By Artur Kluz, Partner, Metropolitan Capital Solutions and Izabella Szadkowska, Senior Associate, Al Tamimi & Company, United Arab Emirates
Despite global economic turbulence, GCC economies have continued to show a healthy and stable growth in recent years. Positive oil price dynamics are resulting in increase in oil and non-oil GDP. While oil the and gas industry is the main driver for the GCC economies, continued efforts by governments to diversify economies is leading to aggressive development of the private sector, industrial cities and free trade zones.
Internationally, the GCC remains better known as a source of capital rather a destination for outside capital. This drive is primarily led by sovereign wealth funds. However, private businesses and family offices are also relatively large investors in global markets especially in European Union countries. These investors tend to prefer traditional sectors that, besides luxury goods, include heavy industries, materials, telecom, financial sector, prime real estate and natural resources.
In addition, historically, the focus has been on either global brands or companies offering strong regional connectivity (in terms of customer base, suppliers etc.).
One relatively less tapped avenue to access regional investors is through regional listings. Historically, local ownership restrictions and less compliance-aimed capital market regulations and domestic focus of regional exchanges made it difficult for foreign companies to list and offer securities to local investors. However, a the recent establishment of financial hubs like the Dubai International Financial Centre (“DIFC”) and exchanges like NASDAQ Dubai established efficient means of access to regional liquidity platforms.
Finally, as local economies continue to experience higher then global average growth rates, a local exchange can bring companies closer to an attractive customer market. The regional IPO and secondary market has remained subdued due to underperformance over a five-year timeframe and its correlation with international markets. However, as the global economic conditions stabilize, this activity is expected to pick up, offering quality foreign companies an efficient venue to tap regional liquidity.
NASDAQ DUBAI
NASDAQ Dubai (formerly known as the Dubai International Financial Exchange) is a securities exchange established and operating in the DIFC, United Arab Emirates. It opened for trading on 26 September 2005. NASDAQ Dubai, besides standard capital markets instruments such as the equity securities, debentures, certificated units issued by funds and structured products is also prepared to list Islamic products, e.g. Sukuks, bonds, funds, equities, indices and index products.
The significant competitive advantage that NASDAQ Dubai offers is multi-currency securities – including those denominated in US dollars and UAE Dirham. The DIFC offers no taxation with a full distribution of profits to investors, or international standard legal framework, book-building IPOs with full access for local and international investors and contractual market-making.
Appealing to American Issuers?
NASDAQ Dubai is an international stock exchange that enables companies to list in the Gulf under a global brand name. Regulated by the Dubai Financial Services Authority (“DFSA”), the listing standards of NASDAQ Dubai are comparable to those of the leading exchanges in New York, London and Hong Kong.
The exchange serves as an ideal venue for American issuers to raise capital, to either expand or set up operations in the Middle East or any US company can widen its investor base by tapping into the deep investor pool in the Gulf region.
Although there are several stock exchanges in the Region, NASDAQ Dubai is the only one that offers a diverse product range for potential issuers, as indicated above. With no foreign ownership limits, the equity minimum free float is just 25% and the minimum equity market capitalization is only USD 10 million and NASDAQ Dubai is the only exchange in the Gulf that offers full links to EuroClear and ClearStream, allowing international investors to hold NASDAQ Dubai securities in an international Central Securities Depository. With direct access to 32 global and local brokers and links to more than 550,000 investors through its network, the exchange offers an excellent trading platform, ideal for international issuers.
It’s worth pointing out, NASDAQ OMX and Netsol Technologies Inc. have a primary listing in the US have a secondary listing on NASDAQ Dubai. NASDAQ Dubai securities provide an attractive investment opportunity for American investors who are aiming to diversify their portfolio.
With zero taxation and full repatriation of profits, investors have the opportunity to invest in a region which is projected to grow in excess of 4.3% p.a, as the World Bank has indicated, for the next 3 years. You can benefit from the Regional investor base and international accounting, reporting and disclosure standards.
Legal Framework
The NASDAQ Dubai legal framework mainly concerns trading in securities on its platform and is set out under rulebooks of NASDAQ Dubai Business Rules. The detailed requirements and procedures for listing on NASDAQ Dubai are set out under Markets Law DIFC Law No. 1 of 2012, Markets Rules (MKT) and, in respect of listing of funds, Collective Investment Law 2010 and Collective Investment Rules (CIR).
These pieces of legislation have been drafted with reference to the rules of leading international exchanges and their standards are comparable with such exchanges. Both, entities incorporated in the DIFC and entities incorporated outside the DIFC, particularly in the United States, may list on NASDAQ Dubai.
General Listing Requirements
Since the DFSA regulates all financial and ancillary services undertaken in or from the DIFC, an application to list must always be made to the DFSA, as the authority maintaining the list of securities. The application may be made by either the issuer or its sponsor.
In assessing the eligibility of a potential issuer, particular emphasis is placed on the experience and expertise of its directors and listing sponsor and, in the case of the listing of a fund, the expertise of the fund’s investment manager. The directors of the issuer are required to have appropriate experience and expertise in the business of the issuer and exhibit high standards of integrity.
In broad terms, in order to be eligible for listing, an issuer must:
– be validly established according to relevant laws of its place of incorporation;
– have published or filed audited accounts which cover a prior period of three years (or any shorter period acceptable to the DFSA, to be decided upon on a case by case basis); – have sufficient working capital available for its present requirements;
– have a listing-suitable business; – appoint directors who have appropriate experience and expertise;
– be able to operate its business independently of its controlling shareholder, should it have one;
– have adequate systems of controls to eliminate or manage material conflicts of interests in its business prior to listing;
– have freely transferable securities;
– make sure that its aggregate market value at the time of listing is at least USD 10 million (for shares); and
– distribute at least 25% of its shares to the public/25% of its shares must be always held in public hands.
Corporate governance requirements concerning the issuer as well as ongoing reporting obligations are in line with international standards.
Conclusion
There are over 20 companies listed on NASDAQ Dubai, a significant number of those being non-Gulf issuers. The value of the largest NASDAQ Dubai IPO to date was DR World Limited issue of USD 4.96 billion, oversubscribed by almost 15 times.
Having experienced the global financial crisis, the Eurozone crisis and the Arab Spring, GCC capital markets have some difficult years behind them. 2013, however, looks quite promising.
According to Dr. Chris Laing, Managing Director and Head of Deutsche Bank’s ECM team for the MENA region, IPO volumes in 2013 are expected to exceed by far those of 2012. Also, Sign Hamed Ali, Acting Chief Executive Officer of NASDAQ Dubai, confirmed that 2013 will be a much better year for the stock market comparable to previous years, in terms of a number of IPOs and the volume of trading. The Exchange will certainly want to attract family-owned entities and small businesses. Qatar National Bank stayed that the GCC’s gross domestic product is predicted to reach $1.5 trn and 4.6% in 2013.
It follows, therefore, that projections for 2013 look promising. US investors – get ready!