Abu Dhabi’s equities market is still in its infancy, but it can reasonably expect companies worth more than $200bn to list once a controversial new law is approved this year.

The Abu Dhabi Securities Exchange (ADX) only came into being in 2000, just eight months after Dubai launched the Dubai Financial Market (DFM). All the other major exchanges in the region were launched before it, and some, such as the Cairo & Alexandria Stock Exchanges, have existed for more than 100 years.

Law change

Tom Healy, chief executive officer (CEO) of the ADX, says private companies with a combined value of more than $200bn will list a portion of their equity on the market once the Abu Dhabi Executive Council has made a forthcoming change to the law.

Real estate and retail companies in particular have flourished in Abu Dhabi. The capital’s streets are lined with tower blocks, and more are planned. Often the ground floor of each building is taken up by a retailer operated under franchise by a UAE company. In most cases, the companies are privately owned.

Private companies have avoided the ADX and the DFM because of a clause in the UAE’s Commercial Law that requires any company from the private sector to float at least 50 per cent of its capital if it decides to hold an initial public offering (IPO). The owners of the UAE’s private companies are scared of losing control of their businesses by giving 50 per cent of the company to external shareholders, according to Healy.

The experience of family-run businesses in the West that continue to exercise control despite holding only a minority of the shares has failed to reassure the bosses of the UAE’s private companies. Examples such as Rupert Murdoch’s enduring control over News Corporation, the US-based media conglomerate, have failed to ease Gulf executives’ fears over introducing external shareholders.

Final stage

The authorities in Abu Dhabi have been consulting over a change to the Commercial Law that would allow private companies to float just 30 per cent of their capital in an initial public offering (IPO). Although the consultation exercise has been under way since at least September last year, a date has yet to be set for the change to come into force. “The Commercial Law takes quite a while to change,” says Healy. “Apparently it needs a lot of consultation, but I am told it is at pretty much the final stage .”

The saga of the Commercial Law says much about business owners’ attitudes to shareholders. The more interesting outcome of the rule changes, however, will be the sheer size of the new listings coming to market. Healy estimates that 200 private companies with an average market capitalisation of $1bn will list 30 per cent of their shares within two years of the change coming into effect. About $70bn worth of shares will be issued, meaning that the total market capitalisation of shares listed on the ADX will potentially more than double.

A total of AED444.9bn ($47.7bn) worth of shares were listed on the exchange at the end of 2007. Another $70bn would be a massive injection of new funds into a fast-growing market.

The ADX has relatively strict rules on financial disclosure. Listed companies have to publish their financial results every quarter and surprise announcements, such as changes to board directors and profit warnings, have to be issued immediately. If a company fails to disclose its information on time, the ADX or its regulator, the Emirates Securities & Commodities Authority (Esca), will fine or even delist the offender.

However, since Healy joined the ADX on 10 September 2007, not one company has issued a profits warning. Either companies are successfully hiding profit warnings from both regulators, or the Abu Dhabi economy is so buoyant that every-one is making money. For now, the latter is probably true.

The 98 investment banks and other brokers that are licenced to carry out trades on the ADX say that private companies have been waiting for the relaxation to the listing requirements for some time. Even if all 200-plus companies decide to list as soon as the law changes, the individual IPOs will be spread over a period of two years. The application process alone would force the companies to stagger their listings because the civil servants would be overloaded with extra work.

The banks say the private companies have already decided to list, and Healy agrees. “If companies are holding back until the law changes, that would suggest they have already made up their minds to go public,” he says. “They want to use the market as a source of funding for further growth.”

In reality, the amount of new issuance coming to the market is likely to be even more than $200bn. The Abu Dhabi Executive Council will continue its privatisation process, although the number of new companies and the size of the stakes to be listed have yet to be announced. “One of the further privatisations is the stock exchange,” says Healy.

A third source of new funding should come from former 100 per cent state-owned enterprises that have so far floated only small stakes on the ADX. The minimum listing requirement set out in the Commercial Law does not apply to the government, which can do what it wants.

Further sell-offs

The ADX’s largest bank by market capitalisation, National Bank of Abu Dhabi, has listed just 30 per cent of its equity. The government continues to cling on to the rest. “There will be further sell-offs of government holdings in companies that are already public,” says Healy.

As many of the emirate’s largest businesses were originally 100 per cent state-owned enterprises, any campaign by the central government to reduce its holdings would create another major new source of issuance on the ADX.

How will the ADX cope with so much extra capital? The ADX is a new exchange in a new market. Like many other emerging markets around the world, its main index has been volatile. When stock markets across the GCC crashed in late 2006 and early 2007, the ADX was no exception, losing more than 40 per cent of its value. Share prices did not recover until the second half of 2007. In fact, the index only returned to the 5,000-plus level it enjoyed at the beginning of 2006 in May this year.

The companies listed on the ADX are regulated more lightly than elsewhere. Esca was set up later than both the ADX and the DFM, which were self-regulating when they launched. “We have been pushing very hard to take the rules out of the exchange and give them to Esca,” says Healy.

Esca is gradually building its own body of regulations. By April 2010, listed companies will have to abide by a new corporate governance rulebook that broadly follows standards in Western markets. Until the new rulebook comes into force, the regulatory regime of the ADX will be lighter than that of the Dubai International Financial Exchange (DIFX), which launched in September 2005. The DIFX is based in the Dubai International Financial Centre, which bases its regulations on UK company law. The ADX is “not quite there” compared with the DIFX, says Healy.

So far, however, the DIFX has failed to challenge either the ADX or the DFM because its market lacks sufficient liquidity to attract investors or companies looking to float their shares. The amount of liquidity on the ADX – once perceived as a weakness – has improved dramatically since the slump in the summer of 2007. “We would expect Abu Dhabi over the next couple of years to grow at a higher rate than the DFM in terms of volumes,” says Khaled Kurdieh, CEO of Mashreq Securities, a UAE-based broker that carries out transactions on both stock exchanges.

The ADX enjoyed substantially higher trading volumes than the DFM in the second half of May. “There is increasing foreign interest in the market and that is the new factor,” says Healy.

The ADX assigns an investor number to every-one who trades in the shares listed on its market. The surge in volumes has mostly come from investors registered in London and Frankfurt. Tougher regulations will encourage more money from Europe at a time when more companies are planning to list on the ADX.

The health of the emirate’s economy gives the ADX the impetus it needs to continue to grow. Ultimately, however, the UAE will find it impractical to have three competing stock exchanges, says Gundi Royle, managing director of investment banking at UAE-based broker the National Investor. “In the longer term, these markets will all merge,” she says.