Dubai: The IPO activity in the UAE has remained subdued for the past few years, which can be broadly attributed to two factors — firstly and the most important one is the lack of favourable market conditions, and secondly the unfriendly regulatory requirements and procedures.
Historically, the UAE stock markets, which have had a relatively drier spell compared to Saudi Arabia, witnessed a total of 10 companies being listed on respective UAE bourses between 2010 and 2014. However, in the last two years, the region was confronted by the declining oil prices and heightened economic uncertainty, which had a significant impact on the IPO activity in the UAE. As a result, there have only been two new additions since 2015 as most of the prospective companies either decided to shelve or defer their IPO plans because of deteriorating market conditions and dismal performance of recent IPOs.
The companies listed since 2010 were mostly quasi-government companies, which suggest that capital markets are still elusive of attracting private companies. Moreover, the UAE bourses do not reflect the dynamics of the economy, as the banking, real estate and construction sectors dominate the overall market capitalisation, which undermines other economic sectors, especially in light of UAE’s long term diversification strategy. Hence, there is a lack of peer comparison for private companies operating in other economic sectors, which might be another reason for the subdued IPO activity in the past few years.
New draft regulation
Given the dismal IPO activity seen over the past few years, the UAE government recognised the importance of reviving capital market activity, which has led to a host of measures being introduced since 2015. For example, the UAE has circulated new draft IPO regulations for feedback from stakeholders, setting requirements increasingly in line with international exchanges. In 2015, it issued the New Federal Commercial Companies’ Law, under which businesses are able to float as little as 30 per cent of their shares than the earlier set threshold of 55 per cent, and permit companies to conduct IPOs by selling existing shares rather than issuing new ones. Additionally, it now allows IPO prices to be determined by book building — obtaining indicative bids from fund managers rather than through a fixed-price evaluation method. The UAE is also at an advanced stage of drafting a foreign investment law that would allow 100 per cent foreign ownership of businesses outside free zones in strategic sectors, thereby indicating the region’s openness to international investment. The earlier 55 per cent requirement didn’t lead to many, especially family-owned, businesses to initiate listing process, but the current lower rate is expected to make it more appealing for business owners to participate in a float as they can retain control of the company. Most notably, there is a tangible sentiment that investment from private equity (PE) players, equity alliances with industry peers, and fixed-interest debt are all suitable alternatives to public flotation for the trading families of the UAE, at least as long as the current uncertainty continues.
The measures introduced by the government have not yielded the desired success as markets have witnessed listing of only three companies since 2015. Some of the key identifiable regulatory factors which still act as a deterrent to local market listing include the two-year lock-up period and the minimum capital requirements. The two-year lock-up period in the DFM and ADX essentially dilutes the purpose of a secondary offering, and such restrictions are not imposed in international markets like the LSE Main and the US exchanges.
Another major concern is the minimum capital requirements of the UAE bourses which are relatively high compared to international markets, such as LSE. Given that the listing rules in New York and London are more flexible than those in the UAE, several companies choose to trade on the LSE and NYSE, which provides much larger liquidity and attracts high quality international investors to the stock, resulting in much higher valuation as compared to local exchanges.
The minimum capital requirement criteria is the important one for the UAE as the country stands to be the most preferred destination for expats to start a business within the region. If further minimised, smaller companies can have a new avenue for raising funds for expansion or growth, especially the ones that have been struggling to avail the necessary funds to expand their existing businesses. Further, the process of listing time in the UAE is lengthier compared to the UK and US exchanges which have a relatively quicker turnaround, thereby reducing the average time frame for listing process; while at the same time not over burden them with too much administrative red-tape. Any changes in the listing requirements will encourage domestic and regional companies to make UAE an attractive destination with the region. Further, this will also be an important step towards providing incentives to local companies and deterring them from listing elsewhere going forward.
Many expected 2017 to be promising for the UAE, however, the market has only witnessed one IPO during the first half of 2017. While the DFM and the ADX have put in place an increasingly efficient and flexible regime for public offerings, external factors are also important for determining investor appetite for new flotation. Economic, financial and geopolitical issues have dented investor confidence, but when there is an upturn, the UAE bourses are well placed to take an advantage considering that most of the major bottlenecks have been removed to bring the requirements at par with the western bourses. Additionally, further impetus for the UAE IPO market will only come from the government and regulator if the listing requirements are made much lighter and flexible, which will encourage local companies to list in the UAE rather than considering international markets. For example, changing the minimum capital requirement will be an important measure in attracting smaller companies, which never even considered going public due to their size; while the lock-up period for controlling shareholders can be abolished, enabling them a route for partial exit at the time of the IPO. Overall, despite the constraints and broad market risks, the prospects for IPO activity looks much better in the UAE, where a sharp rebound in new listings can be expected during the second half of 2017 and beyond.
— Shailesh Dash, Founder and CEO, Al Masah Capital