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The overwhelming response registered by Dubai Financial Market's initial public offering in the midst of the market's lowest ebb during the last two years is mind-boggling for some investors.
It gets more intriguing considering the shorter subscription period of 12 days allowed to DFM by the authorities as per the new IPO rules, compared to the standard three weeks observed in the earlier offerings.
DFM launched its IPO to offload 20 per cent of its lower equity value of Dh8 billion - the higher end being Dh12 billion based on valuation carried out by Ernst & Young. By adopting the IPO route, DFM became the first bourse in the Middle East to go public.
Some observers in UAE financial circles have viewed that the shorter IPO duration coupled with quicker refund turnaround, besides DFM's distinction of being the first market in the Middle East to offer its equity to the public, generated greater-than-expected demand for its scrip. This is especially noteworthy during present times when some companies have shelved their planned IPOs until a better time.
Is there any other reason for the DFM's stock being so sought-after?
Bold steps
DFM authorities took two bold decisions this month and both paid off handsomely. The first one to launch its IPO in the midst of market turmoil and the other to convert the bourse into an Islamic entity.
In my opinion, the DFM's conversion into the world's first Islamic stock exchange prompted much wider participation by the investors from the entire Gulf region, especially from the UAE and Saudi Arabia.
The conversion also enabled the Islamic financial institutions (IFIs) to wholeheartedly participate in the collection of the IPO application money, which would have otherwise been unlikely.
Almost all IFIs leveraged their customers' subscription applications in a Sharia-compliant manner, which created strong demand for the stock.
How can a bourse be transformed into an Islamic organisation? What about the trading of shares from activities considered Sharia-repugnant, such as conventional banks, insurance companies, hotels, etc? Will DFM henceforth only allow Sharia-compliant shares to be traded on its platform?
Having taken part in the conversion process under the guidance of chairman Sharia Board of the Islamic bank I work for, I would endeavour to respond to the above questions.
The process began by identifying the short-term and medium-term objectives. The purpose of short-term objectives was to enable the entity to declare itself as an Islamic entity for the IPO.
Review of the objectives laid out in DFM's proposed memorandum and articles of association necessitated the addition of provisions relating to its activities to remain within Sharia boundaries. Company's prospectus was also amended on the same lines.
Latest audited financials and management accounts of the company were analysed and found to be within the financial covenants relating to equity acquisition set by the Sharia Board of the Accounting & Auditing Organisation for Islamic Financial Institutions (AAOIFI).
The most important aspect in the conversion process was to provide DFM with a mechanism to allow the non-Sharia-compliant shares to continue to be traded on its platform.
According to an analysis, DFM earned over 98 per cent of its income in the current fiscal year by trading in Sharia compliant shares. That leaves it with less than two per cent income earned from trading of shares not considered Sharia-compliant.
As such stocks are already listed on DFM and there is no other channel for them to be listed, scholars have asked the DFM to donate such income amounts to charity.
Such a purging mechanism is called "Tazkiya" or purification in Sharia terminology and is an important process for DFM to remain an Islamic market.
The writer is VP and Head, Sharia Structuring, Documentation and Product Development, Dubai Islamic Bank.
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