The eagerly awaited proposed new and improved version of NASDAQ Dubai’s listing rules was released for public consultation on 18 January 2011 published under Consultation Paper No.1 of 2011 (the CP). The CP is publicly available on the NASDAQ Dubai website (www.nasdaqdubai.com) and is open for public review and comment for two months ending 17 March 2011.
This Client Alert provides an overview of the key provisions contained in the proposed new listing rules and details on how they differ from the existing listing rules together with some of the potential practical and commercial effects of the proposed changes. This is a summary only of the key proposed provisions but there is considerable detail in the CP and so market participants are encouraged to review the CP and the proposed rules in their entirety.
The Proposed Rules: A Whole New Look
The proposed listing rules are a complete redraft of the 8 parts that constitute the existing listing rules which are now proposed to be organised into 10 chapters.
Chapter 1 sets out a new set of general principles that underpin the proposed listing rules which should be used to assist in interpreting the rules and can be summarised as flexibility, liquidity and transparency. Similar to the UK City Code on Takeover and Mergers, their spirit should be observed as well as their letter. Key general principles for NASDAQ Dubai and issuers include attracting high-quality issuers, promoting liquidity and creating and maintaining a genuine investor interest in listed securities.
The eligibility for admission requirements have been clarified and made more prescriptive for different types of securities and issuers. There is flexibility for issuers to “mix and match” the requirements. Chapter 2 provides for general admission rules for all issuers including the documents required for listing (namely a prospectus) and specific requirements for financial statements, corporate governance and a lead manager regime. Chapter 3 sets out the eligibility requirements for specific types of securities: equity, debt, asset backed, mortgage backed, collective investment funds, ETFs, REITS, structured products and Shari’ahcompliant securities. There are also specific provisions proposed for issuers in the mining industry sector.
Chapters 4 and 5 set out general ongoing obligations post-listing and security specific obligations respectively. Again, there has been a willingness to address the concerns of specific industry sector issuers with, for example, detailed obligations for mining and oil and gas issuers.
Chapter 6 sets out proposed express provisions for corporate actions such as share repurchase programmes and tender offers and requirements for preference shares.
Chapter 7 sets out the regulatory powers of NASDAQ Dubai and is particularly useful in bringing together certain listing rules that are scattered throughout the exsting rules. There is the proposal of a new concept of a trading halt which can be requested by the issuer for up to a maximum of two Business Days. This enables an issuer to resort to a more moderate measure compared to a suspension. There is also clarification of the ability to suspend trading both at the behest of NASDAQ Dubai and the issuer.
Chapters 8 sets out interpretation and definitions; Chapter 9 constitutes the appendices, forms and timetables; and a new concept of Guidance Notes has been proposed.
In summary, the new listing rules set out a much clearer framework for listing on NASDAQ Dubai. Many concepts are still the same but they have been organised in a more orderly fashion and with considerable improvement in areas such as the regulatory powers of NASDAQ Dubai where various elements that are spread throughout the existing listing rules have been consolidated into one, more user-friendly, chapter.
New Concepts: What’s New?
All primary listings on NASDAQ Dubai will require a prospectus. This confirms what has effectively been market practice: offering circulars have been prepared up to prospectus standards even though primary listings on NASDAQ Dubai so far have been exempt offers which, strictly speaking, were not required to comply with all of the prospectus contents requirements in the Dubai Financial Services Authority’s (DFSA) Offered Securities Rules (OSRs) but in practice were adhered to by market participants. Ensuring that all offering circulars are prepared to prospectus standards will be reassuring to retail investors and also the regulators in jurisdictions into which retail offers may be made. It remains to be seen, but the Emirates Securities and Commodities Authority (ESCA) may look more favourably on retail offers in the United Arab Emirates by NASDAQ Dubai listed issuers if a full prospectus is a basic requirement.
It is proposed that the DFSA will be involved at the outset of the prospectus approval process, doing away with the no objection principle which under the existing listing rules comes at the end of the application process and caused uncertainty with issuers due to the fact the listing process could have progressed materially only to be blocked at the end of the process. There will be a two-track approval process whereby NASDAQ Dubai will review the document from the perspective of complying with the listing rules and the DFSA will review the document in order to comply with the Markets Law and the OSRs.
Issuers wishing to undertake a secondary listing will be required to have 100 shareholders each holding a minimum of US$2,000 in value of shares that are listed on NASDAQ Dubai. This is clearly intended to encourage liquidity and avoid “boilerplate” listings. The 100 shareholder requirement is not a specific ongoing obligation but issuers with a secondary listing must comply with the more general requirement of maintaining genuine investor interest. There is no restriction on the identity of the primary listing (previously the primary listing needed to be included in the list maintained by the World Federation of Exchanges). In practice, NASDAQ Dubai at the outset of the listing process is likely to focus on the quality of the issuer not the primary exchange.
Lead Manager vs. Sponsor Regime
NASDAQ Dubai has proposed to move from a sponsor regime to that of a lead manager regime. Financial advisers will need to apply to NASDAQ Dubai for approval of lead manager status. Approved sponsors under the existing regime would likely be approved on an expedited basis. Issuers now have the option (not requirement) of appointing an independent lead manager. NASDAQ Dubai is clearly promoting an issuer-led model. The question that arises is under what circumstances will lead managers be appointed? It is likely that NASDAQ Dubai and the DFSA will encourage the appointment of a lead manager on a case-by-case basis and it may be required under the sponsor regime of the OSRs at the behest of the DFSA.
It is proposed that issuers must satisfy one of thee key eligibility tests: the Profit Test, the Assets Test or the Market Capitalisation Test which have built in flexibility. For example, if an issuer has a market capitalisation of less than US$50 million then it can still list as long as (i) it has a market capitalisation of at least US$20 million; and (ii) the founder shareholders are “locked-in” from selling their shares for 12 months after admission to NASDAQ Dubai.
Significantly, issuers may be able to list without a three year trading track record (at the discretion of NASDAQ Dubai) if they are satisfying the US$20 million market capitalisation test or the assets test. There are also mandatory lock-ins for founder shareholders relying on either of these tests.
An issuer must demonstrate that it will have at least 400 shareholders holding US$2,000 of shares each or make a bona fide offer of at least 10 percent of the offering shares to retail with a facility for clawback in the event of retail under-subscription. This last element is similar to the requirements of the Autorité Des Marchés Financiers in France. The requirement for an ongoing 25 percent free float is maintained.
The proposed rules will require debt securities issuers to have an investment grade credit rating by an internationally recognised credit rating agency. Sub-investment grade issuers must have US$10 million of net tangible assets and a guarantor.
There are new specific provisions for Real Estate Investment Trusts, Exchange Traded Funds and Mining Issuers.
Continuing Obligations — Liquidity/Flexibility/Integrity
There are ongoing eligibility requirements including a 25 percent free float and new, more nebulous, concepts of maintaining genuine investor interest and sufficient business operations. There is a proposed provision for when NASDAQ Dubai considers there to be an uninformed market in the issuer’s securities. It may require the issuer to disclose the information needed to correct or prevent the uninformed market.
There are proposed provisions to allow an issuer to request a trading halt for a maximum of two Business Days. Issuers may still request a suspension of trading but trading halts are designed to be less onerous and easily implemented so as to assist market efficiency.
Quarterly Financial Reporting
Issuers are now required to report on a quarterly basis rather than a half yearly basis under the current listing rules.
Some Key Questions and Next Steps
- If NASDAQ Dubai issuers are required to offer a 10 percent retail tranche or have 400 shareholders, this will most likely require a UAE retail offer: will this necessitate a dual regulatory approval process with the DFSA and ESCA or will this be streamlined?
- Will there be equivalent ongoing guidance underpinning the proposed listing rules similar to the Committee of European Securities Regulators (CESR) guidance?
- When will lead managers be able to apply for approval as a Lead Manager under the Listing Rules? Financial institutions with live potential IPOs will need to be approved by the time the proposed listing rules go live if they are going to be able to act as a Lead Manager from day one of the new regime.
- Should specific provisions be provided for other industry sectors, for example, renewable energy issuers?
- Is the requirement for 400 shareholders too high or even feasible in the regional capital markets given the uncertainty of approval of retail offers by local regulators?
- Is 10 percent of the offering a realistic retail tranche?