LONDON, 25 October 2004 — Stock markets hover between the official and the unofficial ones. The intent is there to modernize and infrastructuralize, but the approach is piecemeal. The perception is that there is an absence of a holistic approach to policy making and plans and projects are revised almost on an on-going basis.
Whatever legislation and policies are in place are heavily skewed toward nationals first, and then GCC citizens.
Foreigners, for instance, can only invest in a limited way on the Tadawul Stock Exchange in Saudi Arabia through local mutual funds and not directly. This anomaly has disqualified Saudi Arabia from inclusion in Dow Jones-DIFC Arabia Titans 50 Index, which aspires to be the benchmark and basis for investible products in the Middle East region. Qatar recently announced that it is allowing foreigners to invest up to 25 percent in any particular stock quoted on the Doha Securities Market. Yet, the Gulf Cooperation Council (GCC) markets are currently experiencing a boom in primary public offerings through IPOs, fueled in turn by a liquidity boom thanks largely to the sharp rises in world oil prices over the last year.
Some fifteen IPOs in sectors ranging from telecoms, utilities, transport, insurance and banking, manufacturing, and retail are being planned over the next two months in the GCC to raise almost $10 billion to capitalize on a primary equity investment market boom reminiscent of the dotcom boom of the 1990s. The fact is that many Gulf investors and institutions burnt their fingers badly during the dotcom bubble, losing millions of dollars.
These include several IPOs planned for Saudi corporates including Al-Bilad Bank, the new Islamic bank approved in the Kingdom which plans to sell 50 percent of its shares to raise $400 million; NCCI (the National Company for Cooperative Insurance) similarly plans to sell 50 percent of its equity stake to raise $133 million; Maaden (Saudi Arabian Mining Company); The National Commercial Bank, which plans to sell a 30 percent stake for $4.8 billion — by far the largest offering; and Marafiq (the Power and Water Utilities Company for Jubail and Yanbu).
Global Investment House (GIH), the Kuwait-based investment bank, in its September 2004 GCC Market Review, stresses that in the traditionally cash and real-estate dominated GCC markets, equity culture and investments are fast growing, resulting in huge demand for investment products from retail as well as institutional investors. The booming stock markets in the GCC countries, since the last two-to-three years, have also paved the way for the government-owned companies and family-owned businesses to divest their stakes.
By the end of 2003, according to GIH, the GCC stock markets had 435 listed stocks with a total market capitalization of $302 billion. During the first six months of 2004, the number of listed stocks had risen to 458, with the total market capitalization rising by 23 percent to reach $374 billion.
The privatization process, though started, is at best limited in the offerings, and some times even politically expedient. Many corporates are still not adhering to stringent disclosure and transparency norms, which would make it easier for them to go public in future.
The single most spectacular IPO was the AED412.5 million one for Amlak Finance, the Islamic property financing subsidiary of the UAE’s Emaar Properties, in January 2004. The IPO was oversubscribed 33 times and was perhaps more to do with the timing; the lack of competition in the property finance market; and the fact that Amlak announced that it was converting into a dedicated Islamic property finance company.
In contrast, the IPO by Kuwait’s The International Investor (TII) in 2003 to raise funds to part finance its proposed merger with the AlBaraka Banking Group, which subsequently fell through, had effectively to be rescinded. The two parties have subsequently reached an amicable agreement.
In further contrast, the May IPO for Kuwait’s second Islamic bank, Bubiyan Bank, to raise $250 million, turned out almost to be an embarrassing disaster. The Kuwait Investment Authority (KIA) owns the largest stake at 20 percent and the Kuwait Public Investment Fund with 4 percent. The government was keen that no one institution should dominate the equity of the bank. As such the IPO share allocation for the remaining 76 percent of the equity was severely restricted. With the result that none of the larger shareholders reached the quorum of shares which would qualify them to have a seat on the bank’s board. As such, the quorum for the board representatives could not be realized. The KIA had to compromise and change the initial IPO regulations following talks with a group of larger investors to save the situation. In the end it was decided that the larger investors deposit a KD equivalent of funds to qualify for a seat on the board.
The emergence of Saudi Arabia’s capital market law; the Bahrain Financial Harbor; and the Dubai International Financial Center, which issued its first three operating licenses to Credit Suisse, Standard Chartered and Aon Insurance in October 2004; will offer opportunities to investors, but it will not be the listing and capital markets panacea as some officials, bankers and analysts tend to suggest. Such entities have to earn track records and reputations. No amount of in-sourcing expertise and throwing money at projects can replace these.