The UAE government is finalising legislation to reduce the minimum size of a stake that a company has to float in a bid to revive its struggling initial public offering (IPO) market.
“Hopefully they are going to reduce the flotation requirements to 20-30 per cent from the current 55 per cent,” says Elie Ghanem, head of market and product development at the Abu Dhabi Securities Exchange (ADX.)
“The council of ministers and various regulators have been reviewing many drafts, and it’s now in the final stage of approval, so it will most probably be introduced in 2011.”
Businesses are currently mandated to offer a minimum of 55 per cent of shares by the UAE’s commercial company law. This has served as a major deterrent to family companies, which are reluctant to relinquish their controlling majority and the associated increase in transparency.
“We have been in talks with different UAE entities to encourage them to try and change the law because family businesses don’t like having to lose control,” says Ghanem.
In addition, companies have unrealistic expectations of IPO performance, believing that demand should match the boom years of 2005-07 when companies were oversubscribing to offerings by up to 400 times.
“We’re now back to a more normal level of around 100 per cent subscription which, as per international standards, is great,” says Ghanem.
“But that level is considered embarrassing today as they think it looks like they’re underperforming. Of course, the reality is that banks were overleveraging during the boom, which distorted the market.”
Ghanem also said he expects new regulation governing margin trading – when an investor takes out a loan from a brokerage to purchase stock – to be implemented either by the end of 2010 or early 2011.
On 24 October, the Emirates Securities and Commodities Authority (SCA) opened the door for the licensing of companies interested in margin trading, but they are yet to approve its regulation.
The introduction of margin trading is expected to pave the way for the approval of short-selling, which would enable investors to profit from a fall in the value of shares and therefore help boost trading.
“I think the SCA is now more likely to introduce short-selling,” says Ghanem. “It’s being discussed and we see positive signals.”