Ritika Janiya
Whether it’s a newsflash from the London Stock Exchange or just anything said with regard to the Alternative Investment Market (AIM), know it’s quite important. Recently, London Stock Exchange chief Dame Julia Hoggett wrote to the government regarding her anxieties over several big changes the forthcoming budget might bring about. Break it down further: What’s the Big Deal?
Dame Julia fears the government will soon encounter a spate of problems if it takes away a tax relief called business relief, or BR, from shares listed on the AIM. She fears this will lead to “significant market volatility,” with the stock markets being rather big up and downs, resulting in great uncertainty for both investors and companies.
What is AIM?
AIM is a unique area of the London Stock Exchange where small companies, which are developing, can sell off their shares, helping them to fund further growth. However, in the last few years, the number of companies supported by AIM has been dropping. In 2020, the reported companies were 819 valued at £131 billion, while now it is only 704 companies valued at almost £76 billion. This decline has really been worrisome because AIM is losing the strength it had.
How Important is Business Relief?
Business relief reassures investors to invest money in these small companies. It makes them invest as it provides certain tax advantages. If the government retracts this relief, investors may withdraw money from AIM, which would lower the share price. That is what Julia intends to convey when she says that is likely to undermine its stability.
The Effect of the Repealing of Business Relief
Dame Julia’s letter is very serious in its theme. She underscores the seriousness of things when the government declares the abolition of BR and warns that “many investors will scramble to sell their stakes in AIM companies” in anticipation of the move. This may bring about “significant market volatility” since smaller companies are not as liquid, meaning that its shares are less easy to sell and buy quickly without altering the price.
As many try to sell at once, share prices could drop further. That is particularly risky in the case of smaller firms whose share prices are already very weak.
The Big Picture
Dame Julia’s warning forms part of a much larger debate about how the UK government is managing the economy. Against this tricky situation that awaits them, the new government has warned of hard tax and spending decisions ahead. It only makes their careful considerations even more important about the impacts these decisions are going to have.
The government will also be viewed as being not very keen on letting growth take over the UK economy by eliminating BR. Investors will feel less likely to invest their money in AIM and this will certainly contribute to the downfall of more of these small companies.
A Call for Support
Dame Julia is one of the key figures in finance, and she sits on the Capital Markets Industry Taskforce, an organization that works hand in hand with the government to improve the funding climate in the UK. Fundamentally, she speaks to the fact that things need to be put in place as a team for small companies to succeed end.
Due to this, the LSE has been trying very hard to excel in international competitiveness since some large firms have even opted to list their shares in places like New York instead of London. This even indicates that if it wants to remain one of the favorite destinations for investors, the city needs to come up with a powerful and attractive business environment.
The Role of AIM in the Economy
Thereby, AIM plays a very important role in the economy of the UK since it gives the smaller companies access to funds that they need to grow and succeed. With good performance by such small companies, they help create jobs, innovate, and contribute to the economy at large. Keeping AIM healthy is not only important for investors but is vital for everyone who benefits from a strong economy.
What Can Be Done?
Dame Julia’s letter indeed serves as an awakening for the government to treat seriously their budget-making decisions in the near future. Remove business relief, and either AIM’s existence will be placed in jeopardy or that of so many companies who are truly making it big by virtue of AIM. Therefore, the most prudent thing that the government could do is find ways to encourage such companies by keeping BR and even bettering it for more investors.
