On Agenda: Need to regulate local IPO market, issues

Three years ago, it was Etarat Tyre Company. And now, it is Takaful Insurance. Two-half-baked business ideas have ended up in the waste basket.

An extraordinary shareholders meeting earlier this week ratified the move to liquidate the insurance firm, launched through an IPO of Dh50 million last year, following the realisation that the business would not be viable.

Almost one year after the capital was raised and the company still remaining in hibernation, the board felt that it would be wiser to liquidate it now, rather than run it for maybe two years and expose the capital to erosion.

A feasibility study reportedly showed that there was intense competition in the market and it would be self-destructive to enter business. And hence the drastic step. What a way for a company to go!

It was very much the same story in June 2000, when the shareholders of Ajman-based Etarat decided to liquidate their Dh200 million company, set up with much fanfare for the local manufacture of heavy-duty tyres in technical collaboration with China's Hunan Overseas Intern-ational Corporation.

An amount of Dh110 million, representing 55 per cent of the capital, had been raised through an IPO, which stayed with the company for two years prior to liquidation.

Conceived as the largest tyre manufacturing facility in the GCC, the plant was to turn out one million sets of tyres per year, 90 per cent of which was meant for exports to regional markets, and 10 per cent for local consumption. But the plant never got off the ground and the axe had to fall so that the shareholders could have their money back.

What spoiled the party for Takaful was the entry of two formidable competitors in the form of insurance outfits from Dubai Islamic Bank and the Abu Dhabi Islamic Bank, while for Etarat, a crash in the prices of heavy-duty tyres from Dh500 to around Dh300 put paid to all its ambitions.

A new feasibility study raised doubts about the project's viability, which the management, however, sought to re-establish through a diversification plan, including construction of a residential tower complex and the sale of surplus power and potable water from its captive plants.

That plan also failed, which made liquidation the only viable option. The saving grace was that the shareholders did not lose any money as their capital had earned considerable interest for the time it was in the company's coffers.

While it is true that both companies fell victim to a change in the market situation, it is amazing to see how these companies could go into business without even considering the fallout of a change in circumstances.

How could Takaful imagine that it would be a monopoly player and there would be no competition any time in future?

Similarly, nothing can be more scandalous than a Dh200 million business going bust because there is an unexpected price crash for the products it was planning. It is a different story if a tyre company is forced to down shutters because there is a new technology that eliminates the use of tyres. But it is certainly sad when a company has to be put on the block because its competitors are selling their products cheaper.

Worse still, how is that companies carrying doubtful business models are able to attract such liberal funding from the market? Etarat's IPO was oversubscribed by more than two times, with the issue collecting in excess of Dh222 million as against the allotment of Dh110 million.

Takaful also had a highly successful IPO launch although it now appears that the feasibility study that cast doubts on the business was undertaken only after money had been collected.

Any situation that underwrites the success of an IPO irrespective of the viability of the business it seeks to finance is patently bad. The situation exists because, on the one hand, there is a dearth of issues that investors can safely assign their money to, and on the other, it is easy for any business plan to access the funds, both of which should engage the attention of the regulators.

There is a crying need to regulate the IPO market so that investors are not exposed to half-baked ideas that burn their fingers and encourage genuine offerings that can whet investor appetite coming into the market.

The author is a Dubai-based journalist.