There are differences between the Abu Dhabi and the western IPOs. The first difference is that the western IPOs are accommodative to the foreign companies listing their initial public offering in their stock markets as compared to the Western countries for instance in the United states of America, twenty Chinese companies listed their shares for Initial Public Offering in the New York Stock exchange the Abu Dhabi exchange, there were no foreign firms which listed their shares for the Initial Public Offering. The stock markets are therefore intended to develop and create a positive development and businesses in the country even though they do not necessarily have positive business development. The following are some of the reasons which make the IPO process complicated for foreign companies in Abu Dhabi than in Western countries as the findings from the interviews indicate. The first one is the western countries are currently more accommodative to globalization and that they will accommodate foreign companies to their IPO process.
The other major difference between western stock markets and IPO listings is that the foreign capital markets have few restrictions than the Abu Dhabi stock market. This is per the feelings of sixty percent of those interviewed. They indicated that Abu Dhabi has more complex process than the western IPO listing process. This market is of critical importance mainly because its regulatory framework and procedures are complicated. For instance the Securities and Exchange Commission requires that a company applying to list its shares in the stock market for the first time to fill registration form only six months prior to the intended IPO listing date. On the Abu Dhabi, companies are required by the Abu Dhabi Securities and Commodities Authority to have filled in their application one year before their application for the IPO. The IPO process also requires that the company to have its schedules and information about the underwriters, the value of the company and the expected prices as well as reasons for changing the company from private to a public company. The Abu Dhabi Stock and securities commission also requires the company to develop its resources and to complicate its work and business procedures which will develop its work. The other factor of importance is that the company will also lead to the development of resources and create improvement of the stock markets (Krinsky & Rotenberg 2002).
The other stark difference is that the Western stock market has more speculative buyers than the Abu Dhabi stock market. Eighty percent interviewees indicated that most of the Abu Dhabi buyers are non speculative buyers as shown in the chart below.
The Abu Dhabi stock market is of importance mainly because the companies that operate in this stock market are companies which do have their own mechanisms of dealing with the business procedures. In the United States of America most of the participants in the IPO are the individual investors whereas in the Abu Dhabi IPO most of the participants as they corporate investors. This means that the investors in the United States of America are more speculative, they have to analyze the growth and future prospects of the company compared to the counterparts in Abu Dhabi. Data from Ernest and Young 2012 indicate that seventy eighty percent of US investors are speculative.
When the market is quite speculative, the value of the share diminishes or not reduces to lower levels. This is because the markets can predict the future of the company based on its level of disclosure of information. This makes it easier for companies with prospects for growth to find it easier to list in the western countries compared to the Abu Dhabi where the value of the share is determined by its assets and public trust. The chart below show that ninety percent of the interviewees indicated that physical property was more valuable than intellectual property.
The other factor is that Abu Dhabi IPO investors differ from those of Western countries in that those in western countries especially the United States of America do consider the intellectual property as an asset of the company which has monetary value. The western stock markets have listed successful IPO's for companies that have intellectual property based products as their major asset. Such companies include software companies such as Microsoft, Facebook, Google, LinkedIn, and Apple which are wealthy in holding key technological innovations as their intellectual property (Ernst and Young, 2012). The public investor invests in these companies not because of their physical assets but because of their profitability and future prospects as the company improves its capability to function and improve its activities.
The other finding is that there is difference between the IPO listing process in western countries and Abu Dhabi. According to sixty percent of those interviewed the process of taking a company public in Abu Dhabi is easier compared with taking a company public in the United States of America as shown below.
This is because even though the western countries have longer process. The registration process is quite extensive and some of the documents required in the registration of the company such as the Managements' Discussion and Analysis may take long to prepare. Other factors such as the Pro forma, quarterly and annually reports of the company which are not less than one hundred and thirty days old require a huge team to prepare other wise it may be prove hard to prepare such documents (Price Water House Coopers, 2012). The Abu Dhabi Securities Commission on the other hand requires only the financial reports of the company indicating its performance for the last three years. The other hindrance in the Western IPO process is that the Securities and Exchange Commission requires an explanation on how the proceeds of the Initial Public Offering will be put into use. The companies also have to submit the receipts and expenditure budget of how the proceeds of the IPO were used other than paying the underwriters. The table list shows a list of some of the documents in IPO registration in USA.
Table 2
Document required
No of days required for preparation
Quiet Period
6 months
Financial reports
124 working days
Managements Discussion and Analysis
20 working days
IPO Proceeds Budget
10 working days
Underwriters contract form
2 working days
This complicates it for some of the private companies because they have to show how they use their proceeds and on many instances the reasons behind the IPOs are for personal gain or just to refund the initial investors. However in the use and in Abu Dhabi in specific there are no such regulations that may force the companies to list how they will use the income derived from the sale of shares in the Initial Public Offering. This allows private companies to manage to list their companies to the public initially (Krinsky & Rotenberg 2002).
The other key finding is that there is difference between the United States of America regulations require that a company that wishes to trade in the stock market or to get into the IPO to present its business prospectus, business plan with a plan of not less than five years. This means companies that list in the NYSE or NASDAQ must be companies which have future outlook. The IPO is not for investors who just wish to recover their initial investment; rather the Securities and Exchange Commission sees it as an opportunity for the company to receive more funds to enable the company expands its operations. The case is different as the Emirates Securities and Commodities Authority looks for the performance of the company and uses it as a measure of whether the company will be profitable to the potential investors or not.
4.2 Case studies of IPO'S in the United States of America
The following are some of the IPO'S that have generated heat in the United States of America. The first one is that of public listing of Face book which is an internet based company and the shares of the company traded at a value $42 and the value has since appreciated. The company was listed on the stock exchange in the year 2012. Earlier on, the securities and exchanges commission required that a company to be listed in the stock market to have property value of over $200million (Forbes, 2010). However, the securities Act of 2002 changed this and stated that the value of a company can only be rightly estimated from the value of turnover that the company experiences in its operations. The shares price of the company stock therefore is its value rather than its actual physical properties (Securities and Exchanges Act, 2005). Based on this description of its turn over and revenues, Face book is valued at $10 billion although its actual physical properties may be of less than $100 million. However, it holds a key intellectual property which allows user and the public to advertise and communicate using this priority. This explains why the company won public approval and its share traded for such a high stock price in its IPO. The company followed the due IPO listing process although its properties did not meet the earlier bars of $ 400 million; it ranked high in the value of its intellectual property. This is a major development of the United States of America where it not only recognizes the physical capital and value but also the intellectual property. This may however complicate the accounting process as the PCAOB accounting standards were not accommodative to this type of properties. However, with amendment of its policies and guidelines, intellectual property is a key property and it has value and can be traded in the United States stock markets (Letcher, 2008).
The other publicly listed company in the United States of America is the Manchester United Inc which was listed in the Ney York stock exchange this year. The company also does not meet the criteria but it has social property which has a fan base of an estimated six hundred and fifty million fans. However there are issues which have cropped as a result of this listing regarding the strictness of the SEC and the NYSE regulatory framework. Dawson, 2011 argue that its books of accounts are authenticated and it is selling its shares in order to reduce its debts of over $5 billion (Forbes, 2011). Unlike Facebook and Yahoo whose shares ranks high in the NBYSE and in NASDAQ, Manchester united IPO was not as successful as the IPO's for the two companies. It is negotiable that both companies do not have physical properties s yet companies with physical properties like stadiums do not elicit investor confidence. This is because the US investors are critical and analytical and they were not influenced by the company's team ability to win and to arouse enthusiasm to their fan base. However for an internet based company, its prospects for the future is bright because internet is becoming important for business and society's coexistence. This explains why the public investors are optimistic investing in companies such as Facebook though they do not have real physical properties (Dawson, 2011).
Other than these emerging companies other companies follow the SEC guidelines and they in their IPO listing process. Other companies listed in the American IPO include Apple which had their stock listed in the American stock markets are the Chinese firms. The American stock markets are accommodative to international companies that wish to list their shares in the NYSE or in NASDAQ provided they meet the criterion stipulated by the securities and exchanges commission.
4.3 Case study of IPOs in Abu Dhabi
4.3.1 Cliq- Energy Company
After the completion of the Qualified Acquisition of being part of the SPAC, which is group that had oil agreements in the Middle East, Hibiscus ceased being a member earlier 2012. This was a big challenge to the company because it still had a mandate of raising extra capital as a way of attaining its objectives (Regional Economics 2012). It therefore had to look for other ways to fulfill its goals since its schedule of being traded in the field .of oil was until 2013. The members of SPAC have therefore to depend on other sources like the private equity groups or well off individuals for them to acquire their finances. Richard 2011 indicates that SPAC is a shell company that only relies on the operations of merging with other companies in the listing of IPO for it to go public to obtain its proceeds for the operation of the business. Companies that qualify to merge with a SPAC are required to complete a qualified acquisition within the first three years of operation or at times given a Qualified Acquisition failing where investors are entitled to receive 90% of the IPO proceeds (Regional Economics, 2012).
A company like Cliq is therefore required to raise over rm147 million as stipulated by the ADX for any SPAC Initial Public Offering in order to fulfill the requirements of the E&P sector. After this stage, the company will therefore be able to acquire oil and gas assets, which are under the category of 'Reserves and Contingent Resources' hence acquiring the cash flow earlier than those who had engaged in the earlier exploration stage. In this process, three classifications of shareholders operate in the ADX exchange market, the first category are the management team whose role is to incorporate the deal and the second category are the investors who first invested in the business before its time to go public. The last category comprises of those who invest in the business after its listing in the IPO. As per the analysis Litter 2000 explains that Cliq analysis shows that the management are entitled to own 20 percent of shares of the company at its initial stage of listing, 2.3 percent to be owned by the initial investors and 7.30 percent is allotted to the Initial Public Offering investors. Out the 72% shares that the company puts as security in the market, it is likely to raise an average approximately rm150 million to rm500million.
Investors of Cliq are therefore entitled to acquire a single free warrant for each subscription they make in Cliq even though the entry fee varies from .one investor to another depending on the category of shareholder they represent. The management team is allowed to purchase the Cliq shares at one sen per share while the initial investors purchase them at forty-five sen per share. The IPO investors are the ones to purchase the shares at the highest bid because they purchase them at 75 sen per share (Regional Economics, 2012). The big difference that is experience on the purchasing bids of the Cliq shares by the investors emanates from the discounts that are offered to the three categories of investors due to the varying forms of moratoriums. For the management team investors of SPAC, the shares and warrants they held before the company went public are not tradable in the exchange market until the term of Qualified Acquisition ends.
However, in the case of Cliq the regulations stipulate that the management team is given an extra opportunity that their shares and warrants are not tradable in the Abu Dhabi Exchange market until the completion of the three year of listing even if the QA period comes to an end. In the case of the initial investors, Cliq stipulates that the same rule that regulate the promoters or the management investors is applicable to them with an exception that they are given the freedom of trading their warrants in the exchange market at one's own will. The IPO investors are also not subjected to any moratorium like the other two categories of investors because with them, they are free to trade their shares and warrants with a condition that those warrants held by the management and initial investors are not exercised until their QA period ends.
In case the Qualified Acquisition period does not end within the stipulated time, that is the three years as per the Abu Dhabi Exchange regulations, the loss that the IPO investor can accrue is 10% since the other percentage is given back to them. The 10% that is deducted is to cater for the working capital that the company had used in its operations and for the registration fee; the company had paid when listing in the IPO. The initial investors are again entitled to an opportunity to sell their warrants in the market in order to earn their profits for them to be able to recover some of the costs they had incurred in the period they were operating in the business (Regional Economics, 2012). On the other hand, the management investors are exposed to risks of losing all their capital if they do not manage to compete the three years of the Qualified Acquisition term.
However, if the Qualified Analysis stipulated period is completed successfully by ensuring that the bulk of the IPO proceeds are spent, the investors are able to enjoy some of the benefits like sharing the risks equally as the SPAC shall have qualified to be listed like any other company in the Abu Dhabi Securities Exchange Market. This therefore means that even if the value of company' shares reduce, in case there is no continuous extraction of oil to be purchased in the market, the risk will be shared among the investors hence reducing the losses incurred by each individual. The rule that regulates the operational process of the QA stipulates that for the QA to be passed there should be a greater percentage of the shareholders to support it. This means that the shareholders who can support the passage of the QA must possess 75% of the total shares of the company (Rock, 2008).
4.4. Challenges faced by the Abu Dhabi Securities Exchange (ADX)
Through the interviews conducted it was discovered that even though Abu Dhabi Exchange market stands out as a good and attractive market to invest in as an investors it has its own challenges that have put off investors at one point in its operations. Since its establishment in 2000 November, the company performed well in the market that its graph was always rising in terms of returns until the year 2008 when the market started operating on a U-shaped graph. During the interview, the CEO of the Abu dhabi Exchange-Rashed Al Baloushi who was appointed in March 2012 said that the company has faced a great challenge due to its weakness of over-relying on the speculative and retail investors which has resulted to a slowdown in its operation. For instance, in the first quarter of the year the returns had gone up by 15% but in the second half it again dropped down to 3%. He therefore said that this happened because many investors opted to invest in the firm rather than holding their money in the firm as deposits (Sadek, 2002). This was accelerated by the good performance of the firm that by investing one is likely to accrue more benefits than just holding deposits. The announcement that was made by the government in the year 2011 that the economy of the nation will go up to 4.98% has also been part of the contributions because it has encouraged many investors to go back to the market.
To solve this challenge therefore the CEO reported that the firm has underway plans of ensuring that they incorporate institutional long-term investors who will help the market in achieving its long tern goals. Even though this plan is on the process, he says that it is not an easy task to attract the long-term institutional investors even though it has been at its peak both regionally and internationally (Shilller, 2000).
Another challenge in the ADX market is that as much as the board of directors has put more efforts in diversifying the market in order to accommodate many sectors, it has not yet yielded enough. This is because it still relies majorly on the finance and insurance sectors hence not being in a position to attract more other investors into the market who will want to invest in other sectors. This situation has been so because for those private and family companies that can go public but convincing them has been a problem especially for those ones that have been profitable enough. The analysis shows that even though those firms have been adverse in accepting to go public the management team of ADX has not yet given up because they still hold meetings with those firms with hopes of bringing them in the listing on the Abu Dhabi Exchange market. Shiller, 2000 concluded that if these companies accept to go public the ADX would be in a position to overcome the challenge of diversification.
Research shows that in the year 2008, the country experienced an economic crisis, which actually was felt worldwide and this affected the performance of the market. During this time, the listing percentage dropped because of the fear that investors had that the situation was to continue for an unknown period. This crisis affected the performance of 2010 that the growth trend of the market capitalization in the first quarter, the ADX registered a growth of 2.20%, followed by a reduction in the season of summer. At the end of the year, the growth had therefore declined to 0.85% making it worse as compared to the previous performance in the year 2009 with growth of 16.3 in all the phases (Emirates Financial Services, 2011). 68% felt this global slowdown in the economy especially the exchange markets across the country as in the case of the New York Stock Exchange, which experienced low price value on the shares, traded hence a decline in its returns (Stoll & Curley, 2008).
Abu Dhabi Exchange market has faced challenges in improving its corporate governance for them to establish a derivate ground to trade on. This will also enhance the operations of the company in trying to increase the number of the investors in the market by covering the massive private trades that have operated outside the public market. The firm tried sorting out this problem by establishing a watch screen in the year 2011 that helped the firm list more companies in the same when the exchange market conditions were not favorable. According to the research conducted it was discovered that even though the managed to list 51 companies in 2011 the firm has not yet it the target that will help it achieve its long term goals and so it is still on the process of coming up with better strategies to attract more investors.
4.5. Role of the government
Through the research conducted the government of Abu Dhabi which his under president Khalif bin Zayed al-Nuhayyan who is also the president of the United Arab Emirates has established a governmental body that oversees the operation of the Abu Dhabi Exchange market. The Emirates Securities and Commodities Authority was established by the ministry of economics to combine efforts with the board of directors of ADX to set rules governing the operations of Abu Dhabi Exchange market as well as improve its performance (Stoll & Curley, 2008). This was established in order to achieve the set goals of the firm as well to achieve the government's goal of improving the economy of the nation.
The Emirates Securities and Commodities Authority has always played a great role in the act of streamlining the licensing procedures for the security companies as well as those operating as joint stock companies. It again has the mandate of ensuring that companies in the listing adhere to the rules and regulations in the Abu Dhabi Exchange constitution for the betterment of the market performance. This body of the government ensures this therefore by punishing those companies that breach the market rules by levying high fines on them (high-profile fine). To ensure that the set rule and regulations are strictly practiced the Emirates Securities and Commodities Authority started the issuance of National Securities Identifying Numbers (NSIN) in the year 2010 to the shares owned by the local companies in the Abu Dhabi Exchange.
In the year 2012, the SCA announced its signing of the agreement with the Abu Dhabi Exchange of starting the implementation of the international financial reporting standards for those companies listed in the exchange market by the use of the eXtensible Business Reporting Language (XBRL). This is therefore intended to provide the companies with a mechanism necessary for releasing all varieties of information like the corporate disclosures and financial statements. This was therefore included, starting the year 2011 where the ADX governing body' fourth quarter of the year reported that the release would cover 20 companies in the Abu Dhabi Exchange market and this was to be effective in the year 2012.
The government of Abu Dhabi has therefore worked hand in hand with the Abu Dhabi Exchange board of directors to ensure that the performance of the market is up to standard to attract both international and regional investors the growth of the economy to improve the living standards of the citizens of the nation. The SCA together with the ADX introduced the Exchange Trade Fund (ETF) in the operations of the market in the year 2010 where the National Bank of Abu Dhabi had one share and the Dow Jones another 25 shares as the Exchange Trade Funds (Stoll & Curley, 2008).
The index-tracking fund that was established by the SCA in the ADX market has allowed investors who participate in the market to have a wider range of asset categories, which helps investors to spread the risk by investing in less than one category. This has also led to the reduction of costs when investing in the market hence attracting more investors to the market, which has resulted to the growth and development of the market. The SCA has always supported the plans of ADX board of directors in the performance development that even when they introduce the operations of Exchange Trade Fund, the government did not intervene on the rules and regulations that government it as much as they initially operated on the ADX constitution before they established the new rules and regulation.
In 2011, the SCA put more efforts in implementing new and beneficial issues that were practiced in other exchange markets like in the Nasdaq Dubai Market Exchange but were not practiced in the ADX and the Dubai Financial Market exchange to start practicing them in the ADX. This was another way of improving the operating system of the Abu Dhabi Exchange market (Pagano, 2012). In 2011 February, the SCA made an announcement on the availability and operation of the operating system of the delivery versus payment (DVP) which it had formulated with support from the ADX. This system helped investors to start taking the necessary steps of converting the settling mechanisms, which enabled ownership transfer and payment of securities to take place simultaneously hence mitigating the risk that existed in the current processes of delivery and receipt processing(Regional Economics, 2012).
Research shows that the government has helped in reforming the market operations of ADX through the Emirates Securities and Commodities Authority in implementing market structures that are in line with the MSCI recommendations. This has enabled the firm to be upgraded by the Financial Times stock Exchange (FTSE) Group from being a frontier to the level of secondary emerging. This process has provided a comprehensive framework of regulations that boost the opportunities in investors and financial markets in achieving their objectives in the ADX. This has also attracted more global and local investors to the market like the House of Insurance, which listed in the year 2011 after the slowdown of the market performance.
4.6. The impact of these differences
These differences do impact the IPOs in the western countries and the Abu Dhabi stock markets. The first impact is that the western investors are quite analytical and are concerned with the future performance of the company rather than its present performance. The Abu Dhabi and Asian investor on the other hand uses the previous performance of the company to determine its performance and hence its future returns on investments. This affects trade in that it is unlikely for the western investors to buy stock or shares in the Abu Dhabi Exchange mainly because they feel that it is not up to their standard. The table below shows a percentage of shares bought by foreigners in Abu Dhabi IPO.
The second impact of these differences is that not all companies listed in one of the stock market qualify to be listed in the Initial Public Offering of the other countries. The data below shows percentage of companies that were successfully listed in the US IPO and Abu Dhabi IPO.
For instance, Facebook was successfully listed on the New York Stock Exchange. However, the company may not succeed to lists its shares in the Abu Dhabi Exchange IPO due to the fact that the company does not have real, tangible assets and the Emirates Securities and Commodities Authority does not recognize or attach the same value to intellectual property as the United States of America. This may result in the share price of the company being undervalued or the company not qualifying for the IPO in this stock market.
The second impact is that this disparity has resulted into entry of the foreign firms that ascribe to their preferred school of thought. For instance, most of the firms that have physical assets such as land, machinery and real estates have focused on the Abu Dhabi stock exchange, this is because the registration process for such companies is much easier and it does not need extensive activities for it to qualify for an IPO. Also such company share value rank high. On the other hand companies that have intellectual property especially the technology and communication based companies do not list in this IPO's rather because they may not be approved by the regulatory commission. The following graph shows the entry of foreign companies in both western countries and Abu Dhabi and whether they are property or technology based companies.
Their stock value of technology based companies may diminish in the Abu Dhabi Exchange; likewise many of the companies listed in the ABI Dhabi stock market may also diminish in value in the NYSE due to this disparity. The western countries allow companies from China will deal with the business of the country as it will deal with the business as it will ensure the development of the resources.
4.7 Market performance
After the 2008 performance where ADX had raised to $61 billion, the market exchange experienced an awake of the economic crisis in the year 2009, that in the year 2010 the graph of operation went in a U-shape as compared to the previous graphs where its market capitalization registered a growth of 16.3% all years round. In the year 2009, the Abu Dhabi Exchange had registered a market capitalization growth of $71.45 billion ((Hunt-McCool, 2012). In the year 2010 the investors developed a negative attitude towards the exchange market that they withdrew back to wait and see how the situation unfolds. This therefore affected the growth trend of the market capitalization that in the first quarter of 2010, the ADX registered a growth of 2.20%, followed by a reduction in the season of summer. At the end of the year, the growth had therefore declined to 0.85% making it worse as compared to the previous performance in the year 2009 with growth of 16.3 in all the phases (Emirates Financial Services, 2011). The Abu Dhabi Exchange registered a drop of 52% on the shares traded in comparison with the year 2009 simply because the investors reduced the volumes they had in the year 2009 immediately the noticed the wake of the crisis. This also affected the market capitalization that it dropped by 3% hence realizing $69.5 billion (Richard, 2011).
In its nine sectors in the listing only three sectors registered growth in the year 2010 as the six showed decline. Among the six sectors, the real estate sector was the most affected in the year that it dropped its value by 46.15% followed by the consumer sector, which had a drop of 18%, and the insurance sector dropped its value by 15.50% (Ibbotson, 2010). As much as the ADX experienced these declines, it managed to mitigate them through the strong performances of other sectors like the telecommunication sector, which registered a growth of 8% in the second half of the year. The industrial sector is another area that realized an upward growth of 5.08% as compared to 2009 after the government strategy, which aimed at widening the economy of the nation. The financial and banking services of Abu Dhabi contributed in mitigating loses accrued from other sectors by registering a growth of 5.1% (Emirates Financial Services, 2011).
The Abu Dhabi exchange registered a reduction in its listing after Aabar Investment Company decided to go private though this took effect in the first quarter of 2011 after being in the initial public offering for two years. In the same year February, Abu Dhabi Insurance House went public selling its shares in the market. It therefore sold 54% of its shares to the marketing generating $ 17.95 million hence breaking the deadlock of the Abu Dhabi Exchange market as a way of encouraging people that ADX is still a marketing exchange that performs (Emirates Financial Services, 2011). After breaking this ice, it followed two other successful offerings by the Abu Dhabi firms in the month May that is the Eshraq as a real estate raising $224.58 million and Islamic Insurer Wataniya raising $22.54 million and this was oversubscribed over six times. The political unrest in Egypt and Tunisia forced its leaders to withdraw their participations in the stock exchange markets of GCC where Abu Dhabi Exchange market is one of the exchange markets in the GCC. Even though they had to step out of the ADX, this does not the long-term goals of the Abu Dhabi Exchange market because there are still emirate corporations with substantial hydrocarbons wealth, which are very profitable and are in the listing of the ADX. The Abu Dhabi government is another reason as to why the ADX will never lose focus to achieve its long-term objectives because it also strives to improve the economy of the nation hence enriching the Abu Dhabi Exchange market (Hunt-McCool, 2012).
4.8. Reasons why these differences exist
The first reason why these differences in regulations exist is due to the value differences between the two countries. The western countries and especially the United States of America gas changed its value or attachment in property since the economic meltdown which led to a serious economic decline of property as shown in the trend table shown below on participation on IPOs.
Since the 1980's the Americans and westerners have changed shift and focus on the real estate to the technology, intellectual properties and attached worth on this. This explains why the value of technology based companies is higher than the value of traditional companies (Price Water House Coopers, 2012). The traditional companies are companies whose focus is on the issue of developing real physical assets to create profitability and capital gains due to appreciating value of properties. The regulatory framework of the two countries therefore dictates the development of appropriate strategies that will result into future profitability of companies that hope to list their stock in the stock markets. This is why some of the companies that have listed in the ADX are property development and oil companies (Rock 2008).
The other reason is that or companies that have successfully listed their stock in the IPOs in the United Arab Emirates and Abu Dhabi in specific are companies that have aligned themselves with the values that the people of United Arab Emirates value. For instance insurance companies have performed dismally in their Initial Public Offering Abu Dhabi Exchange mainly because they deal with a sensitive issue that may not be in line with the Islamic values that most of the people in Abu Dhabi have. The data below shows the attachment of Abu Dhabi to their Islamic values.
The Islamic values assert that it is wrong to anticipate and plan for calamities such as accidents and that are against a person who does activity that will result in misfortune or calamity. Therefore most of the people of not take insurance policies and they only do so in businesses that they are in partnership with foreigners (Ernst and Young, 2011). Therefore insurance businesses have performed dismally in the ADX. On this issue of the Islamic values, have also affected the banking sector as most of the people there do not believe in creating interest as it is forbidden in Sharia law. Although the UAE does not follow the sharia law strictly, interest based business do have it rough in this country if they do not align themselves with Islamic banking.
The other reason for this difference is the existence of speculation and non speculative public investors. As seen earlier the western countries especially the United States of America has speculative investors who invest in a particular company due to its future profitability and likelihood of capital gains. The western countries investors invest in the future of the business. This is the reason why the Securities and Exchange Commission has placed a requirement for companies that hope to be in the stock market to present a business plan for not less than five years. However in the United Arab Emirates and in Abu Dhabi the public investors are non speculative, the essence of them investing in the company is that they may acquire lateral share of the property of the company. The non speculative investors invest so that they can create a positive development or the companies that area because they have a sense of ownership on that company. This explains why the UAE markets are popular with property companies. To protect this non speculative buyers who may not be informed about the likelihood of the companies collapse in future. The commission puts in place mechanisms of preventing their public investors from investing in debts and companies that area likely to fail.
Due to the regulatory requirement that requires companies listed on the IPO's must have over eighty percent of their assets on equity, most of the companies do not engage in IPO's to pay debts but for expansion or to refund the initial investor. This means that most of the companies that trade in the stock exchanges have real dividends and shareholding value which can qualifies materially. However the case is different as the motivation is that of enjoying profits and capital gains that will accrue to a company due to its prospects for future growth and its ability to meet the shareholders expectations.
The other reason for this growth is that the regulations is in Abu Dhabi is that it is intended to control or to prevent that have debts to be listed on IPO's. The Emirates Securities and Exchanges commission prevents companies that have debts from being listed on the ADX market. This protects the investors from investing in a company which neither will nor give value for their money. it ensure. This also acts as a buffer of preventing the western companies that are based on debt from getting access to these markets. The investors in the UAE markets must be protected mainly because they are intended in the country the investors can be taken advantage of by scrupulous companies that can easily defraud the investors their money. In the western countries this has happened in the case of this of Enron by the Ponzi schemes where the company was started and case to be with an intention of taking it public and defrauding the investors of their money.
4.9. Why the western IPO's are better than the Abu Dhabi IPO
The western IPOs are better in comparison to the Abu Dhabi Initial Public Offering mainly because that are offered on the bias of dealing with the company and resources that will result in the develop as it will ensure that there will be in the country. The other aspect of importance is that the countries that are in place will ensure that there are little or no responsibilities in the way of dealing with companies resources. The other factor of importance is that there is a responsibility of ensuring will be of callings it will deal will deal with the development as it will ensure that there will be in the development as it will ensure there it will create the country as it will lead to the development of the countries that will deal with the country as there will be no resources to invest in the future of the company. The other factor of importance is that there will keep it will ensure that there will can keep the company and there will deal with the development of the resources of the company will deal with resources that will ensure the development of the resources ass it will deal with the resources.
The western country is also advantageous in that they will have a responsibility as accept all manner of companies. The determinant of acceptance is the profitability and future prospects of the company rather than its equity or the assets that the company holds. This is advantageous as it allows companies that are technology intensive and have intellectual property can successfully participate in the IPO listings. The other factor of importance is that they have to ensure that the investment is no restriction that types of businesses to invest in.
The western IPOs are also imperative mainly because they create and develop resources of the country's economic strength. They ensure that companies get an opportunity to increase their equity even at the same time reducing their debts. This is advantageous to upcoming companies which have high prospects for growth in future especially technology related companies. This is because they can enlist additional capital to grow their business through initial public offering process rather than increasing debts. It also ensures that companies that are listed on the initial public offering are companies with business plans of over five years a period through which they investor can recover part of their money before the company experiences also or non performance. This protects the investors' money and it ensures that it will deal with the development of resources as it will develop the future of the business. The Abu Dhabi IPO allows the initial investor to recover their money, but does guarantee that the future of the company will be profitable as the management can choose to move out after the recovery of their initial investment which is detrimental to the public investor. Although they reason that even though the company collapses the company has enough equity or capital to refund to the shareholders. This makes the western IPO process better as it results into a phenomenal growth of the companies. The fact the public companies also have to list the use of their proceeds in the United States prevents the initial investors as well as the company's management from misusing the funds. It prompts the company that is listed in the IPO to use the proceeds of the IPO in the expoanisio0n and debt repayment which is advantageous for the company.
The level of disclosure of information is the western markets is also an added advantage as it allows the public to carefully scrutinize the company in all its aspects, from its business operations, management as well as the development of the resources of the resources in the company. This allows the investors to make informed decisions. Abu Dhabi on the other hand focuses on the disclosure of financial information of the company alone. Issues such as corporate governance structure disclosure are not emphasized. Requirements of Management Discussion and Analysis are also not given emphasis which leaves out crucial in formation regarding the company undisclosed. This analysis is important because it allows the investor to focus on the external and internal environments of the company by analyzing the strengths, weaknesses, threats, and opportunities.
4.10. Market development of ADX
Through the good relationship that exists between the Abu Dhabi Exchange and the Emirates Securities and Commodities authority (SCA) has resulted to a good number of market developments in the local and federal levels since its merge. For instance in the year 2010 March, there was an introduction of the exchange Trade Fund in the Abu Dhabi Exchange market which was followed by the National Bank of Abu Dhabi (Hunt-McCool, 2012). Through the combined efforts of the ADX and the SCA, there has been an index tracking that exposes investors to a wide range of assets to buy at low costs in a less risk structure hence posting high shares than other exchange markets in the region. This was successful because the Exchange Trade Fund (ETF) was designed and implemented with both the ADX and the SCA and operated on a platform of the ADX as well as being regulated by the ADX regulation without any interference from the SCA until the time a new set regulations was formed to control its operation (Richatd, 2011).
In the year 2010 August, the National Bank of Abu Dhabi joined hands with the ADX together with the Thomson Reuters with an aim of presenting a lecture that highlighted the benefits of to Exchange Trade fund hence allowing investors to have an access to the twenty-five blue chip companies across the United Arab Emirates (Pagano, 2012). Apart from the support from the NBAD, the Abu Dhabi Exchange hopes to bring other exchange trade fund to the market as a way of improving its performance and for it to be in the track of achieving its long-term objectives. During the third quarter of the same year (2010), there were structural changes that took place through the reintroduction of margin-trading regulations, which were in practice in the previous years before the onset of the economic crisis in the year 2008 (Kaplan, 2010). This were rules by which the investors had the authority to borrow from brokers to purchase stocks in the market and this created an oversight to rules and regulations that controlled the ADX but on the other hand they are seen as being significant in the developments of the market exchange (Regional Economics, 2012).
4.11. Emerging issues
In the year 2011, SCA was looking at the issues that were practiced in the market making by the Nasdaq Dubai Market Exchange but were not practiced in the ADX and the Dubai Financial Market exchange to start practicing them in the ADX as a way of improving the operating system of the Abu Dhabi Exchange market (Pagano, 2012). In 2011 February, the SCA made an announcement on the availability and operation of the operating system of the delivery versus payment (DVP) which it had formulated with support from the ADX. This system helped investors to start taking the necessary steps of converting the settling mechanisms, which enabled ownership transfer and payment of securities to take place simultaneously hence mitigating the risk that existed in the current processes of delivery and receipt processing(Regional Economics, 2012). Pagano (2012) adds that this practice is therefore part of the wider effort of trying to bring the operations of the United Arab Emirates in correspondence to the recommendations of the International Organization of Securities Commissions. This will therefore enable the ADX move from the current to the emerging issues as defined by US- based company that deals with the issuance of market indices that is the Morgan Stanley Capital International (MSCI) (Regional Economics, 2012). The MSCI was therefore expected to declare its decision in 2011 June though it did not manage to but promised to announce its decision on December 2011. The local press report (2011) reported that the MSCI had set limits on foreign investment on the companies that were on the listing as well as cited limits on the DVP settlement system (Pagano, 2012).
On the process of reforming the operations of the ADX market to be in line with the recommendations of the MSCI, ADX and SCA have already achieved a plus in the operating system of the exchange market. In the year 2010 September, analysis by shows that the Financial Times Stock Exchange (FTSE) Group, which is a United Kingdom organization that provides indices announced that the ADX was officially upgraded to a secondary emerging, which was a great improvement in comparison to other exchange markets worldwide. This process provided provision of effective supervision of security markets in the region and a comprehensive regulatory framework for controlling the operation of the financial markets together with the investors (Richard, 2011).
In the fourth quarter of 2010, the CEO of SCA, Abdullah Al Turifi declared that this was a way of boosting the performance of foreign investors in the exchange market since it creating more opportunities as the local press reported it (Pagano, 2012). This attracted corporate investments who invest in the EAU markets and this resulted to an increase of shares of the country to the market hence gaining popularity in the international stock indices just the FTSE index, which has always increased its volume in the market (Regional Economics, 2011). During this period, 21 more companies were added to the list of the FTSE emerging Market indices. Out of the 21 companies, six of them were listed from the list of the Abu Dhabi Exchange market, fourteen from the Dubai Financial Market and one from the Nasdaq Dubai and this was an improvement in the working system of the ADX. The companies were had an opportunity of being exposed to the global fund managers plus the billion dollars that they have the authority to control. This therefore increased the index of the Abu Dhabi Exchange market by 1.5 % (Pagano, 2012).
4.11.1 Bonds
The high levels of liquidity in the Abu Dhabi economy initially meant that the market had little interest for debt market in the region of emirate where Abu Dhabi Exchange market had only listed two issues, which had originated from the National Bank of Abu Dhabi. As the crisis in the economy reduces, the ADX prepared to develop a debt market where it encouraged its listed companies to bring fixed income bonds to the market exchange (Pagano 2012). This was a result of the credit crisis, which was experienced in the year 2008 with subsequent freezing of the external funding systems that made the ADX realized the need of a debt market. Since the establishment of the debt market, the Abu Dhabi government has always operated on yield curve with a good number of investors participating in the market. The most recent operation that was realized was in 2009 with yields 3 billion dollars and this was oversubscribed two times (Regional Economics, 2012). Abu Dhabi has therefore utilized its position as the third largest oil export country to grant its creditworthiness in the global economy hence creating a debt management office to oversee future operations of the government in improving the working system of the Abu Dhabi Exchange market (Prestiani & Hong, 2011).
4.12. Aligning the Abu Dhabi IPO with the western IPO
The Abu Dhabi IPO can be aligned with IPO in the western countries mainly due to the fact it has increased its capability by streamlining its regulation to match those of western countries. This will require the Emirates Securities and Exchange Commission to amended the Initial Public Offering Act of year 1990 and allow companies which have debts of not more than fifty per cent to list their shares in the stock market. The other change that might come in is that the IPO process must ensure that there is development of resources and creation of positive perception on the stock marketing process.
The other important factor is that of increasing the level of public knowledge in the stock market operations. This can be done by informing the public and educating theme to be speculative in buying stock where the investors will have knowledge on investing for future growth rather than relying on the approval of the stock exchange. The other factor of importance is that of business disclosure of information.
The other way in which the market can align itself with the western IPOs is that Abu Dhabi must draft legislation that will recognize intellectual property as a monetary asset. Currently the legislation does not recognize such assets, although there are laws that govern patents based on the intellectual property and copyrights international law. The regulatory framework has not taken this issue with the seriousness it deserves. This act will recognize patents, technology and software based companies allowing them to list their patents in monetary value. The public also has to have a paradigm shift for them into focus on investing on such type of businesses as the public is also suspicious of such companies and this is the reason why technology companies have performed dismally in the Abu Dhabi Exchange.
To streamline the Abu Dhabi IPO with the western IPO the companies must also take into consideration the western markets and work to improve them and to ensure that there is progress in the establishment of such markets. The western IPO requirement of having business plans of more than five years is critical in aligning the IPO process of Abu Dhabi with that of the western countries. This requirement helps and protects the investors from the future collapse of the companies where they have invested. It also keeps at bay bogus and non performing companies from trading in the public. The Emirates securities and Exchanges Commission must increase the level of disclosure that companies that want to list their stock in the stock markets have to disclose. To align themselves with the western IPO markets, the Emirates Securities and Exchanges Commission must needs to solicit more information regarding the nature of the business, business plans of the company, the management's discussion and analysis on the strengths and weaknesses of the company as well as the opportunities of the company. This provides the investors with crucial information which is imperative in the development of the company.
CHAPTER 5: CONCLUSION
5.1 Summary of the findings
This study obtains some imperative findings in the comparison of the IPO in the western countries with those of Abu Dhabi. Some of the key differences that emerge are with regard to regulations procedures. There were also differences in the requirements of equity and debt ratios where the western countries required equity of fifty one percent. Whereas Abu Dhabi required eighty percent equity. There were feelings that the United States initial public offering is more complex and has more regulatory requirements than the Emirates securities and Exchange Commissions. The other difference is the identification of the role of speculative and non speculative stock investors and how they invest in different markets. Some of the findings concerned differences in regulatory requirements where the research identifies that there were variance in corporate governance requirement in the western countries with the corporate governance requirements for companies listing their shares for the first time in Abu Dhabi.The other important finding was on the development of resources as well as the creation of positive development of th
