On 6 February 2012, the NASDAQ Dubai securities exchange, which is based in the Dubai International Financial Centre (the DIFC), opened its proposed new Admission and Disclosure Standards (the ADSs) for public consultation.
Reform of the DIFC's Listing Regime
The proposed ADSs form part of significant ongoing reform of the regulatory architecture governing NASDAQ Dubai and other securities exchanges in the DIFC. On 1 October 2011, responsibility for maintaining an Official List and listing authority functions in the DIFC was transferred from NASDAQ Dubai to the DIFC's regulator, the Dubai Financial Services Authority (the DFSA). Responsibility for admission of securities to trading on NASDAQ Dubai remains with the exchange. This approach mirrors the position in the UK, where there is a similar split in functions between the Financial Services Authority (in its role as the UK Listing Authority) and the London Stock Exchange, which regulates admission to trading on its markets for listed securities.
The ADSs and the DFSA's Markets Rules
It is proposed that the ADSs will form part of the NASDAQ Dubai Business Rules and will replace the existing Issuers and Securities Rules. Separately, the DFSA has been consulting on its proposed new Markets Rules, which will include the DFSA's listing rules. The Markets Rules will be promulgated by the DFSA pursuant to a power to be conferred on it by a new DIFC Markets Law, which is currently in the final stages of being passed, and which will replace the existing DIFC Markets Law of 2004. It is intended that the new NASDAQ Dubai Business Rules incorporating the ADSs and the DFSA Markets Rules will come into force at the same time.
NASDAQ Dubai's Objectives
The ADSs begin with an introduction setting out the stated objectives of the rules, which include (i) ensuring an internationally competitive and accessible market; (ii) maintaining fairness, transparency and an orderly market; (iii) ensuring liquidity and (iv) following international standards for trading securities. NASDAQ Dubai reiterates the importance of its relationships with issuers.
Ensuring Liquidity on NASDAQ Dubai
One of the key issues for consideration as part of the public consultation process is NASDAQ Dubai's proposals that seek to ensure adequate liquidity on the exchange. The trading liquidity of securities has historically been a significant challenge for exchanges in the GCC region compared to major exchanges in established financial centres such as London, New York and Hong Kong. However, the lack of foreign ownership restrictions, a sophisticated trading platform, a robust regulatory framework and the international brand offered by NASDAQ Dubai ought to position the DIFC's principal securities exchange to enjoy increased liquidity as it becomes a more established financial centre.
To address liquidity concerns, it is proposed that ADS Rule 2.1 (Liquidity Requirements) will contain certain provisions to encourage liquidity. The draft ADS Rule 2.1.1 gives NASDAQ Dubai a general discretion as to whether to admit equity securities to trading. There would need to exist, in the opinion of NASDAQ Dubai, "conditions for sufficient supply and demand of such equity securities to facilitate a reliable price formation process". ADS Rule 2.1.2 goes on to set out the conditions as to which an issuer will need to satisfy NASDAQ Dubai in this regard, namely (i) that it will have a "sufficient minimum number" of bona fide shareholders, each holding equity securities of the issuer with a value of at least US$2,000 or (ii) sufficient price formation is maintained through the appointment of one or more market makers. In the case of (i), NASDAQ Dubai provides guidance that 250 shareholders will generally be a sufficient minimum number, although the exchange reserves discretion. In the case of (ii), the appointment of a market maker would need to be made pursuant to an agreement between the market maker, the issuer and NASDAQ Dubai.
This provision is likely to prove controversial with market participants, who will be concerned at the practicality of such prescriptive measures. For example, US$2,000 may be seen as too high an amount to allow local retail investors, who should be encouraged to participate in local IPOs, to count towards the eligibility threshold for listing. Similarly, the threshold of 250 shareholders may be seen as an unrealistically high number, particularly taking into account the regulatory hurdles associated with pursuing a local retail offering in the wider UAE beyond the boundaries of the DIFC. Although the concept of a retail offering of securities solely within the DIFC is theoretically possible (at least as a matter of law), it would be virtually impossible in practice to find 250 retail (or non-institutional) shareholders within the 110 acres that make up the DIFC free zone. Another consideration is that there is little possibility of institutional investor-only offers (the encouragement of institutional investors in the GCC should be a wider objective) and also the potentially higher costs of wider marketing efforts to attract a high enough number of investors.
Other Provisions
The draft ADSs contain a number of provisions regarding the procedural steps needed for admission to trading. They do not generally touch on matters of eligibility for listing, as there has been an effort on the part of NASDAQ Dubai to avoid overlap with the DFSA's Markets Rules. The ADSs contain a number of features that are specifically tailored for the GCC region, including requirements for Shari'ah-compliant securities and pronouncements of Shari'ah compliance. It should also be noted that, in alignment with the DFSA's strategy of bringing the DIFC closer into line with EU and UK listing and disclosure requirements, the structure of the new ADSs will be familiar to those market participants who are used to the securities offering regimes of the UK and other EU member states following the EU Prospectus Directive standards.
Prospectus Review Process
One question that market participants, particularly issuers and their advisers, will likely be asking is how these proposed changes affect the review process for having an offering document approved. Effectively, the new process, which again mirrors the position in the UK, is that it is the regulator (here, the DFSA) that will be responsible for reviewing and commenting on an offering document and providing final approval of the document. The exchange (in the form of NASDAQ Dubai) will not review a prospectus for substantive content but will instead be focused on ensuring that the issuer meets the requirements for admission of securities to trading (including the liquidity requirements discussed above).
Deadline for comments
The consultation period closes on 5 March 2012. NASDAQ Dubai's official announcement of the opening of the consultation period can be viewed at www.nasdaqdubai.com/regulation/regulation-public-consultation.html , which also contains a link to the draft ADSs. Latham & Watkins will be submitting a full response.
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