A question of confidence

Dubai Financial Market was created in an effort to restore the investor confidence that disappeared in a share meltdown three years ago. Can the market restore that confidence and persuade more companies to go public?

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By  David Ingham Published  September 6, 2001

DFM is born|~||~||~|Wherever you may be in the world, investing is all about confidence. Three years ago, the confidence of Dubai’s investors was shattered when shares trading in the emirate’s over the counter market crashed, amidst accusations of insider trading and improper practices.

In response to that debacle, the leadership of Dubai instructed the Dubai Department of Economic Development to immediately look into setting up a formal, regulated stock market. Soon after, the Dubai Financial Market was born.

The objective, as Essa Abdulfattah Kazim, director general of the Dubai Financial Market, explains, was clear. “The stock exchange was a solution to the improper practices that were conducted over the counter,” he says.

The new market would also provide a way for companies to access capital beyond the traditional banking system. “This is also an institution to support development and promote development,” explains Kazim.

To stop the earlier improper practices from happening again, the market would have to be well regulated and transparent. To ensure that this was achieved, the team appointed to oversee the project carried out extensive research into how other markets around the world functioned.

An early step was to observe markets in other so-called developing economies like Hong Kong and Singapore. This was followed up by research into other regional markets and local investment practices, plus a study of international regulations and best practices in partnership with Ernst & Young.

The result is a market where rules for listing are stringent, investors must be formally registered, and broker activities are licensed and closely monitored. A regulatory body, the Emirates Securities and Commodities Authority, performs a similar function to the US Securities & Exchange Commission, overseeing the market’s activities. The Authority is a federal organisation with members from government and the private sector.
Currently, there are around a dozen companies listed on the market, along with a handful of bonds and mutual funds. Kazim believes that regaining investor confidence is the vital prerequisite that will encourage more companies to list and issue bonds.

“Our first job was to regulate the market properly, to generate interest and get back the confidence of the public in the market,” says Kazim. “The majority of, especially small, investors got hurt. It takes time for people to come back and invest in a means that was a source of their bankruptcy.”

Exactly what measures are in place to ensure transparency and fairness? Quite a lot, it would seem.

For starters, investors must be issued with an investor number (IN) before they can begin to buy and sell shares listed on DFM. Kazim says around 38,000 corporate and individual INs have now been issued. Once the investor has the IN number, he must register with an authorised broker, of which there are around a dozen.

Some fairly serious requirements are placed on these brokers. For example, they must have paid-up capital of no less than AED 5 million and a bank guarantee of no less than AED 10 million must be deposited with the market. The broker must also be majority owned by UAE nationals and there are tests carried out before a broker is licensed.

Once all that is done, you can trade either in person through your broker at DFM, by phone or by fax. To protect investors, all conversations conducted over DFM lines are recorded. Company board members are not allowed to trade unless approved to do so by the market controller.

Broker charges are 0.3% of the transaction amount and clearing and settlement is done on the ‘T+2’ system. This entitles the seller to receive his funds within two working days of a trade.

A dispute committee exists to mediate in case of disagreements and there are stiff penalties for insider trading. These range between three months and three years in prison and AED 100,000 and AED 1 million in fines.

Spotting improper practices is something that’s very simple with the system, Kazim says. “If you enter an order, we know whose it is,” he says. “It’s very easy for the market controller to monitor.”
||**||What can you buy?|~||~||~|
Coaxing investors back by building confidence is one thing, however. There has to be something for them to buy on the market when they go there.

A key part of the market’s strategy, Kazim says, is to diversify the products on offer. Mutual funds and the Emirates Airlines bond have recently appeared to augment the 12 floated companies listed in DFM’s most recent Quarterly Statistical Bulletin.

Besides the confidence thing, Kazim believes that it’s success stories like the recent Emirates bond issue that will have more companies looking at the stock market as a means for raising capital. “After the experience of the Emirates bond, where they targeted AED 750 million and got AED 2 billion, people are now thinking more about going public and selling some of their assets.”

There aren’t however many Emirates Airlines, but what’s important, Kazim argues, is that the issue has woken companies up to the potential that stock markets offer. In Emirates’ case, the company has raised a sackful of money without giving away any company equity.

That’s a win-win as long as the airline can meet the repayments. “This is a means of long term financing that didn’t exist before,” says Kazim. “Through that issue, we’re creating awareness amongst companies that stock markets are not just to regulate trading, that they’re a means whereby you can raise fresh capital.”

Kazim thinks that Emirates may also have set a spectacular precedent that many companies will feel encouraged to follow. “Bond financing is something that a lot of companies might be looking at in the near future,” says Kazim. “Companies are still reluctant to go public.”

That statement makes a lot of sense, as Western IPOs are often as much about founders getting rich as raising cash for company expansion. In the Gulf’s family and state run enterprises, this motivation barely exists. The bond issue is a perfect solution, allowing families or governments to maintain their equity stakes in their companies whilst raising funds required for expansion.
Besides product diversification, other initiatives to encourage trading activity are underway. One initiative is an Internet-based trading system that is under development and will be rolled out as demand picks up. For now, investors can view realtime prices online and can view their portfolios and prices on their mobile phones thanks to WAP technology.

Educational programmes that try to reach out the general public are also ongoing. Daily seminars aimed at the public have been scaled back since initial interest tailed off, and now efforts are focused on educational institutions. “We receive on a weekly basis at least two schools, which come with thirty to forty people,” says Kazim. “It's an opportunity for us to educate future investors.” The circulation of publications and investor guides is also ongoing.

Of more importance are plans to unify GCC stock markets, by allowing each market’s shares to be listed on other markets. A first step has already been taken with the creation of an electronic link between the Dubai and Abu Dhabi financial markets.

Investors in Dubai can now tell their broker to buy shares in an Abu Dhabi-listed company, and vice versa. In the near future, each market’s Web site and ticker boards will begin to list the other’s shares.
||**||Stock market unification|~||~||~|
Rolling that type of integration out beyond the UAE to other markets may prove to be a stuttering process, however. As things stand now, there is no restriction on a UAE company selling up to 49% of its shares to non-UAE nationals.

That companies do not is entirely their own choice, and so far only one DFM-listed company, Emaar, has broken the mould. Should a GCC agreement be enforced, at least 25% of a company’s shares would have to be available to other GCC nationals.

Any possible market unification would likely revolve around an electronic link, which would allow shares to be traded on other countries’ markets. Within that system, a national market could keep its own rules and regulations. Disputes would have to be settled between each market’s governing authorities.

Kazim himself is in no doubt that such moves towards unification would be desirable. “It’s one area where competition is not really helping, because you always want markets to consolidate efforts, whether it’s a consolidation of liquidity, companies or investors,” says Kazim. He politely hints, however, that progress is slow. “The GCC should be much quicker in taking decisions,” he says. “The world is moving very fast.”

Whether these efforts towards regional market consolidation bear fruit or not, the Dubai Financial Market will continue to try to build investor confidence at home. A look at trading volumes suggests that confidence may be returning, slowly but surely.

Between the second and fourth quarters of 2000, share trading volumes rose from 7,165,147 to 9,151,101. In the first quarter of 2001, the figure rose to 14,353,273, dropping back to 12,113, 950 in the second quarter.

Mixed signals, but the long term trend appears to be upward and the recent Emirates bond issue was a triumph for the market. But the process of restoring investor confidence and encouraging companies to look at capital markets for financing is an ongoing process. Confidence, after all, is a very fragile thing.||**||

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