Nasdaq Dubai listing regime overhuled

Dubai Financial Services Authority (DFSA) released a consultation paper in October last year proposing significant changes to the way a NASDAQ Dubai listing application is presented and approved, and to the requirements for a company seeking listing. The paper contained a substantive set of listing rules to be administered by the DFSA (the proposed rules). NASDAQ Dubai under took a comprehensive consultation process during the past 18-24 months, and identified key areas where there is market support for amendment to its listing rules. Ideally the DFSA will have used the information and feedback gathered by NASDAQ Dubai in formulating the proposed rules. Baker Botts made a submission to the DFSA in connection with the proposed rules and anticipates the DFSA will publish the final rules before the end of the first quarter.

RATIONALE AND EFFECT OF CHANGES ON THE LISTING PROCESS

The proposed rules, once implemented, should result in a shift of the Listing Authority function from NASDAQ Dubai to the DFSA, as its regulator. Applications for admission to the Official List of Securities will be made to, and considered by, the DFSA. Once the DFSA has given conditional approval, the applicant will seek admission to trading on an Authorised Market Institution (AMI) based in the DIFC and only once admission to trading is granted will the securities be admitted to the DFSA Official List.

While NASDAQ Dubai is currently the only AMI based in DIFC, the proposed rules leave the regime open for additional exchanges to operate there in future, since the DFSA will maintain the Official List for all such exchanges, with the securities on that list potentially traded on different markets.

The changes may be a result of market feedback that the listing process in the DIFC is currently different from that followed by the UK Financial Services Authority (FSA). As many market participants in Dubai are familiar with the FSA model, there is a sense that aligning the model more closely with the UK will be more palatable here. In the past, there has been criticism that the process – whereby NASDAQ Dubai considered listing applications and reverted to the DFSA only near the end of the process – left applicants uncertain as to whether their application would be successful until very late.

The DFSA is seeking to address these concerns and while this is commendable, the criticisms referred to above have not been fully resolved in the proposed rules. The process under the proposed rules will still be a two-step process involving both the DFSA and NASDAQ Dubai, since admission to the Official List and admission to trading must both be achieved for an applicant to successfully trade its securities on NASDAQ Dubai. The proposed rules may not go far enough to rule out NASDAQ Dubai imposing additional regulation of its own. If NASDAQ Dubai does add regulation to supplement the Proposed rules then issuers will need to comply with the DFSA’s rules and with a reasonably substantive set of NASDAQ Dubai trading rules on an ongoing basis. In attempting to simplify the listing process, the market may end up with a more complicated two tier regulatory regime with two regulators involved post listing.

OTHER AMENDMENTS

Under the proposed rules the DFSA will take responsibility for regulating many of the ongoing obligations of a listed issuer. The DFSA will monitor continuous disclosure of price sensitive information and will liaise with issuers in respect of their company announcements. By way of observation, it seems that while the DFSA will take a primary role in monitoring continuous disclosure, NASDAQ Dubai will still need to remain alert to the announcements which are being released by issuers and may also need to play a role in keeping its market informed. It is foreseeable that an issue may arise for the reputation of the AMI if any issuer is allowed to continue trading of its securities when the market has not been informed about a material matter.

NASDAQ Dubai is itself a DFSA regulated entity and, as such, must take responsibility for its own market and its reputation. The shift of the burden of monitoring continuous disclosure to the DFSA should not relieve NASDAQ Dubai of its obligations to also monitor company announcements and issuers should be prepared to discuss their announcement decisions with either regulator. Potential issuers will note that the market capitalisation requirement (previously set at a minimum of $50 million for eligibility to list on NASDAQ Dubai) will decrease significantly to $10 million. This change should open the market to smaller companies, although NASDAQ Dubai may choose to impose a higher market capitalisation threshold, or additional listing criteria, where an issuer wishes to trade on its market. It is surprising to see that the proposed rules, while keeping the free f loat requirement at 25%, do not require any minimum shareholder spread for listing. 

The previous drafts of the amended NASDAQ Dubai listing rules contained concepts of a minimum number of shareholders or a compulsory retail offering in the eligibility criteria, aiming to improve liquidity on the market by ensuring applicants will have a reasonable shareholder base which may be willing to trade. In light of market pressure in relation to historical financial reporting requirements, the DFSA has included guidance in its proposed rules indicating that newer issuers who have not been in existence for three years and are unable to provide financial statements for that period with an application to list, may be granted a waiver from this requirement.

WHAT HAPPENS NEXT? NASDAQ

Dubai has recently released its draft Admission and Disclosure Standards (ADS) which will operate alongside the DFSA’s new rules and the consultation period will be open for comment until March 5, 2012. Only once the DFSA rules and the ADS have been finalised will there be clarity on the complete regulatory position for entities seeking to list on NASDAQ Dubai, as both sets of regulations need to be considered together.

Vanessa Abernethy is a corporate partner at Baker Botts, Dubai. Vanessa advises listed companies and investment banks in relation to a range of equity and debt security issues and frequently works with regulators. Vanessa is a member of the NASDAQ Dubai Practitioners’ Committee. The summary information contained in this article does not constitute legal advice and the reader is urged to consult with a legal advisor if legal advice is required.