22/08/2016 05:21 AST
Driven by new investor-friendly regulations, capital markets in the GCC and the rest of the Middle East and North Africa region are poised to attract overseas investments on the back of a strong rebound in initial public offering (IPO) activities once the economic environment stabilises, market experts said.
"Regulators in the Mena markets continue to implement new regulation to strengthen the capital markets and attract investment. Once the economic environment stabilises and general market sentiment improves, the backlog of IPO candidates will begin to emerge," analysts at EY said.
While the UAE has circulated new draft IPO regulations for feedback from stakeholders, Saudi Arabia's Capital Market Authority has announced a number of major changes such as relaxing requirements for foreign institutional investors, introducing new trading options, the relaxation of reporting deadlines and the implementation of a new settlement process as the country works toward inclusion on the MSCI Emerging market index.
Under the new Commercial Companies law, businesses in the UAE will be able to float as little as 30 per cent of their shares compared to the current level of 55 per cent, a requirement that had been perceived as making the UAE unattractive for an IPO.
The law aims to relax rules covering stock market flotations and seeks to attract more investment by moving corporate regulation closer to international standards. Analysts believe that as the new UAE legislation allows companies to float a minimum of 30 per cent of their equity, an increased number of company owners will be encouraged to go for IPOs. Also under the new law, for the first time, company owners will be able to carry out floats by selling existing shares, rather than by issuing new equity. Flotation prices will be allowed to be set by book-building, or obtaining indicative bids from fund managers, rather than through a fixed-price evaluation method.
Phil Gandier, Mena transaction advisory services leader at EY, said Saudi Arabia and Egypt are the key markets that are likely to see IPO activity in Mena given the new trends.
"Uncertainty in global capital markets, driven by events such as the vote by the UK to exit the European Union and fluctuating oil prices, may result in future uncertainty in the Mena capital markets and the potential deferral of IPOs in the Mena region," said Gandier.
Already, the first six months witnessed reduced levels of IPO activities. The Mena region witnessed six IPOs in the second quarter of 2016, collectively raising $397.5 million, a 40 per cent decrease in volume and 81 per cent decrease in value compared to the second quarter of 2015.
"While uncertainties with oil prices remain and regional geopolitics continue to play out, we would expect to see continued volatility in regional equity markets. Valuations tend to fluctuate significantly in times of uncertainty and investors tend to stay out of equities. Any significant IPO activity we see in the short to medium term is, therefore, likely to be government-sponsored," said Steve Drake, head of PwC's capital markets and accounting advisory services team in PwC Middle East.
In the GCC, IPO performance in the second quarter of 2016 remained low as oil prices, global economic volatility, regional political unrest and Brexit continued to bring uncertainty to markets.
According to PwC, in Q2 2016, compared to Q2 2015, the number of IPOs diminished by half and the total proceeds raised were approximately four times less. In terms of IPO performance compared to Q1 2016, although the number of IPOs in Q2 doubled, the total money raised of $274 million from the two offerings fell by 42 per cent.
Khaleej Times
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