Nasdaq Dubai plans to overhaul its listing rules in a bid to boost initial public offerings (IPOs) by family-owned entities, small businesses and regional companies.
All companies on the exchange will be required to prove there is "genuine" retail investor interest in the company before floating shares, Jeff Singer, the chief executive, said yesterday. Under the proposals, an IPO should reserve at least 10 per cent of the offer for individual retail investors, or have a minimum of 400 shareholders. Currently, a company can float 25 per cent on the exchange but it does not require any retail participation.
"It needs to be a genuine IPO. You can't come out to market with just 10 investors," Mr Singer said.
The exchange will also relax rules on small and medium-sized businesses and family-owned companies wanting to float shares.
A family firm will be able to float more than half of the company and still retain majority voting rights under the proposed rules.
Start-up companies, with less than three years in operation, will also be able to float, if they have more than US$10 million (Dh36.7m) in net assets. Previously a company needed to have been operating for at least three years before it launched an IPO.
The proposed rules will also allow companies with a market capitalisation as low as $20m to list, provided that pre-IPO shareholders do not sell their shares in the first year after the IPO.
"Investors will expect the price to be discounted to reflect illiquidity," said Paul Reynolds, the managing director and head of debt and equity advisory at Rothschild Middle East, adding that the risk associated with poor market conditions meant regional and international investors would expect a premium. "There may be a huge pipeline of privatisations, but only a few of these likely [small to medium] candidates should undertake an IPO," said Mr Reynolds
He said the smaller a business was, the more difficult it would be to attract investor interest because of the perceived limited returns associated with the company.
Listed firms, which include state-backed ports operator DP World and the contractor Depa, will also have to report results quarterly, rather than the current half-yearly updates.
The overhaul marks the first change to the exchange's rules since 2005.
The proposals are expected to come into force by the second quarter of this year after a two-month consultation period with the UAE's main market players, including the two other bourses - the Abu Dhabi Securities Exchange and the Dubai Financial Market General Index - and their regulator, the Securities and Commodities Authority.
But final approval will come from the Dubai Financial Services Authority (DFSA).
Mr Singer said the rule change would help in the bid to be included on MSCI's Emerging Market Index, although some market commentators are sceptical about the proposals.
"What happens if you can't attract that 10 per cent [of retail investors], which at the moment is not realistic," said an international banker, who did not want to be identified.
Offering trading in the dirham is a key requisite for encouraging local investors to trade on Nasdaq Dubai, the banker said. The exchange, which denominates all trading in dollars, has been in discussions with the DFSA for several months but no decision has been made to implement a change in currency.
Retail investors create the bulk of trading activity on UAE markets as they typically buy and sell shares more frequently than institutional investors who draw in long-term investment. But individual investor activity has been thin on the ground since the onset of the global financial crisis.
Last month the telecommunications operator, Axiom, was forced to scrap its IPO on Nasdaq Dubai because of illiquid market conditions. It was closed to retail investors. Traded value on the exchange rose 22 per cent to $1.31 billion last year, up from $1.07bn in 2009, but the volume of traded shares slipped 15 per cent last year, compared with the pervious year.