Reclassification to boost foreign trading

02 December 2013

Qatar’s stock market has been rewarded for its recent improvements by gaining an upgrade from frontier to emerging markets status

Qatar is gradually increasing its efforts to open up its stock market to foreign trading.

To encourage the launch of more initial public offerings (IPOs) as well as enhancing its regulatory framework to raise liquidity, the Qatar Exchange (QE) is focused on improving the investment potential of its stocks. With a market capitalisation of about $140bn, the exchange is larger than nearly all others in the region (only Saudi Arabia’s, and the three UAE exchanges combined beat it in terms of size).

The problem is that it struggles with liquidity. In many cases, just 5-10 per cent of market capitalisation is accessible to foreign investors. The rest is either not traded, or not actively traded. There are signs of advancement, however.

Index compiler MSCI’s reclassification of QE to emerging markets status from May 2014, seen as a nod of approval from institutional investors, acknowledges the efforts being undertaken to enhance access to stocks.

Status upgrade

In its review announcement in June, MSCI said market participants have recognised the improvements in operational efficiency and welcome the commitment of the Qatari authorities to increase foreign ownership limits applied by local firms. With the index tracked by funds worldwide, the upgrade is likely to lead to higher foreign investment, as most allocate more to emerging markets than to frontier markets, QE’s current classification.

The upgrade to emerging markets status is exciting, but work is still needed from a regulatory perspective

Ahmad Anani, Latham & Watkins

Upgrades to QE’s trading platform have now been completed. This has resulted in Qatar Holding, the direct investment arm of sovereign wealth fund Qatar Investment Authority, taking sole ownership of the securities market in October, as it bought NYSE Euronext’s 12 per cent stake in QE. It also opens up the possibility for the exchange to become a public company in the near future, which could help it become more transparent while further developing its operational capacity.

Qatar’s largest listed companies*
NameMarket cap ($bn)
Qatar National Bank33.6
Industries Qatar28
Ezdan Real Estate 12.7
Masraf al-Rayan6.6
Commercial Bank Qatar4.8
Qatar Electricity & Water Company4.6
Qatar Islamic Bank4.5
Qatar Fuel (Woqod)4.1
Doha Bank3.2
Qatar Gas (Nakilat)3
Barwa Real Estate3
Qatar Navigation2.8
Qatar International Islamic Bank2.5
Al-Khaliji Bank1.9
Qatar Insurance1.6
*=By market capitalisation. Source: SICO

“Qatar has worked very hard at getting the reclassification and, of course, does not want to get reviewed and downgraded. The upgrade to emerging markets status is exciting, but work is still needed from a regulatory perspective to move the market forward,” says Ahmad Anani, a Doha-based senior counsel at US law firm Latham & Watkins. “The key is to raise foreign ownership restrictions. There is a lot of recycling [of funds] right now – you can see that when an IPO is launched, it will take liquidity from [others already trading on] the market. What’s important is to bring in fresh money and to allow transactions such as derivatives trading.”

That the work should not end with the emerging markets status upgrade is something the government seems to have taken note of.

In June, Yousef Hussain Kamal, Qatar’s economy and finance minister, and chairman of the Financial Markets Development Committee, announced that Commercial Bank of Qatar and Qatar Islamic Bank would be raising their foreign ownership limits soon. Both are targeting a level of 25 per cent of market capitalisation. More firms are expected to follow.

“An increase in companies raising their limits is a step in the right direction. For the moment it seems to be a company-specific initiative,” says an investor. “They are looking at one company at a time, as each is required to individually amend their articles of association to raise their limits. If, down the line, the authorities decide on a policy shift, raising the limit for everyone would be even more effective.”

Boosting listings

Qatar has quite low foreign ownership limits (25 per cent of free float, which usually amounts to less than 10 per cent of market capitalisation) and much of that is not actively traded. Firms allowed to have higher limits often do not have many actively traded shares, as most share capital tends to be held by local holding companies.

That can be seen with telecoms companies Ooredoo and Vodafone Qatar, which both have their foreign ownership limits set at 100 per cent, but more than three-quarters of their share capital is in the hands of large shareholders. The same can be said for the bank Masraf al-Rayan, which allows 49 per cent.

Another way to boost trading is by increasing the number of listed firms on the QE. Government-related entities are leading this initiative, with the hope that their strong assets will convince investors to put funds into the lowly liquid stock market.

State energy firm Qatar Petroleum (QP) is looking to launch several IPOs in the coming years, including an $880m listing of Mesaieed Petrochemical Holding Company expected later this year. The value of QP subsidiaries involved in IPOs is expected to total about $50bn, Hussain al-Abdulla, executive board member of Qatar Holding and chairman of the QE, told reporters in May.

[There will] be a much more regulated environment, with more transparency and financial reporting

Ahmad Anani, Latham & Watkins

The prospective listing of Doha Global Investment Company (DGIC) could also help broaden and diversify the exchange’s offering. Developments around the new investment firm are being keenly watched by investors, as the QR45bn ($12.4bn) company will include $3bn in the form of assets from Qatar Holding. Half of DGIC’s capital will comprise paid-up capital, says Al-Abdulla, and will initially be reserved for locals. The wait is for DGIC to actually be formed – its IPO was due to be launched in May 2013, but no announcements have been made about a new date.

Framework improvements

Aside from QP and DGIC, many more companies are expected to list, according to Zain al-Abdin Sharar, director of legal affairs and enforcement at the Qatar Financial Markets Authority. Speaking at the MEED Qatar Banking Summit in September, he said a host of improvements in the exchange’s framework is intended to double the number of listed companies in the next five years.

The authority has amended the corporate governance code for firms listed on the main market, and is about to introduce new financial adequacy rules for financial service firms, he said. It will soon also announce new mergers and acquisitions regulation for listed companies, and is considering introducing rules for margin trading and the listing of real estate investment funds.

Furthermore, the Commercial Companies Law, which is under review by the government, plans to lower the threshold for small and medium-sized enterprises (SMEs) to list.

With the capital requirement of QR10m for Qatar’s second, SME-focused market currently similar to that of its main market, the QE Venture Market has yet to attract enough listings to officially launch. Plans to change the minimum to QR2m instead could get the ball rolling.

“I think the issue is the capital required in order to get listed,” says Anani. “For limited liability companies, if they want to go public there is fee requirement that they’ve made at least 10 per cent profit in last two years. That could make it prohibitive for some.

“The law will also address some issues in governance and reporting. The end result is going to be a much more regulated environment, with more transparency and financial reporting. That should encourage investors.”

And while authorities work on developing these frameworks, the QE is trying to diversify its offering as well, by increasingly listing bonds.

Some of Doha’s frequent issuance is only through the exchange and not through over-the-counter trading (usually the main market for bonds), which could garner more attention for the equity markets. The QE started off with trading T-bills, after which several rounds of government bonds found their way to the exchange.

Some of the latest issues have included bonds that also encourage retail investors to join the trading activity; the minimum purchase amount on these bonds starts at QR10,000, significantly lower than the $100,000 on some of the State of Qatar bonds. The next step would be to deepen the bond market through moving to corporate bonds and project bonds.

“The bonds draw investors to the exchange as they offer diversification. Most subscribers have been local banks, which need to hold different types of securities,” says a Doha-based broker. “Liquidity needs to be addressed through the introduction of new instruments. For the stock market, I expect more movement once measures, such as margin trading, kick off.”

Prioritising liquidity

Qatar’s multi-pronged approach to developing its exchange shows it has understood the priorities are to deepen the offering and get more liquidity to its market. The results of the initiatives will depend on the government’s ability to turn its plans into its reality.

Concrete details about each initiative have not yet been announced, but it is encouraging that the government has already identified key areas it will be looking at. The decision to use government-related entities to raise the amount of investable stocks is positive as no IPOs have been launched for several years.

In numbers

$140bn The Qatar Exchange’s current market capitalisation

5-10 per cent The Qatar Exchange’s market capitalisation accessible to foreign investors

Source: MEED

MEED has launched new pages for each exchange in the GCC, with news and updates on listed companies. The Qatar Exchange page can be found at Links to all the exchanges can be found at

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