In October of last year the Dubai Financial Services Authority (“DFSA”) released Consultation Paper No. 78 proposing significant changes to the way a listing application with NASDAQ Dubai is presented and approved and to the requirements which will be imposed upon a company seeking to list. The Consultation Paper contained a substantive set of Listing Rules which are proposed to be administered by the DFSA (the “New Rules”).
NASDAQ Dubai subsequently released its draft Admission and Disclosure Standards (the “ADSs”) for public consultation and the consultation period for the ADSs closed on 5 March.
We made a substantive submission on the New Rules and the ADSs and the purpose of this update is to discuss the impact the New Rules and the ADSs will have on the NASDAQ Dubai market going forward.
We expect the DFSA to publish the final New Rules sometime early in the second quarter of this year and hopefully NASDAQ Dubai’s ADSs will be finalised and in force by mid-way through the year. Only once both sets of rules have been published in final form will the market be certain of exactly what the regulatory regime will look like.
The approach taken by the regulators
Prior to the New Rules being released for comment we were hopeful that the DFSA would take advantage of the significant amount of work NASDAQ Dubai had undertaken over the previous 18 months in formulating its last draft listing rules, which the public commented on in mid 2011. The substantive feedback from market participants which NASDAQ Dubai received during that process clearly identified what the market would like to see in the listing rules and this intelligence is undoubtedly very valuable.
Unfortunately, in looking at the New Rules it does not seem that all of the work previously undertaken by NASDAQ Dubai has been carefully considered by the DFSA as the New Rules do contain some areas where the market would have liked to see regulation but where there is no coverage in the New Rules.
In considering the ADSs ideally any gaps in the New Rules would have been covered by NASDAQ Dubai, but while the ADSs do cover some of the obvious omissions from the New Rules, there is still an absence of regulation in certain key areas when the two sets of rules are considered in their entirety.
NASDAQ Dubai has chosen to keep its regulations reasonably light and not to cover provisions which are already covered by the DFSA in the New Rules unless there is a compelling reason to layer stricter regulations on top of what the DFSA has included in the New Rules. Many of the changes reflected in the ADSs appear to have been added in a bid to ensure that liquidity of securities traded on NASDAQ Dubai is maximised and this is a very positive move.
Rationale for the changes and their effect on the listing process
On 1 October last year there was a shift of the Listing Authority function from NASDAQ Dubai to the DFSA as its regulator. The changes to the regulations of the DFSA and of NASDAQ Dubai have been made to formalise the rules which will apply to issuers and potential issuers under the new Listing Authority regime.
The New Rules make it clear that applications for admission to the Official List of Securities will be made to the DFSA and applications for admission to trading will be made to the Authorised Market Institution (“AMI”) upon which the issuer wishes to have the securities quoted. The DFSA must first give conditional approval for the applicant to be admitted to the Official List, after which the applicant must seek admission to trading from an AMI based in the DIFC free zone. Only once admission to trading is granted will the relevant securities be admitted to the DFSA Official List.
The proposed amendments leave the system open for there to be multiple stock exchanges operating in the DIFC in the future, although at present NASDAQ Dubai is the only such exchange. Going forward the DFSA will be able to maintain the Official List of Securities for all DIFC based exchanges but the securities on that list may be traded on different markets.
While the market here is very different from the UK market there are undeniably a large number of market participants based here who are from the UK and are familiar with the UK Financial Services Authority (“FSA”) listing model. Over the past few years many areas of the DIFC laws and regulations have been moving closer to the equivalent laws and regulations in the UK. There are indications from the DFSA that the change to the listing regime here may have come about in a bid to align the listing process with the FSA model as there is a belief that this will be more palatable for market participants here.
While the intention may have been to adopt a model similar to that used by the FSA, the New Rules do not go far enough to rule out NASDAQ Dubai imposing some reasonably heavy additional regulation of its own given that the DFSA has taken a reasonably light touch approach. Issuers are likely to be left in the position that they need to comply with the DFSA’s New Rules and also to ensure compliance with a reasonably substantive set of NASDAQ Dubai ADSs on an ongoing basis. NASDAQ Dubai has chosen to add a layer of regulation in some areas of the ADSs but has resisted doing so in others. However, perhaps the better approach to be taken by NASDAQ Dubai would be for it to regulate any areas not sufficiently covered in the DFSA’s New Rules.
The historical listing process involved NASDAQ Dubai considering listing applications and reverting to the DFSA only near the end of the process. This two tiered process has been subject to some criticism as it left applicants uncertain as to whether their application would be successful until the very end. However, The DFSA has not fully addressed this criticism as the process following implementation of the New Rules and the ADSs will still be a two step process involving both the DFSA and NASDAQ Dubai since admission to the Official List and admission to trading both need to be achieved for an applicant to successfully trade its securities on NASDAQ Dubai.
In attempting to simplify the listing application process, the market may end up with a more complicated two step ongoing regulation regime with two regulators being involved post listing.
Effect on the ongoing obligations of issuers
Under the New Rules the DFSA will take responsibility for monitoring many of the ongoing obligations of an issuer. The DFSA will monitor for continuous disclosure of price sensitive information and will liaise with issuers regularly in respect of their company announcements. In addition, the DFSA will take responsibility for the timely filing of annual financial statements and NASDAQ Dubai will no longer have a role in these filings.
While it is positive that the DFSA will take a primary role in monitoring continuous disclosure, it is crucial that NASDAQ Dubai remains alert to the announcements which are being released by issuers as it also must play a role in keeping its market informed. It is possible to foresee a reputational issue for NASDAQ Dubai if an issuer is allowed to continue trading in its securities when the market has not been informed about a material matter. NASDAQ Dubai is a DFSA regulated entity and, as such, it is required by regulation to take responsibility for it own market and its reputation.
Hopefully the DFSA will pick up most breaches by issuers of the continuous disclosure rules. However, in reality such breaches are not always easy to identify and NASDAQ Dubai will need to stay vigilant if it is to itself be confident that securities traded on its market are only trading on a fully informed basis. To that extent, the shift of the burden of monitoring continuous disclosure to the DFSA does not relieve NASDAQ Dubai of its obligations to also monitor company announcements, despite what the New Rules and ADSs suggest. Issuers should be prepared to discuss their announcement decisions with either or both regulators.
The DFSA is reserving the right to control decisions in respect of suspension and removal of securities from trading even though, broadly speaking, NASDAQ Dubai is supposedly given responsibility for any issues related to the trading of securities. This is one area of the new regime which is inconsistent. Clearly NASDAQ Dubai as the AMI should absolutely be given some powers to make such decisions for itself since there will be serious issues to its reputation as an exchange if securities are permitted to trade in an erratic way as a result of a potential breach by the issuer of the New Rules or the ADSs. It remains to be seen how control over suspensions and delistings is split between the regulators but any suggestion that NASDAQ Dubai can not retain some control over these decisions is unlikely to have the support of the market since most such decisions go to trading (which is regulated by the AMI) and not to admission to the Official List, (which is regulated by the DFSA). Some changes will need to be made to the New Rules and the ADSs if the monitoring of the market is to be correctly split between the DFSA and NASDAQ Dubai.
Other than as discussed above, in general the DFSA has made a very good attempt to move all matters relevant to the ongoing listing of the issuer to its jurisdiction, while leaving matters related to trading within the jurisdiction of NASDAQ Dubai. The New Rules, for the most part, get this split correct with only a few areas seeming to sit with the wrong regulator, such as where the New Rules make it the DFSA’s concern how the securities will be settled, although this issue may be corrected when the New Rules are finally published.
Additional amendments of note
Potential issuers will be interested to see that the $50 million minimum market capitalisation requirement which has previously been set by NASDAQ Dubai in order to be eligible to list, will be decreased significantly to $10 million. This move alone will open up the market to smaller companies seeking to list on NASDAQ Dubai, although there is room for NASDAQ Dubai to impose additional market capitalisation thresholds higher than the $10 million or indeed any additional trading criteria where an issuer wishes to trade on its market.
The ADSs fall short of imposing additional criteria in respect of eligibility to trade (other than in respect of depositary receipts which are specifically dealt with) but it is suggested that some such criteria should be added as not all companies with a market capitalisation of just $10 million will be suitable for listing. As the ADSs stand the profits test and assets test which were suggested by NASDAQ Dubai in the last draft of the NASDAQ Dubai listing rules have disappeared, but consideration should be given to these rules, or other similar criteria, being added back specifically to apply to companies seeking admission to trading that have low market capitalisation only.
The New Rules do not contain any process whereby an issuer which is already listed on a major international market and is seeking a secondary listing on NASDAQ Dubai can apply a fast track process and dispense with the need for a full prospectus where no new capital is being raised. This will make it very unattractive for issuers seeking a secondary listing here which is not in conjunction with their primary listing application or a capital raising.
We were surprised to see that the New Rules, while keeping the free float requirement at a minimum of 25%, do not require any minimum shareholder spread in order to be admitted to the Official List. However, fortunately NASDAQ Dubai has added a shareholder spread requirement as a requirement to trade on its market. Issuers will need to prove to NASDAQ Dubai that they have either a minimum of 250 shareholders each with a holding of at least $2,000 worth of securities (the number of shareholders required is indicated in guidance to the ADSs) or that they have appointed one or more market makers. We applaud NASDAQ Dubai for this addition to the ADSs since limited liquidity has been a previous criticism of the market and measures were definitely required to improve trading volumes. This concept was supported by the market when the draft NASDAQ Dubai listing rules were commented on midway through last year.
Market participants may be interested to see that the DFSA is not proposing any compulsory retail offering component for an IPO and neither is NASDAQ Dubai. The market has previously indicated that the NASDAQ Dubai market could attract more retail liquidity if it forced issuers to ensure some retail investors receive shares in each IPO. In the past retail offerings for NASDAQ Dubai listings have not been common place. While some may say a rule requiring a retail offering could deter issuers from listing in the DIFC, there appeared to be some market support for the concept when NASDAQ Dubai consulted on its draft listing rules in 2011. However, the new shareholder spread or market maker requirements (see above) are likely to be sufficient to generate the additional retail liquidity.
Under the New Rules there will be a requirement for all issuers to notify the market at least 14 days before any record date for any corporate action. This change is positive and one that was proposed to be included in the last draft of the NASDAQ Dubai listing rules as the major international markets all have similar provisions to give the market enough time to prepare for the effect of any upcoming corporate action. In addition to this requirement, NASDAQ Dubai has made it clear in the ADSs that where there is more than one consecutive corporate action proposed by an issuer the record date in respect of the second corporate action must not be earlier than when the share register has already been updated in respect of the earlier corporate action. However, there may be two record dates for two corporate actions on the same date where the corporate actions are to happen together. It would seem prudent for NASDAQ Dubai to consider requiring record dates for separate corporate actions to be separated by a reasonable timeframe to allow security holders to decide whether they wish to participate in one or both corporate actions.
In terms of the financial reporting requirements, the DFSA is surprisingly not requiring issuers to submit recent financial statements at the time they apply to list. Audited financial statements for the past three financial years are required but NASDAQ Dubai has had a rule whereby the last set of financial statements must be recent to minimise the risk that the financial status of the company has been materially impacted by events since the last set of financial statements. NASDAQ Dubai has not chosen to pick up this rule in the ADSs.
However, in a positive move for issuers the DFSA has included guidance in its proposed draft Listing Rules whereby it is giving strong indications that an issuer who has not been in existence for 3 years and is, therefore, unable to provide financial statements for a full three financial years, may be given a waiver from this requirement. The market will receive this guidance note positively since there has been pressure to allow newer companies to list for some time.
The addition of quarterly reporting by issuers which has been suggested in the past by NASDAQ Dubai has not found its way into the New Rules or the ADSs.
With the addition of a working capital report requirement for issuers under the New Rules and a suggestion that the DFSA may add some additional listing fees over and above the trading fees already charged by NASDAQ Dubai, the market should be prepared for the cost of listing to increase. Working capital reports, while important and compulsory in many jurisdictions, are not cheap to obtain and the DFSA and NASDAQ Dubai will need to co-ordinate very carefully re any fees levied to ensure that the fees for a NASDAQ Dubai listing do not become so high as to make this an unattractive option for companies looking to raise funds in a market where there are other options.
Interestingly, the New Rules will require issuers to report to the DFSA whenever the free float minimum is breached. The suggestion is that the moment the number of shares of an issuer in public hands drops below 25% of the total market capitalisation, the regulator should be informed. This sounds like a good idea but in practice will be extremely difficult for issuers to comply with given that as a result of the broad definition of shares not held “in public hands” and as a result of NASDAQ Dubai’s omnibus shareholding structure, issuers can not know at any point in time who each and every beneficial shareholder is and whether a particular share is or is not deemed to be held “in public hands” . It will be interesting to see how the DFSA enforces this rule.
Areas which are not covered
The market will have noted some obvious areas which do not appear to be covered by the New Rules but which would be regulated in the international markets as a matter of course. Perhaps NASDAQ Dubai will choose to pick up the regulation of some of these areas as some are crucial for an orderly and well regulated market.
For example, there are no separate rules for the listing of Real Estate Investment Trusts (“REITs”) or of Exchange Traded Funds. The standard listing rules which cover shares and basic debt instruments in the New Rules will not be applicable for more unusual fund products which are becoming more common. It is surprising that the DFSA has not chosen to target, in particular, REITs to attract regional ones to the DIFC, since many of the markets in the GCC do not permit the listing of such products. NASDAQ Dubai has not included any such rules in the ADSs either.
We are aware of a number of REITs which are considering a listing on NASDAQ Dubai in the coming 24 to 48 months and by not including any specific rules which openly invite such products to the DIFC’s markets, it is possible these products may choose to list elsewhere. It would not be a prudent approach for the regulators to simply assume any issuers interested in listing a REIT on NASDAQ Dubai will approach the DFSA and NASDAQ Dubai for a series of waivers to make such a listing possible.
In addition, there are no rules in the New Rules regulating the way rights issues and bonus issues should be conducted or the way share splits and share consolidations should be conducted and the rules proposed in relation to share repurchases are very light touch. To NASDAQ Dubai’s credit it has provided a full set of timetables in respect of many of these corporate actions in the ADSs and it has included some very “broad brush” on-market share repurchase rules. However, more is needed to properly regulate these matters. Hopefully in time there will be robust international standard regulation of such corporate actions to ensure that the DIFC retains its reputation as an international style regulator.
When you consider the New Rules and the ADSs side by side it is obvious that there is an absence of regulation in some areas but as a first attempt to completely overhaul the regulatory structure of the DIFC stock markets, both sets of rules are a step in the right direction.
The main rationale for the changes (despite the publically stated rationale) may be to make way for additional markets to operate in the DIFC and it is difficult to see how there is an argument for any more stock exchanges in the UAE (in the DIFC or elsewhere) given there are already three here.
The system which has operated up until late last year with the Listing Authority function maintained by NASDAQ Dubai and the DFSA regulating NASDAQ Dubai itself but not directly regulating its issuers other than in respect of a few areas, appeared to be working so it is not easy to see a compelling reason for the shift in the regime. However, if there is some merit in mirroring the UK model then that model needs to be mirrored closely and in this case the regulators seem to be moving to a regulatory environment like no other in the developed world since the New Rules and the ADSs partially adopt a UK model and partially leave the model as it was. The most significant oversights appear to be the omission of robust regulations in respect of corporate actions; allowing companies with a $10 million market capitalisation to list with only a regulatory discretion standing between them and approval to list; and not catering for more unusual or sophisticated products in the rules.
NASDAQ Dubai’s focus on liquidity is positive but there will still be a two tiered listing process involving both NASDAQ Dubai and the DFSA so one of the problems the DFSA identified as the rationale for the change is not remedied.
We are awaiting the final versions of both the New Rules and the ADSs to see what, if anything, has changed from the consultation drafts discussed above.