Let there be allotments going to more investors and bring in greater depth to the market and thereby greater action
With about 12 equities, more than 20 structured products and sukuks worth substantial value having listed on its exchange, has DIFX been able to live up to its name? Though we have been hearing about a pipeline of listings, especially in equities listing, what we saw was totally different.
What happened to Nano-Dynamics and Future Pipes? "They may not come to DIFX at all. So are many others who were weighing the option of taking an IPO or doing a secondary listing on DIFX," says a broker on DIFX. He told The Business Weekly that many of the brokers who have set up office to do trading on DIFX are not serious about making the office 'look serious' about trading.
The last two listings were DP World and DEPA Ltd, which went through an IPO for their primary listing on DIFX. While DP World trades at 24 per cent discount to its issue price of $1.30, DEPA Ltd is at a better position as the discount is only about six per cent to its issue price. There was the strong argument attributed to the poor performance of the dollar-denominated stocks on DIFX, that the revaluation of dirham could undermine the dirham value of these stocks. Now that the dollar is said to have touched its rock bottom and the dirham revaluation has been ruled out where does this argument go?
Needed a retail focus
Whatever reasons the experts who have seen and lived in the US, London and other developed markets place before us, there has to be a significant role the retail portion should play when it comes to trading. Sources told The Business Weekly that there was only very marginal role played by the retail investors in the couple of IPOs that took place on DIFX. "In the case of Kingdom Hotels Investments, I believe there were not more than 50 investors who were able to take part in the issue. It was more of a private placement.
Even in the case of DEPA, I don't think there were many counters opened to accept applications. To be frank, in both cases, I was not fortunate enough to see the application form itself," said an investor who has always been upbeat about the UAE capital markets. There are many investors and analysts who argue that DIFX should ensure that a certain portion of the IPO goes into the hands of retail investors, the criterion of which needs to be unambiguously defined.
Investment bankers' role
If there is a law that requires a particular allotment to retail investors in order for the IPO to qualify as a public offer, the investment bankers would see to that a particular percentage of shares reached the hands of retailers.
They will be encouraged to hold road-shows and whatsoever needed to make the issue a success.
What's the incentive?
But what is the incentive to do so currently? It is true an IPO can be closed within the DIFX jurisdiction by distributing the shares among 10 or 20 investors and this gains a lot of time, energy and money for the investment bankers, rather than doing an IPO where tens of thousands of shareholders take part. As of now, there is no incentive or compulsion on the investment bankers to make the markets deeper and broader through allotments to larger number of investors.
Who will come to market now?
While a few companies have put on hold or cancelled the idea of doing an IPO on DIFX, the post- DP World scene looks very low-spirited for the market. Is book-building also a villain?
In the case of DP World IPO, the issue price was arrived at by a book-building process where large institutional investors played a major role. Even a majority of the brokers and analysts believed and argued that it was always better for the book-building to be done through the informed investors than leaving it into the hands of common investors who are 'not qualified' to take an informed decision.
TBW doesn't know whether the market has established clear-cut rules for book-building like in many other countries. "Even in the absence of written rules, the exercise can be made more transparent in order for the common investors to know how the book-building was evolving during the period. In many developed and emerging markets, experts said, the retail investors get to watch how the book is being built for a particular IPO. Many question the way the price is arrived at in this market as only a few institutions or top-notch investors get to participate in the book-building process. While the retail investor is required to make the bid and obliged to take possession of the shares he has bid for at whatever price the book-building has discovered, the investors who are responsible for the price discovery are at much more liberty when it comes to accepting allotment," explained an analyst.
The moot question is that if the retail investors are free to control the price in the secondary market, why not he play a role in the book-building as well. After all, ideally it needs to be market-driven.
Local brokers
It is very important for DIFX to seek the help of local brokers who have already established a strong link with the retail investors. Let there be more retail investors applying in the IPOs; let there be allotments going to more investors and let these moves bring in greater depth to the market and thereby greater action.
By CL Jose
© The Business Weekly 2008
