A timely intervention on ‘greenfield’ IPOs

UAE’s stock market authority has significantly raised the norms for such listings

25/02/2015 05:59 AST

Greenfield IPOs were a distinct feature of the UAE capital markets’ landscape during 2014. In total, there were seven UAE-related IPOs last year: two were London listings, one was on Nasdaq Dubai, and the remaining four were on Dubai Financial Market (DFM).

Three of the listings on DFM were considered greenfield — Marka, Dubai Parks and Amanat — as they did not have any historical performance for investors to take into consideration, or they were not asset-backed structures.

Despite the fact that all greenfield IPOs listed successfully, and oversubscribed multiple times, the share prices of both Dubai Parks and Amanat have since lost value and are now trading below par value. The decline could be because newly established companies do not have historical results, or because they are not backed by any hard assets. Either way, UAE’s Securities and Commodities Authority (SCA) has decided to step in and impose counteractive measures.

In an attempt to directly address this situation, and to mitigate investors concerns, the SCA has issued new rules to govern offerings, specifically from newly established public joint stock companies. SCA’s ambitions are twofold: it wants to protect the interests of retail (individual) investors from the risks associated with greenfield IPO investments; secondly, it wants to sustain positive sentiment surrounding the UAE’s major stock exchanges.

One of SCA’s main considerations was around who should be eligible to invest in greenfield IPOs. The regulator decided that subscriptions in shares of newly established companies should be geared towards more qualified institutional investors, banks and investment funds, as opposed to the generally less informed retail investor.

SCA’s intent with these new rules is clear: it would like greenfield IPOs to be firmly in the domain of the professional, institutional investor, rather than proving attractive to the average individual who likes to invest in equities. As such, the subscription limit of no less than Dh5 million has been explored as a vehicle to limit retail involvement.

One of SCA’s more striking changes is the establishment of a ‘Class B’ trading screen, to trade the newly established public joint companies. Public companies with financial and operational trackrecords will be traded on a ‘Class A’ screen.

It is not yet clear whether the shares of the existing newly established companies — such as Amanat, Marka and Dubai Parks — will be shifted to the Class B trading screen, but the intention to protect investors is clear. However, creating two classes of trading screens could create an additional liquidity issue, which could negatively impact the success of greenfield IPOs, especially existing ones.

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