Open for business

Omar Bin Sulaiman says Dubai’s new stock market has the regulatory strength to compete with the world’s biggest financial centres. But can it bring some sense to the region’s booming investment scene? Richard Agnew reports.

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By  Richard Agnew Published  October 2, 2005

Open for business|~|38-Gate-1_200.jpg|~||~|For a region where anything share-related sparks a frenzy of activity, the launch of Dubai’s new stock market last week was decidedly low-key. The Dubai International Financial Exchange (DIFX) opened for business at 2pm on September 26, providing a modest range of five securities tracking other bourses in Europe, Japan and the US. Still, officials aren’t too bothered that, so far, traders have little on offer. “You need to open the shop first, before people can buy anything,” explains Dr. Omar Bin Sulaiman, the head of Dubai International Financial Centre (DIFC), the tax-free oasis in which DIFX is located. Despite the subdued start and some seemingly cautious growth targets, DIFX is confident everything is going according to plan. Early next month, the regional mobile telecoms outfit, Investcom, plans to list on the exchange, and its initial public offering (IPO) will be the first of a series that DIFX hopes will bring its capitalisation to US$2 billion by the end of 2006. By comparison, bankers expect a total of AED40 billion (US$10.9 billion) to be raised on the UAE’s stocks markets, including the Dubai Financial Market (DFM) and Abu Dhabi Securities Market, throughout the course of this year. Ultimately, though, Dr. Sulaiman hopes DIFX will be the main exchange in the Middle East for a range of securities, including bonds and derivatives, and provide a gateway for international and regional investment. “I think we’re actually ahead of schedule. It will take time before people take advantage of it. In the next 18 months, we expect between 15 and 18 IPOs,” he adds. Where those firms are likely to come from is less clear, considering none are yet listed on the bourse. The media and technology sector is one likely vertical source, with start-up companies set up in the emirate’s internet and media free zones expected to use the exchange to raise equity. Dubai-based handheld phone manufacturer, i-mate, which floated a 20% stake in London earlier this month, has said it is seeking a dual listing in Dubai. Aside from Investcom, other regional telcos such as Jordan Telecom are also believed to be considering DIFX for flotations. “Companies in the energy sector, the telecoms sector and retail sector are in the pipeline, as well as local family businesses,” says Dr. Sulaiman. The Dubai exchange stands to benefit from surging demand for Islamic financial products, including the future launch of bonds, debt instruments and future stocks that comply with Shari’a law. But Western companies, eager to get a piece of the oil-fuelled liquidity of the Gulf states and follow the money which has returned to the region since 9/11, are also very much in DIFX’s sights. Four international companies — CSFB, Deutsche Bank, HSBC and UBS — have registered as brokers on the exchange so far, and Bin Sulaiman says 40 players will be in place by the end of next year. Observers add that Dubai’s geography could prove a key factor in attracting investors, by establishing a trading centre that fills a time zone gap between Asian and European markets. “DIFX would open a new time zone for global traders because they could trade the global markets before both Europe and the UK would be open for business,” says Hemendra Ghaghada, a market analyst at Emirates FX. For listings, the international arena is also expected to be a key battleground for the exchange. DIFX officials have talked of tapping into the economic boom in India by luring companies from the sub-continent, although other exchanges in Europe and Asia have the same idea and Indian companies are likely to adopt “a wait-and-watch policy”, says A. Rajagopal, an analyst at Kotak Mahindra Capital in Mumbai. The market is also already courting large firms in Europe, Japan, China and Malaysia, says Dr. Sulaiman, and has opened talks with some 200 companies in all. For multinationals, the option is there to have secondary listings to those in their home markets, he adds. “There are top companies from Europe talking to the exchange and some don’t even have operations in the region. They want to diversify their investor base,” he says. In attempting to lure large numbers of international companies, however, DIFX will have to succeed where other exchanges in the region have failed. Dubai will have to contend with the Gulf’s reputation for poor regulation when it comes to compete with major financial centres abroad. Dr. Sulaiman is therefore keen to point out how DIFX will differ from its regional counterparts, including the emirate’s other two stock markets, where only local companies can float and restrictions are placed on foreign buying and membership. He also doesn’t rule out the launch of a supplementary exchange in DIFC, governed by its rules, to target the smaller, locally-based companies the existing markets mainly attract. “DFM is a local market. Some companies will always go to DFM, but companies that aspire to become regional and international players will go to DIFX. That’s how we look at it. You might have some companies in both. Family businesses will also be interested because of the challenges they face on DFM, such as having to issue over 50% of their shares, while DIFX offers that opportunity with only 25%. They don’t want to lose control overnight,” he adds. The strength of its regulations are another area DIFX has been keen to distinguish itself from regional stock markets. DIFX borrows characteristics from established exchanges abroad, quoting shares in US dollars and existing solely as a computer network without a trading floor. Like the world’s biggest exchanges, it also promises transparency and strict regulation, in contrast to local bourses, which are dominated by a few investors who appear to have access to price-sensitive information long before it trickles into the public domain. A timely reminder of the need for more rigorous trading rules came just a few weeks before DIFX’s launch, when over US$2 billion-worth of trading on DFM was wiped out because of the manipulation of Dubai Islamic Bank shares by a group of investors in the exchange. “I think controls at DIFX will not only be more sophisticated than those in place at DFM, but better than those in the region as a whole,” says Dr. Habib Al Mulla, the man implementing the regulatory laws at DIFX. Dr. Sulaiman is also eager to point out that worries over the transparency of other regional stock markets and the rules they are governed by were one of the main reasons why DIFX was set up. He talks of a “spill over” effect on other regional bourses, persuading them to tighten up their rules. Although “a lot of things” would have to change on regional exchanges for them to be regulated at the same level, he ultimately aims to develop a network connecting them, with DIFX as its central hub. “We do have concerns about the local market,” he says. “It’s always in the back of our minds. One of the reasons we started was because there were concerns — not just in Dubai, but in the region in general — and we wanted to create a well-regulated environment. In recent months, the closer DIFX came there more announcements we heard about improvement in regulations and transparency. The message is getting through. Eventually we will link the regional exchanges and have world class exchanges in this part of the world. They will have to make changes and if they do that why not link them in the future?” he adds. Unfortunately, DIFX itself has not been totally immune from questions over its corporate governance. Last year, the chairman and chief executive of the Dubai Financial Services Authority (DFSA), the exchange’s regulator, were sacked, raising questions about practices in the centre. Philip Thorpe, the chief executive, then went on to join Qatar’s upcoming financial centre (QFC), which is expected to rival DIFX and Bahrain’s planned Financial Harbour for the mantle of the Gulf’s leading exchange. A week before DIFX went live, an official on its board also accused two members of its top management of violating best practice by not disclosing their involvement in a private financial consultancy. But perhaps a more pertinent warning about the weaknesses of regional stock markets came even closer to DIFX’s launch — when tens of thousands of Saudi investors crossed the border to the UAE last week in a rush to participate in Dana Gas’s IPO in Abu Dhabi. Crowds of investors clashed with police when banks could not accommodate demand for the shares — a sign of the share-buying stampede which has led recent IPOs in Gulf states to rocket to absurd values. Earlier this year, Japanese broking giant Nomura released a report entitled The Great Arabian Bubble, which pointed to a disconnect between reality and the worth of companies on GCC stock markets, particularly those in the UAE and Saudi Arabia. Saudi Telecom’s market capitalisation of over US$70 billion, for example, makes it four times as large as America’s AT&T and twice as big as Britain’s BT. This has clearly caused DIFX some concern. “If we launched the market with an exciting IPO on day one, we’d be inviting the sort of frenzied activity that takes place in this part of the world during those events,” says its chairman Lynton Jones. “We don’t want that. We want to behave responsibly and make sure the whole thing works,” he adds. For Dr. Sulaiman, also, the stronger framework offered by DIFX will mean greater stability in the stock markets, and the economy as a whole. “We always worry about the average investor in the region,” he says. “You have to look at the culture of investment in the region. More sophisticated investors — wealthy families and big corporations — are used to investment tools and approaches and have advisers all over the world helping them. We worry about the middle class and the newer investors getting into the market and we want to create an environment that caters for them. We want to tap into the average individuals in the region and create wealth for them — that’s part of the social impact we want to create. If we create enough for the younger generation we will have more peace in the Middle East and wealth in the Middle East.” ||**||

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