Dubai’s new stock exchange is the first step towards putting the country on the international investment map. Pervez Akhtar and Kamar Jaffer report
In line with His Highness Sheikh Mohammed bin Rashid Al Maktoum’s vision encapsulated in the 2015 Dubai Strategic Plan to develop Dubai as an international investment hub between Tokyo, Hong Kong and Singapore in the Far East and Frankfurt, London and New York in the West, Borse Dubai Limited was established in August 2007 to consolidate the Government of Dubai’s two stock exchanges in the holding company for Dubai Financial Market (DFM) and Dubai International Financial Exchange (DIFX).
Borse Dubai is 60 per cent owned by the Investment Corporation of Dubai, 20 per cent by Dubai Group LLG (a member of Dubai Holding Group) and 20 per cent by DIFC Investments LLC.
The DIFX is located within the state-owned onshore financial free zone known as the Dubai International Financial Centre (DIFC). The Dubai Financial Services Authority (DFSA), regulates the conduct of financial services in the DIFC to ensure compliance with the legal and regulatory framework based on internationally acceptable standards familiar to the participants of the global financial markets.
The DIFX was launched in September 2005 as a dollar-denominated, regulated and transparent electronic trading platform to provide multinational companies, government-held corporates and family-owned conglomerates from the Middle East and North Africa, Turkey, Levant region and Egypt, Indian sub-continent, South Africa and further afield with an opportunity to tap into the international capital markets by means of an IPO, secondary listing, issue of bonds or other debt instruments to finance their expansion strategy overseas.
With the rise in competition and liberalisation of markets following the membership of the Gulf Cooperation Council (GCC) states to the World Trade Organisation, an IPO on the DIFX would allow the founders of these companies to retain majority ownership and diversify risk among investors, gain capital to expand beyond their saturated domestic markets and seek opportunities abroad.
Issuers seeking a listing on the DIFX must comply with the Listing Rules to have their securities admitted to trading. A company applying to list its securities must comply with the eligibility criteria relating to the issuer of securities and the eligibility criteria relating to the securities. These include:
– The DIFX must be of the view that both the issuer and its business are suitable for listing;
– The directors must have appropriate experience and expertise in the business of the applicant and exhibit high standards of integrity;
– The DIFX generally requires a minimum free float of 25 per cent of the securities to be listed;
– The applicant must have published audited accounts for the preceding three years, in accordance with the International Financial Reporting Standards;
– If there is a majority or controlling shareholder, the DIFX must be satisfied that the applicant will be able to operate its business independently of that shareholder; and
– The applicant must have an expected market capitalisation of at least $50m (£24.3m). The DIFX does not have any foreign ownership restrictions, lock-in restrictions on investors or any restriction on the percentage of a security that an investor may hold.
Listing on the DIFX will enable an issuer to broaden its shareholder base by attracting institutional and high net worth investors and to obtain a reference price or market value for the company based on investor demand. Following admission of their securities to trading, issuers are subject to continuous disclosure obligations.
The DIFX promotes transparency, disclosure, corporate governance and accountability using mechanisms familiar to international investors such as a comprehensive disclosure regime, class transaction tests and related party transactions, full reporting of accounts, avoidance of shareholders’ agreements and full disclosure of control mechanisms and corporate governance.
In the Gulf, the business model has generally been for state-owned companies and family-held conglomerates to have direct or indirect ownership over a variety of business sectors (eg infrastructure, ports, airlines, telecoms and real estate) and have the same representatives or nominees sitting on the board of directors of numerous companies within the group. These companies will need to implement corporate governance standards and produce financial statements to meet the transparency and governance standards set out in the listing rules.
In the context of the unprecedented public scrutiny of the aggressive cross-border acquisitions led by emerging market companies, a listing on the DIFX will place well-capitalised multinational firms in the GCC, adopting a corporate governance strategy commensurate with international best practices in Organisation for Economic Co-operation and Development (OECD) countries, in a strong bargaining position when embarking on cross-border acquisition sprees, particularly during the course of takeover or competitive bids.
The DIFX has attracted international and regional investment banks as ‘members’ to trade and/or provide securities clearing services on the exchange. They are: ABN AMRO, Arbuthnot Securities, Barclays Capital, Citigroup, Credit Suisse, Daman Securities International, Deutsche Bank, EFG-Hermes, Hichens Harrison, HSBC, ING Bank NV, Jefferies International, KAS Bank, Mashreq Capital DIFC Ltd, Merrill Lynch, Morgan Stanley, National Bank of Dubai Investment Bank, SHUAA Capital and UBS. The members will assist in pricing and underwriting IPOs. Deutsche Bank, Merrill Lynch and Morgan Stanley are providing liquidity on the exchange.
On 20 September 2007, Borse Dubai and Nasdaq announced a series of transactions as part of the planned takeover of the Nordic exchange operator OMX AB (publ) to create a global exchange platform across the US, Europe, Middle East and North Africa and Asia. The DIFX is set to be rebranded ‘Nasdaq DIFX’ and will benefit from Nasdaq’s technology and trading platforms, experience and geographic reach to accelerate its growth and compete on the global financial markets.
One of the main challenges of a new stock exchange is to attract sufficient issuers and instruments to ensure a meaningful liquidity pool attractive to international investors. Abraaj Capital, the Dubai-based private equity firm, which has $4.6bn (£2.23bn) of assets under management and company capital of $1bn (£480m), announced on 16 December 2007 that it was considering floating between 20 and 30 per cent of the company in an IPO of up to $1bn (£480m) on the DIFX.
DP World, the third largest global port owner and operator following its acquisition of the UK’s Peninsular & Oriental Steam Navigation Company (P&O) for $6.8bn (£3.30bn) in 2005, announced on 21 October 2007 that it would be selling 20 per cent of its shares worth at least $3.5bn (£1.70bn) on the DIFX in November 2007 as it seeks to double its capacity over the course of the 10 years in the Far East (for example, China, India, Vietnam and Pakistan).
The proposed IPOs by Abraaj Capital and DP World (a subsidiary of Dubai World, which is a holding company owned by the government of Dubai) are landmark listings for the DIFX as it seeks to attract regional heavyweight issuers, enhance liquidity and enlarge ownership of securities to institutional and high net worth investors. The proposed listings will invigorate the DIFX and underline the stature of the DIFC as a prominent international financial centre as Dubai seeks to gain a foothold on the global financial stage.
Pervez Akhtar is head of corporate in Dubai and Kamar Jaffer an associate at Allen & Overy