Greenfield IPOs were a distinct feature of the UAE capital markets’ landscape during 2014. In total, there were seven UAE-related IPOs last year: two were London listings, one was on Nasdaq Dubai, and the remaining four were on Dubai Financial Market (DFM).
Three of the listings on DFM were considered greenfield — Marka, Dubai Parks and Amanat — as they did not have any historical performance for investors to take into consideration, or they were not asset-backed structures.
Despite the fact that all greenfield IPOs listed successfully, and oversubscribed multiple times, the share prices of both Dubai Parks and Amanat have since lost value and are now trading below par value. The decline could be because newly established companies do not have historical results, or because they are not backed by any hard assets. Either way, UAE’s Securities and Commodities Authority (SCA) has decided to step in and impose counteractive measures.
In an attempt to directly address this situation, and to mitigate investors concerns, the SCA has issued new rules to govern offerings, specifically from newly established public joint stock companies. SCA’s ambitions are twofold: it wants to protect the interests of retail (individual) investors from the risks associated with greenfield IPO investments; secondly, it wants to sustain positive sentiment surrounding the UAE’s major stock exchanges.
One of SCA’s main considerations was around who should be eligible to invest in greenfield IPOs. The regulator decided that subscriptions in shares of newly established companies should be geared towards more qualified institutional investors, banks and investment funds, as opposed to the generally less informed retail investor.
SCA’s intent with these new rules is clear: it would like greenfield IPOs to be firmly in the domain of the professional, institutional investor, rather than proving attractive to the average individual who likes to invest in equities. As such, the subscription limit of no less than Dh5 million has been explored as a vehicle to limit retail involvement.
One of SCA’s more striking changes is the establishment of a ‘Class B’ trading screen, to trade the newly established public joint companies. Public companies with financial and operational trackrecords will be traded on a ‘Class A’ screen.
It is not yet clear whether the shares of the existing newly established companies — such as Amanat, Marka and Dubai Parks — will be shifted to the Class B trading screen, but the intention to protect investors is clear. However, creating two classes of trading screens could create an additional liquidity issue, which could negatively impact the success of greenfield IPOs, especially existing ones.
Newly established public joint stock companies will also be required to appoint an underwriter to underwrite shares that have not been subscribed, and the company’s founders will be subject to a two-year lock-in period, as provided for under the Companies Law.
To improve awareness of the risks associated with investing in greenfield IPOs, a new disclaimer will also be placed at the front of the offering prospectus stating: ‘Newly established companies require a period of time that could extend to years, to be able to stabilise its operations in the markets and generate profits to investors. This is unlike established companies which have a work precedent, track record and financial and operational results that would allow the investor to solidify their investment decision’.
SCA will also be taking a more stringent approach towards implementation of the feasibility study and business plan, submitted during the IPO process. Any deviation from the approved plan will require SCA’s approval and an extraordinary general assembly of the company.
Finally, the new set of rules stipulate that a new company must appoint a listing consultant to assist the business in compiling all necessary listing documents, follow up on the process with the regulator and provide listing consultation for two financial years after the date of listing by providing all relevant information to investors.
The next couple of months will be critical in determining whether these robust new rules help to change the ‘wait-and-see’ approach many IPO candidates take due to market volatility. They are substantial and changes, so it will be fascinating to see how the market reacts.
It will be particularly interesting to see the impact of these new rules on the share prices of the existing newly established public joint stock companies.
Whatever happens, we will certainly be watching closely.
The writer is Partner & Head of Equity Capital Markets at Al Tamimi & Company.
