ECM 2006: A fair share
Equity markets in the Middle East retain many esoteric characteristics that make them difficult for international investors to penetrate. But the increasing wealth of the region makes it a location where investors are keen to invest. On the occasion of its first birthday, the Dubai International Financial Exchange (DIFX) looks steady on its feet, but issues remain with trading and coping with different legal regimes. Owen Wild reports.
September 2005 saw the opening of the Dubai International Financial Exchange (DIFX), an exchange that comprises part of the Dubai International Financial Centre (DIFC) and offers the structure and access required by international investors. The regulatory environment was based on the UK's FSA and hoped to capture the larger firms of the Middle East looking for international profile and investors.
“The DIFX was a success at its launch and is now on a clear growth path, having been operational for some time,” said Nasser Alshaali, chief operating officer of DIFX. ”It is the only international exchange in the region and already has a diversity of listings that makes it unique among GCC exchanges.”
Interest in the exchange was high before its launch as international banks saw an opportunity to expand rapidly their reach in the region. Progress was quick, with the first IPO in October 2005, but the pace then slowed with a three-month break between the issue closing and trading of the stock beginning. The delay was caused by foreign banks unwilling to facilitate trading until liability issues were resolved. The exchange publicly denied any issue, but established a working group that solved the problem to enable trading in late January 2006.
“Listings include companies with roots in a range of countries, including Saudi Arabia, Bahrain, India, Switzerland and the UK," said Alshaali. "Some have reincorporated inside the Dubai International Financial Centre while others have remained outside it. The DIFX provides assistance in a variety of legal and jurisdictional issues that may arise."
Jurisdictional issues mean a first-mover headache for the debut listing from each country, but those that follow should be able to benefit from the experience of predecessors. The speed to listing for each company is therefore expected to accelerate over time, but there is still a significant delay between listing and trading.
Jordan's Hikma Pharmaceuticals, a Jordanian company that redomiciled in the UK, completed its London and DIFX IPO in late October 2005 yet global depositary receipts only began trading in Dubai in August 2006. DIFX states this is not an issue related to the exchange but a matter of demand for GDRs. In any case, all DIFX IPOs so far have had a second listing, so trading has been possible despite waiting for it to begin on DIFX.
The apparent lack of demand for GDR trading on DIFX suggests companies could list in London alone, but despite the increasing sophistication of local investors, it remains the case that this would limit access to Middle Eastern money. Local investors are also usually price insensitive, so limiting their participation would have a significant impact on IPO pricing. As a result, dual-listings are considered inevitable, and it may be some time before a sole listing can take place in such a way as to satisfy all accounts.
“The interest in dual listings is currently strong and as the exchange builds we should also attract more single listings. We expect to see more of these by the end of the year,” said Alshaali. This is based on a pipeline of approximately 100 IPOs expected across the GCC region over the next 12 months and an expectation that DIFX should capture a proportion of these.
During the market volatility in 2006, Middle Eastern markets suffered more than most. However, the DIFX held up better than others in the GCC because of its greater institutional audience, being less dependent upon retail. But conditions have nevertheless impacted on IPO activity.
"Stock markets in the region have been very volatile this year and some companies are being more careful about the timing of IPOs than they were in 2005," said Alshaali. "Last year there was no bad time to IPO, including weekends. Issuers on the DIFX can benefit by using a bookbuilding model for pricing IPOs, as on other international exchanges, whereas IPOs on other exchanges in the region often take place at a discounted price because of local regulations. The DIFX model encourages mature understanding of pricing among the investing public."
One of the largest IPOs planned for the region this year was that for DP World, which will list on DIFX. However the US$3bn deal has now been delayed and will not take place until 2007. This is a significant loss for the exchange as it would have been an opportunity to show how far the market had developed in less than two years. However Alshaali suggests the pipeline is sufficient to ensure several other notable listings this year.