CBI says small firms put off by listing rules

The historic failure of the UK financial system to support thriving medium- sized companies means many smaller firms are still being discouraged from expanding through raising cash on the stock markets, a report by the Confederation of British Industry argues today.

It claims few of the rules governing public companies are designed with smaller businesses in mind, so that many entrepreneurs are put off from floating by the sheer weight and complexity of regulations and the high cost of organising a stock market listing.

Adair Turner, the CBI's director general, said: "There are obstacles to further growth in this sector... but the problems are solvable and are mostly the result of smaller quoted companies not having a strong enough voice."

The report is also likely to intensify the battle between Labour and the Conservatives over the Government's record on providing help for small businesses. Recent official figures obtained by Labour in a parliamentary answer showed the UK had a lower proportion of small firms than the European average.

Despite the barriers to entry, small quoted companies, of which there are some 1,700 outside the Stock Exchange's 350 share index, are estimated to contribute 6 per cent of the UK's non-government turnover. The CBI forecasts that they could outperform the market as a whole by as much as 10 per cent in the next two years.

The creation of the Alternative Investment Market last year, which now has more than 200 members, gave the sector a significant boost.

AIM, which requires members to obey less onerous rules than the Stock Exchange, is worth pounds 4.5bn and has raised pounds 650m for its members. However, many companies which joined the AIM market have been frustrated by its inevitable lack of liquidity because the shares are not frequently traded. It means share prices can be more susceptible to violent swings.

One suggestion is that the Stock Exchange should create a special category specifically for the hundreds of firms below its 350 index. It could open the way for a lighter regulatory regime on the companies which join.

The Exchange could relax its policy against shares that do not carry normal voting rights, so that family businesses are not discouraged from floating because of fear they will lose control over their company.

The CBI also calls on theHampel Committee to investigate the setting up a two-tier system of regulation for small and large quoted firms.