UAE market regulator aims to give everyone a fair share

The SCA’s new rules on share offerings are robust, address international investors’ concerns and are a milestone in modernising the legal environment of equity capital markets. They could provide a shot in the arm for the IPO market.

The Securities and Commodities Authority (SCA) has finally unleashed the eagerly awaited new rules on share offerings and IPOs.

The new rules were under consideration for several months and are a milestone towards fundamentally modernising and liberalising the legal environment of the UAE’s equity capital markets. They include a range of incremental reforms and address the two most crucial concerns of international institutional investors: the issuer’s ability to have a discretionary allocation power; and delivery vs payment.

The new IPO rules are comprehensive and conclusive, covering a range of related subjects, including greenfield IPOs, rights issues, underwriting and bookbuilding and strategic investment.

The new rules were approved last month but will take effect only upon publication in the official gazette, which is expected in either this month’s or next month’s editions.

The overall effect is that qualified institutional investors will no longer be subject to a pro rata allocation mechanism anymore and they will not need to prefund their investment applications. Funding will instead be made on allocation of shares. In recent IPOs, pro rata allocation and prefunding requirements had always been two critical areas that were not only subject to long discussions between the SCA and an offering’s global coordinators, but also a marathon for law firms to run, trying to secure appropriate exemptions.

With respect to greenfield IPOs and despite the successful IPOs of Maraka PJSC and Amanat Holding PJSC in 2014, the SCA wanted to mitigate investor concerns and has included a set of rules specifically to govern newly established public joint stock companies. The idea is that the dynamics of a greenfield IPO are will be more formally put under the regulatory microscope. Ultimately, the SCA’s ambitions are two-fold: it wants to protect the best interests of retail investors from the risks associated with investments in greenfield IPOs; and, it wants to sustain the generally positive performance and sentiment surrounding the UAE’s major stock exchanges.

One of the SCA’s main considerations was around who should actually be eligible to invest in greenfield IPOs. With this in mind, the regulator has decided that subscriptions in the shares of newly established companies should ideally be geared towards more qualified institutional investors, banks and investment funds, as opposed to the generally less-informed retail investor. Government-owned entities and institutions will also be allowed to subscribe. The subscription amount has been explored as a vehicle to limit retail involvement, by enforcing a minimum subscription amount of not less than five million dirhams.

As a point of interest, greenfield IPOs are also allowed to follow the bookbuilding pricing mechanism. The new rules are silent in relation to SCA’s previous set of rules which established a “Class B” trading screen, on which the shares of newly established public joint companies will be traded. It is not clear whether the same approach will still be followed.

As for rights issue rules, these are, more or less, a replication of the repealed set of rules issued by virtue of the Ministerial Decree No. 38 of 2013. However, the new rules seem to have abolished the two-year lock-up period imposed on founders in relation to their ability to transfer or sell their rights to subscribe for newly issue shares in capital increases. It will be fascinating to see SCA’s practical interpretation of this point.

Underwriting activity is also regulated by the new IPO rules. In general, the facilitators of underwriting could enable the IPO market to flourish and attract leading global financial institutions registered with the UAE Central Bank to act as underwriters and develop the UAE capital market.

Following all well-developed capital markets jurisdictions, SCA has issued a fresh set of rules that govern the bookbuilding process as a pricing methodology for IPOs. The new bookbuilding rules address the two crucial concepts of pro rata allocation and prefunding requirements as explained earlier.

The new rules allow companies to increase their capital and allot the newly issued shares to a strategic investor without applying existing shareholders’ pre-emption rights. However, for this to happen, the strategic investor must carry out similar or complementary activities to the company and must have issued at least two financial statements.

There are other new concepts addressed under the IPO rules, such as employee share option schemes, which provide a higher degree of flexibility to public company boards to implement a scheme, so long as it does not exceed 10 per cent of the company’s issued share capital. Also, new rules are now in place setting out the technical requirements and obligations of listing consultants and financial advisers. This is in addition to a new separate section addressing electronic subscription.

These are clearly a substantial and important set of changes, so it will be fascinating to see how the market reacts to them. More generally, the next couple of months will be critical in determining whether these robust and relatively swiftly introduced new rules help to change the wait-and-see approach that many IPO candidates are taking.

Ahmed Ibrahim is partner and head of equity capital markets at Al Tamimi & Company.

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