Dubai: Taking stock

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Dubai's capital markets appear to be in for significant change with plans unveiled to establish a second-tier stock exchange coming hot on the heels of Dubai Financial MarketDubai Financial Market (DFMDFM) - the government-administered domestic bourse - and the DIFCDIFC-based NASDAQ DubaiNASDAQ Dubai's move to formally link their trading platforms. All of this is happening as speculation of a merger between the bourses of Dubai and Abu Dhabi mounts.

The new second-tier market would cater to the needs of the emirate's smaller enterprises, while a merger between the Dubai and Abu Dhabi exchangesAbu Dhabi exchanges would create a massive new trading base that would be even more appealing for foreign investors.

On July 20, Nasser Saidi, the chief economist at the Dubai International Financial CentreDubai International Financial Centre (DIFCDIFC), announced that plans were afoot to launch an alternate market catering to small and medium-sized enterprises (SMEs), a move away from the high-profile and high-value listings that dominate Dubai's existing capital markets.

Speaking at the Gulf Venture Capital Association conference in Dubai, staged to release the fourth annual "Private Equity and Venture Capital in the Middle East" report, Saidi said the regional private equity industry needed a second-tier market with less stringent requirements where smaller companies with revenue of $20m to $80m could be listed.

"There is a huge opportunity for setting up a tier-two market to accommodate SMEs run by families and hundreds of well-run free zone entities operating within the UAE and across the region," said Saidi, who is also the head of external relations at the DIFCDIFC Authority (DIFCA) and the executive director of the Hawkamah Institute for Corporate Governance.

More than just opening doors for local firms, Saidi held out the prospect that a second-tier market would serve SMEs throughout the Gulf and beyond.

"The new market will be a platform for companies from across the region. We expect such a market to give a significant boost to the private equity industry in the region which needs a viable exit route," he said.

Under the proposal, the new exchange would act in a similar fashion to London's Alternate Investment Market, allowing smaller firms to list their shares given the market's lower regulatory threshold.

According to Saidi, the Middle East's existing equity markets are geared to the requirements of larger companies, despite the fact that some 95% of firms in the region are SMEs. By making it easier for such firms to list, while only requiring them to offer a relatively small portion of their capital, the region's SMEs would be able to develop while giving investors a wider range of options.

While Saidi did not give details on the time frame for the establishment of the second-tier market, or indeed on its location, organisation and regulation, he did say that the plan was well advanced.

"We are talking to a number of parties, gauging interest from companies. There is the issue of market infrastructure, the issue of regulation, we're addressing all of these, it is a work in progress," he said.

While supportive of the move, some in the industry have voiced concern that it could be some time before the new market was ready to be launched. Phil Gandier, head of transaction advisory services at Ernst & Young Middle East and North Africa, told the Reuters news agency that, though welcome, any such alternate market was some way off.

"I think we are still far away but it would certainly be useful," Gandier said. "But there is still a lot of work to do on the main board - the quality of the applications, transparency and corporate governance - before they start a second-tier market."

News of the proposed tier-two exchange came hard on the heels of another major change in the way Dubai's two existing exchanges did business. On July 11, the Dubai Financial MarketDubai Financial Market (DFMDFM) - the government-administered domestic bourse - and the DIFCDIFC-based NASDAQ DubaiNASDAQ Dubai, formally linked their trading platforms, a strategy officials hope will prompt local investors to pump liquidity into the international market.

"The move is aimed at attracting more retail investors to equities listed on NASDAQ DubaiNASDAQ Dubai," the exchange's CEO, Jeff Singer, told local media on July 12. "We initiated some reforms in 2008. But in talking with brokers we realised that we need to make a fundamental changes. Rather than changing our model we decided to outsource to DFMDFM because they have a proven successful retail business model."

Action has been somewhat slow on the NASDAQ DubaiNASDAQ Dubai since it was launched in 2005 (it was then known as the Dubai International Financial Exchange), with only a limited number of listings and a relatively low level of trading. This should change with the consolidation of operations, according to Essa Kazim, DFMDFM's managing director and CEO.

"Cooperation between the two exchanges will increase," he said on July 11. "Today's outsourcing is a major step for us and the region. Through these growing links, DFMDFM gains a wider array of product offerings and international expertise, while NASDAQ DubaiNASDAQ Dubai benefits from DFMDFM's high liquidity." The DFMDFM's sizeable investor base was another draw, Kazim added.

It will take some time to see how the move pans out, and if it results in greater equity inflow to NASDAQ DubaiNASDAQ Dubai-listed companies. However, it is unclear how long this process - or the proposed second-tier market - will take, with suggestions being floated that the Dubai exchanges and that of Abu Dhabi could merge to create a regional giant. Though there are media reports of officials from the neighbouring emirate holding talks over a potential marriage, for the moment Dubai seems to be concentrating hard on its own market development.

© Oxford Business Group 2010