange and did not reach the company until recently. The founding Chinese shareholders responded by lending $10m of their own money, interest free, so that expansion plans could proceed.
It is impossible to imagine such a thing happening at a company from any other country, concludes Blackwell.
No wonder the directors described the valuation of the shares as “very, very disappointing”. With hindsight, they would not have come to Aim.