The small and medium enterprises (SME) sector in Dubai has made headlines in recent months. Reports indicate that the emirate is home to more than 72,000 SMEs, which contribute over 40% of domestic GDP and account for up to 42% of employment.
While the role they play in shaping Dubai's economy is undoubtedly significant, many argue that SMEs' room for growth has been stifled by the lack of financing options. Most SMEs currently do not have access to capital such as bank funding due to the absence of readily enforceable security.
In December 2012, Dubai SME, an affiliate agency of the Department of Economic Development mandated to develop the sector, and Nasdaq Dubai signed an agreement to help guide SMEs towards suitable financing options to fund their growth.
Since then, Nasdaq Dubai has reportedly been giving serious thought on setting up a securities exchange targeted at the SME sector. Bearing in mind the issues that this sector has had with finding capital, such an initiative is laudable.
Challenging market conditions has led the private equity industry in the region to explore appropriate avenues of exit from their investments. The introduction of an SME-focused exchange would provide a welcome alternative to trade sales or secondary buyouts.
But any enthusiasm for this development should be tempered by Dubai's previous experiences and challenges in the financial services sector. For example, despite numerous efforts, the UAE is still regarded as a frontier market by the MSCI Index rather than being upgraded to an emerging market.
Bumpy ride for SMEs
Under the current rules at Nasdaq Dubai, listed companies are required to provide a full prospectus prepared by an investment bank, float a minimum of 25% of their capital and have a market capitalization of at least USD 10 million (which was recently reduced from USD 50 million).
However, companies in Dubai have traditionally struggled with the requirements of listing on an exchange, which require a track record - a transparent system of corporate governance and full disclosure regarding the company's affairs.
While there has been significant progress made by major regional players towards complying with bourse requirements, SMEs have lagged behind. In addition, current laws related to the types of corporate entity that may be in public hands, as well as the rules on local ownership of onshore entities that are prevalent throughout the region, are likely to present significant hurdles for an SME seeking admission to such an exchange.
Perhaps the most relevant analogy can be drawn with the AIM market in London, which was launched as an international sub-market of the London Stock Exchange, targeting smaller growing companies. AIM has a "light touch" regulatory regime and dispensed with the requirements for the minimum amount of equity that had to be floated and for the track record of applicants to the market.
To some extent it also outsourced the regulatory function of scrutinizing applicants to nominated advisers rather than a central authority. During the boom times, the market prospered, however in recent years it has been hit by the withdrawal of companies and the criticism that its regulatory oversight and requirements were not tough enough. In addition, a lack of trading volumes and liquidity has reduced the attractiveness of the AIM market.
If a Nasdaq Dubai SME market is to avoid the same fate, serious consideration will have to be given as to whether SME companies in this region are ready for the compliance and regulatory requirements of listing, and if such a market can be robust enough to deal with the region's own challenges.
Sandeep Dhama is a senior associate at SJ Berwin's Middle East office, a position he has held since 2012. He specializes in M&A, joint ventures and private equity, with expertise in capital markets and restructuring.
© Zawya 2013
