London's equity capital markets will benefit from a further boost next month as the new stamp duty exemption for securities trading on growth markets comes into effect. The exemption was announced in last year's budget and is intended to incentivise investor participation in the UK's growing small and medium sized quoted businesses. Shares traded on certain growth markets, including AIM and the new High Growth market (which will shortly celebrate its first anniversary), will qualify for the exemption.
In anticipation of the exemption coming into force on 28 April 2014, HM Revenue and Customs (HMRC) has recently published some guidance on its application.
Which shares are eligible?
The exemption will apply to purchases of securities which trade on HMRC 'recognised growth markets' and which are not 'listed' on a 'recognised stock exchange'. Eligible securities qualify for the exemption wherever they are traded and will be designated as exempt from stamp duty reserve tax in CREST.
What is a recognised growth market?
A market must be an HMRC recognised stock exchange and meet one of two conditions:
- A majority of companies trading on that market are companies with market capitalisations of less than £170m in the qualifying period.
- The market's rules require that companies seeking admission demonstrate at least 20% compounded annual growth in revenue or employment over the three years preceding admission.
The first condition appears to be designed to capture securities traded on AIM, where approximately 90% of companies currently admitted to AIM have a market capitalisation of less than £170 million. The second condition captures the High Growth segment, where rule 2.3 of its rulebook requires that issuers must be able to demonstrate growth in audited consolidated revenue of at least 20% on a compound annual growth rate basis over the prior three financial years.
The HMRC guidance does not comment on when the compliance with the conditions will be measured. We assume however that AIM Regulation will closely monitor the market's ability to satisfy the condition and it is possible that we will see AIM Regulation suggesting to larger companies that they should be moving up to the Main Market if their trading on AIM jeopardises the market's ongoing compliance with the conditions.
HMRC will publish and maintain a list of recognised growth markets on its website. A list of recognised stock exchanges on the HMRC website can be viewed here.
Boost for SMEs but certain dual-listed companies will miss out
The abolition of stamp duty for growth companies is widely viewed as a positive move by the government. The initiative should give investors a further reason to back ambitious companies and increase capital for smaller businesses. The removal of a tax should be good 'PR' for London as a potential listing destination, and should promote equity financing as a viable solution for growing companies.
Traditionally, larger funds and investors have been wary of investing in growth companies, not wanting to be subject to start-up risk and attributing a small proportion of their investment portfolios to 'growth' shares. Consequently, shares in growth markets tend to be illiquid - and this factor has further compounded investor scepticism of these markets. Whilst lower investment costs can only be a good thing - investors will want to consider the whole 'investment story', "warts and all", rather than be swayed by one factor.
It is also worth noting that shares in companies which trade on a growth market but which also have a 'listing' on a recognised stock exchange will not qualify for the exemption. For example, we note that securities trading on ASX Market of the Australian Securities Exchange (ASX) and the Main Board of the Johannesburg Stock Exchange (JSE) are deemed to be 'listed' on recognised stock exchanges in respect of HMRC legislation. Consequently, companies with listings on those exchanges and whose securities are traded on AIM, will not qualify for the exemption.
Some might argue that this creates an unfair disparity between issuers trading on the same market, where certain companies listing on other exchanges suffer an immediate competitive disadvantage as a viable investment vis-à-vis companies which do qualify for the exemption. When such companies are listed on ASX or JSE for historical reasons but the majority of their investor base has migrated to AIM, we may see those companies choosing to de-list from those exchanges but maintain their trading on AIM, in order to afford their investors the benefit of the exemption.
The counter argument to this, is that if an issuer is 'listed' elsewhere and does not qualify for the exemption, it is likely to be a larger and more established company which does not need to benefit from the exemption. However, we have seen a few large companies choosing to pursue a listing on AIM and more recently, certain premium listed companies have transferred their trading from the premium segment to AIM. If not 'listed' elsewhere, such companies would have the benefit of the exemption but similar sized dual-listed companies would not. Will this be another factor for larger companies with other listings to consider when choosing a London market? Given that investors should consider all aspects of the potential investment, it seems unlikely that this will have a significant impact on where issuers choose to list, but it will be interesting to observe how the market responds to the initiative over the next twelve months.