Smaller Companies: The case for a reprieve

THERE IS something ironic in the fact that the Unlisted Securities Market is on 'death row' just as a considerable revival in trading in smaller company shares is under way.

It is almost inevitable that the Stock Exchange will decree that new entrants to the market will be banned from June and the USM will be closed by the end of 1995 - just 15 years after it started.

There are three main reasons for the secondary market's demise - the 1987 crash, recession, and a regulatory change imposed by the European Community in 1990.

Of the three, the EC intervention has probably been the most destructive over the past two years. Its contribution was a directive that said the trading requirement for companies joining the main market should be cut from five to three years, and for the USM from three to two.

That had two effects. One was that the difference in trading requirements - one year - offered little distinction between USM and main market companies.

The second was to induce scepticism among investors, who generally do not think a two-year trading record sufficient to make an informed assessment of a company's future.

The demise of the USM has been rapid over the past three years. After hitting a peak of 448 quoted companies in 1988, the number has steadily dwindled to below 300 in the past few weeks.

And until the exchange formally announces its intentions - probably at Easter - the rate of decline is likely to accelerate.

More companies are moving up to the main market, others are choosing obscurity on the 535 matched bargain lists while some are opting for a halfway house - The Stock Exchange Alternative Trading System.

While few believe the USM can be saved, there is widespread belief that an appropriate successor to the adolescent secondary market can, and should, be created.

The exchange is already being lobbied from several quarters. Price Waterhouse, the chartered accountancy firm, is the latest to join the cause.

It rightly argues that demand for new equity capital will increase when the UK emerges from recession. And with shares hitting an all-time high, paper will undoubtedly again become an acceptable currency.

Under the right management and with solid support, small companies can, and often do grow very quickly. It should be remembered that Hanson and Grand Metropolitan, two of today's stock market giants, only came into existence in the Sixties.

The form a new secondary market would take is anyone's guess, but a secondary market there must be. A new second market purely for institutional investors is one suggestion, while others are pressing for a further relaxation of entry rules and requirements.

On a broader horizon the exchange is presiding over something with far greater responsibility than just allowing companies access to alternative funding; it has a hand in the future development of the UK economy.

Closing the doors in June would deny those companies less than two years old a viable opportunity to expand, and further depress investor interest in those companies already on the USM.

There is a way for the exchange to avoid a total disaster. It could simply give the USM an indefinite stay of execution until an appropriate alternative is found.