Dubai: The UAE Cabinet has given its backing for a relook at the country’s Agency Laws by getting such businesses — dominated by family-owned enterprises — to go for IPOs (initial public offerings).
A draft law to this effect has been issued, and with more details to follow on such a transition can be made.
Much hinges on the level of shareholding that promoters will need to shed, said experts.
“Under DFM rules, it needs to be a majority of the equity, while under DIFC and Nasdaq Dubai regulations, the offloaded stake must be equal to one-fourth of the equity,” said Advocate Nasser Malalla Ghanem, Senior Partner at NM Associates, a joint venture with Global Capital Partners.
“Now, there was a lot of talk in the recent past about exemptions being made to these requirements.
“If the new Agency Law specifies a lower sell-off of promoter stakes, the take up could be significant when the IPO market turns favourable," added Ghanem.
Classes of shares
He said the move could lead to the introduction of multiple share classes in the country.
“While we await further clarity, this could eventually lead the UAE Company Law in the direction of allowing multiple classes of shares. It would allow profit sharing to be split — as in the case of developed stock markets — and alleviates a key concern family businesses have been grappling with.”
New classes of shares could be created in line with practices in mature stock markets, says Nasser Malalla Ghanem of NM Associates.
What’s the cut-off?
Offloading the majority stake was also a sticking point with family-owned businesses.
Leading groups had, in the past, said that an ideal percentage would be under 20-15 per cent.
If the new Law takes on board these considerations, it could be the boost the moribund IPO market sorely requires.
Third stock market
Incidentally, Dubai announced the setting up of a third stock market earlier this week — at the just announced Dubai Future District.
Market sources reckon this could be the destination that family enterprises could be headed in.
Before any shift into IPO mode, family businesses must take corporate governance seriously, says Tariq Chauhan of EFS.
“Public companies require effective corporate governance and disclosures — family-owned companies must ensure that all governance sensitivities are understood by all stakeholders,” said Tariq Chauhan, Group CEO at EFS. “They were finding it difficult to go public due to complex IPO preconditions.
“If these conditions are modified and aligned to meet the needs of family businesses, it will be a great boost.”
Managing the downside
The UAE Cabinet notes that in any transition family businesses need to make, the risk side of things will be managed.
There will be the “least possible risk” in investment, particularly for small shareholders and owners of SMEs, by granting them statutory protections in cases of termination or non-renewal of agreements without “material reasons”.
New law paves the way for greater corporate transparency
Archie Berens, Managing Director at Hanover Communications, which specialises in financial consultancy, said: “Providing retail and institutional investors with a greater variety of local companies in which they can own shares will boost financial literacy and offer family businesses more opportunities to access capital and trade their shares. This can only be a good thing.
“Standards of transparency and corporate governance will also improve further, bringing the UAE even more closely in line with international best practice and support its ongoing efforts to attract foreign investment.”
There is no doubt that such a step is not only important for stock markets in the UAE but also crucial in ensuring longevity for family businesses and in enhancing their governance as well,” according to Abdulnasser Alshaali, a UAE based economist.
“Such a step will provide the public with new investment opportunities that were previously inaccessible.
“This Law could lead to a win-win situation for family businesses and investors who have always pursued diversification into sectors dominated by those family businesses.
“In an era of low interest rates and fading allure of other investments, this Law could not have been more timely.”
It will be a win-win for family businesses.
What the Draft Law wants
The draft law amends provisions in Federal Law No. 18 of 1981, otherwise known as the “Agency Law” that regulates commercial agency and distribution agreements within the country.
The amendments come within the “framework to enhance the country’s trade and investment development and boost the UAE’s competitive business climate in line with international standards and regulations,” the UAE Cabinet’s General Secretariat said in a statement.