Derek Pain: Stocks wilt as over-regulation takes AIM
No Pain, No Gain
Saturday 18 July 2009
I have often criticised the esoteric accountancy requirements that are inflicting grave damage on some quoted companies. And attempts to kill share certificates is a long-standing grumble.
Today, at the risk of being billed a grumpy old man, I have another complaint – the deluge of over-regulation that is coming uncomfortably close to strangling the stock market.
The vast stack of current listing (and accounting) rules was, in the main, dreamed up when the economy was thriving. They are clearly unsuited for the recessionary influences now devastating many aspects of the nation's commercial life.
It is, I feel, not surprising that more and more companies are delisting their shares. AIM, the Stock Exchange's junior share market, is particularly vulnerable. Twenty-nine delisted in June and, on average, the monthly exit rate this year is 24. Not all have abandoned quoted life though. Booker, the cash and carry chain, has moved from AIM to the full market, but the uncomfortable fact remains that AIM is shrinking.
At the end of 2007 it embraced nearly 1,700 constituents – now there is talk that its strength could slip below 1,000 within a year or so.
The cost of retaining an AIM presence is becoming an increasingly important factor. The yearly bill is more than £200,000, which isn't excessive for a group that is turning over millions in profits. However, for a small, loss-making business it is difficult to justify such an outlay.
The share-price crash has also had an impact. Approaching 700 AIM constituents are now capitalised at less than £10m, with many around the £1m mark.
With its shares down from 50p to 3.125p, Pubs'n'Bars, a member of the no pain, no gain portfolio, has joined the minus £1m brigade. Even putting through a simple deal is expensive and will cost around £250,000. That was the accounting, legal, printing and regulatory costs incurred by another constituent, Wyatt, when it merged with Green CO2.
It is not only AIM sufferers that are feeling the strain. Regent Inns resigned from the full list because of the prohibitive expense of meeting stock market requirements. Its declining capitalisation – its shares have slumped from more than 100p to around 1p – emphasised the cost pressures. The shares are now traded on the fringe Sharemark facility.
I wonder whether the present complex regulatory regime can be justified. City authorities insist that the intention is to shelter investors. But such protection is pretty porous, judging by some of the AIM disasters that have occurred. Indeed, an American group called Sky Capital, which had a presence on AIM until a few years ago, were charged with running an alleged boiler room operation earlier this month.
Despite the cost of membership, AIM remains a relatively lightly regulated share market. Its rule book prompted a US regulator to describe it as a "casino".
A couple of years ago when AIM was booming, the light touch – although far from cheap – was seen as tolerable. But nowadays the expense of living on the junior market is extracting a wounding toll. It is estimated that around half the AIM companies that delisted this year did so because of financial stress. If the cost of survival was not so high, perhaps some of them would have stuck it out.
The AIM shrinkage is exacerbated by the near disappearance of new arrivals. At one time there was a flood of new issues. Now flotations and other cash-raising exercises have a scarcity value. Max Property, a venture seeking to take advantage of the property slump, inflated the May figure. Otherwise the maximum new money raised in any month this year was £2.4m.
Of course, AIM is not suffering in isolation. Arrivals to the full list have fallen dramatically and, around the world, flotations have become conspicuous by their (near) absence.
Stock markets are also suffering from the sharp decline in corporate activity. A few lusty takeover battles would offer inspiration. Perhaps this week's action could herald a revival. Certainly the slide in share prices has produced a multitude of bargains.
Recently, shares appeared to relinquish some of their springtime enthusiasm, but I remain fairly confident that they will strengthen as the year progresses. Britain's economy will struggle to get out of its present mess, but shares have a habit of anticipating events and many believe recovery will start next year.
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