Overregulation is preventing more companies from listing in the UAE and holding back the development of country’s equity markets, according to Shehab Gargash, chief executive and managing director of Dubai-based Daman Investments.

Medium and large companies are held back from listing because the UAE is “not a very friendly jurisdiction to IPOs [initial public offerings]”, says Gargash. “Less profitable companies should have access as long as you do your proper declarations and projections. I also think the ability to value should be more flexible. The laws governing IPOs are a little too rigid and thus tend to limit how many companies are really groomed to go to the market. We tend to be a little too overcaring when we vet our IPO candidates. We should give a little more leeway.”

He added that the requirement for companies to raise capital upon launching an initial public offering is one of the reasons why companies are held back from listing. Others are being held back because they’re waiting for a market that will pay a higher premium, or because they don’t meet the rigid requirements, he says.

With the exception of Nasdaq Dubai, valuations for listings on UAE exchanges are based on regulators looking at book value and economic projections of profitability, which has led to speculation on large IPOs in the first days of trading.

In addition, regulation requires companies to increase their capital when they go public and they face a minimum amount of ‘free float’ (the amount of shares that can be traded on the market), which would mean giving up some of the company ownership.

Despite that Daman Investments is still planning its own IPO and is looking to launch it in 2015.

From 2006 to 2013, only 10 companies listed on stock exchanges in the UAE, according to research by Daman Investments. Three companies listed on the Abu Dhabi Securities Exchange, and seven listed on Dubai Financial Market.

Even though there is a lack of breadth in the market, Gargash is “extremely bullish” on the UAE’s stock markets as banks are becoming more aggressive in lending and an increase in foreign investments following index compiler MSCI upgrading the UAE to emerging markets status could help further boost the upwards performance.

But investors need to be cautious as a part of the recent rise in the markets is due to speculation that Qatar and the UAE would indeed get a reclassification, according to Nasser Saidi, president at the local Nasser Saidi & Associates and former chief economist at Dubai international Financial Centre.

“Generally in advance of an actual reclassification, there will be an overshooting phenomenon where prices go beyond what is dictated by economic fundamentals. After that prices will decline,” he said.