to leap or to lag: choices before gcc regulators

Kuwait Financial Centre S.A.K.“Markaz” R E S E A R C H

To Leap or To Lag Choices before GCC Regulators

“The securities market acts as a brake on channeling savings to low-yielding enterprises and impels enterprises to focus on performance” - G.N. Bajpai (Former Chairman of Securities and Exchange Board of India) Effective financial intermediation can be achieved only through a well-rounded financial sector that does not rely solely on banks for finance. In this context, securities market development plays a key role be it equities, corporate debt or government securities. Gulf Co-Operation Council (GCC) capital markets have grown substantially in size over the last few years, but have they grown sophisticated..? While GCC is a homogenous group, countries comprising GCC vary very widely with respect to their capital market structures. (Appendix 1) Some of them allow foreign investors, while other does not. While foreign investment is just one among many factors, it is time to assess the evolution and progress of GCC capital markets within an emerging market context. Sooner or later, GCC markets will be actively pursued not only by local residents, but also by foreigners as and when investment norms are relaxed. The GCC region is bound to offer enormous investment opportunities to investors. However, regulatory environment and market sophistication will play a key role in integrating GCC markets with the rest of the world. Transient economies, especially BRIC’s, have also gone through similar evolutionary process and hence offers a lot of learning value for GCC capital markets. This paper measures and assesses the progress made by GCC capital markets and the steps needed to catch up. When benchmarked against BRIC countries, GCC capital market structures lag significantly (Figure 1). In order to leap forward, GCC regulators and policy makers should make careful and quick choices. Otherwise, they will continue to lag.

Figure 1: Measure of Progress

1.622.17

2.774.07

5.045.106.166.256.436.59

7.65

0.00

2.00

4.00

6.00

8.00

10.00

Qat

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Bahr

ain

Kuw

ait

Saud

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abia

Om

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UAE

Russ

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Braz

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Chin

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Source: Markaz

April 2007 Research Highlights: Examining the evolution and progress of GCC capital market structures relative to MENA and BRICS.

M.R. Raghu CFA, FRM Head of Research +965 224 8280 [email protected] Amrith Mukkamala Research Analyst [email protected] Kuwait Financial Centre S.A.K. “Markaz” P.O. Box 23444, Safat 13095, Kuwait Tel: +965 224 8000 Fax: +965 242 5828 www.markaz.com

R E S E A R C H April 2007

Kuwait Financial Centre S.A.K. “Markaz” 2

Methodology Our aim is to benchmark GCC capital markets with other emerging markets. We choose Egypt from MENA region and BRIC countries (Brazil, Russia, India and China) as we believe such an assessment would not only be interesting but fair. The countries are compared on 8 parameters (Figure 2) that we believe are important to examine the progress of capital market structures. Among the parameters, we take into account three structural parameters i.e.,

• Capital Market Authority • Capital Market Law & • Stock Exchange

We believe that the effectiveness of these structures will be paramount to the efficient functioning of the capital markets. We also look at five other non-structural parameters including openness to foreign investments, extent of institutionalization of the market, etc. (Figure 2). All the parameters have a scoring scale of 0-10 with 0 implying poor score and 10 implying the best score. Each parameter also has sub-parameters that are explained in the respective sections.

Market

Breadth & Depth 10%

InstitutionalParticipation

10%

Foreign

Investment10%

Primary Market 10%

Information Disclosure

10%

Stock

Exchange 10%

CML 20%

CMA 20%

GCC Capital Markets

Figure 2: Parameters for Evaluation

Source: Markaz

The methodology considers 8 important parameters with appropriate weightings.

All parameters are scored on a scale of 0 – 10.



1. Capital Market Authority (CMA) Ideally capital markets are regulated by an independent regulatory authority. While they are called by different names, the most common reference would be Capital Market Authority (CMA) or Securities & Exchange Commission (SEC). As is well known, some of the GCC capital markets do not have such regulatory structures or they are evolving. In this section, we measure three important factors:

Sub-parameters

Explanatory notes Sub-Weight

A. Existence of CMA

The mere existence of a capital market regulator would be a big plus-plus for any market as it forms the basis for sound regulation

50%

B. Historical strength

It is also important to study the number of years of existence of the regulator, as learning is a function of experience

25%

C. Conflicts in structures

Independence of regulatory regime is extremely critical for orderly governance of capital markets. 25%

A. Existence of a Capital Market Authority (CMA) The vital part of any regulated securities market is the regulator itself. The very existence of an independent regulatory structure provides scope for faster development of the capital market. The independent structure should be further augmented through skilled staff that can improve surveillance and enforcement. An important ingredient in enforcement is the legal and judicial system.

Country Capital Market Authority Score (0-10)

BRIC Brazil Securities & Exchange Commission 10 Russia Federal Financial Markets Service 10 India Securities & Exchange Board of India 10 China China Securities Regulatory Commission 10 MENA Egypt General Capital Market Authority 10 GCC

Saudi Arabia Saudi Arabian Securities and Exchange Commission 10

UAE Securities and Commodities Authority 10 Kuwait Not Available 0 Oman Capital Market Authority 10 Bahrain Not Available 0 Qatar Not Available 0 Source: Respective stock exchange websites

On a perusal of capital market structures, it is observed that BRIC and Egypt have formal CMA’s in place. Within GCC, Saudi Arabia, UAE and Oman have formal CMA’s while Bahrain, Qatar and Kuwait do not have a formal Capital Market Authority. The operation of Bahrain’s stock market is overseen by Central Bank of Bahrain (earlier called as Bahrain Monetary Agency). This can be due to the reason that Bahrain’s stock exchange is considered as a self regulating institution. However, stock exchanges are profit making entities themselves and there is a need for a neutral regulator, who will in turn take care of investor interests rather than the stock exchange and member firm’s

There are a few GCC markets wherein a formal capital market authority does not exist or is evolving. Both existence and evolution of a CMA is important for the capital markets



interests. Qatar on the other hand, has an internal regulating committee within the Doha Securities Market (DSM).

Kuwait has various governmental institutions overseeing the capital market. Kuwait, Qatar and Bahrain in turn are working on various stages of formation of a CMA. For instance, Bahrain and Kuwait are working on a CMA which will be headed by a committee of qualified personnel. We believe that speedier processing of these laws and structures will prima facie constitute the first major step and will go a long way in making the markets more efficient and attractive to investors, both foreign and domestic. Appendix 2 provides the CMA governing structures for all the countries under analysis.

B. Evolution of the Capital Market Authority While the existence of CMA provides basic confidence, the tenor of existence provides the required maturity for the capital market process. With the advent of newer product classes and risk management techniques, the higher the duration of CMA in existence, the higher is the extent of its learning. Brazil ranks as the CMA with the longest existence followed by Egypt. Russia lags behind with a CMA history of just 3 years. Within GCC, Oman leads with a tenor of 9 years followed by UAE at 7. Saudi Arabia is the newest in the list while other GCC countries are yet to start the process.

Country Years Since Established Score (0-10)

BRIC Brazil 31 9 Russia 3 2 India 15 6 China 15 6 MENA Egypt 28 8 GCC Saudi Arabia 4 3 UAE 7 4 Kuwait N.A 0 Oman 9 5 Bahrain N.A 0 Qatar N.A 0 Source: Respective stock exchange websites C. Conflict in structures There are several structures which are followed across the world (Annexure 2) in a bid to provide an independent authority for the stock markets. Our research of the various structures in BRIC, Egypt and GCC region showcases the gap that GCC still needs to cover. For understanding the various stages at which each of these markets are currently operating, we have categorized them into three categories. • Markets with a CMA but without any kind of conflict in structure with

that of the underlying markets. This is the most desirable status to have and we term it as “Matured structures”

• Markets with a CMA but there is an existence of a conflict in structures. We term it as “Maturing structures”

• Markets without a CMA or CMA being a part of another large organization. We term it as “Infant structures”

Brazil’s SEC is the oldest CMA in our universe of study. Markets can be classified into mature, evolving and infant structures depending on the stage of CMA.



Matured Structures

Maturing Structures Infant Structures

Brazil Saudi Arabia Kuwait China Oman Bahrain Russia Qatar India UAE

Egypt Source: Markaz Analysis

Matured structures We have noticed that the BRIC markets have highly regulated markets, with matured CMA structures. In our belief, matured CMA structures are those with an independent market authority, which has far less intervention by the government directly or indirectly, and importantly has no conflicting relations with the markets. This is due to the fact that most of the developed markets in the world such as NYSE are listed entities due to de-mutualization of stock exchanges, which has helped investors to unlock value in these entities. Our research also shows that the transparency levels of de-mutualized exchanges and the CMA is high. While all the BRIC countries and Egypt will qualify under this, among GCC UAE is the only country that has a CMA that can be considered independent and thus presents no conflict in structures. Maturing Structures These markets, in our view, have structures which restrict the CMA in its independent authority. Saudi Arabia: The stock exchange is regulated and controlled by the CMA. The board of directors of the stock market is nominated by the chairman of the CMA. This reduces the efficacy of the exchange as the objective of the stock exchange is different from that of the CMA. The objective of the stock exchange is to foster a conducive atmosphere for efficient capital allocation. Its primary objective is to enable investors and companies to participate in this process. Whereas, the objective of the CMA is to regulate this process according to the law of the land. Oman: The CMA is governed by board of governors. The Director General of the Muscat Securities Market is a Board member of the CMA too. Infant Structures The Infant structures would basically signal absence of CMA and where capital market is governed by a group of committees or various ministerial boards. For example, the Kuwait market is governed by the Market Committee whose members comprise of ministerial officials, Director General of Kuwait Stock Exchange, stockbrokers etc. Bahrain capital market, even though under the Central Bank of Bahrain, is headed by the director of the Bahrain stock exchange himself.

BRIC markets have highly regulated markets with matured CMA structures, UAE has a matured market structure as compared to maturing structures of Saudi Arabia and Oman.



Country Whether conflict exist with CMA

Score (0-10)

BRIC Brazil No 10 Russia No 10 India No 10 China No 10 MENA Egypt No 10 GCC Saudi Arabia Yes 5 UAE No 10 Kuwait NA 0 Oman Yes 5 Bahrain NA 0 Qatar NA 0 Source: Markaz Analysis

In the overall analysis Brazil tops the list for CMA followed by Egypt and China. Qatar, Bahrain and Kuwait trail behind. (Figure 3)

0

0

0

1.4

1.5

1.6

1.7

1.8

1.8

1.9

1.95

Kuwait

Bahrain

Qatar

Saudi Arabia

Oman

Russia

UAE

India

China

Egypt

Brazil

Figure 3: CMA Score

Source: Markaz Analysis

2. Capital Market Law (CML) A Capital Market Law (CML) is an integral part of a market structure enabling regulators to effectively implement regulations to best serve investor interest. The law acts as a guide to investors, market participants and the stock exchanges on three important responsibilities of the capital market regulator – Licensing, Supervision and Enforcement. A CML is a law which provides authority and responsibility to a group of people (read a committee or a board) and states clearly how it will regulate the securities industry and also take care of the interests of investors at large. We examine two things: availability and duration of existence with equal weights. While all BRIC countries and Egypt score high in terms of availability, some of them like Brazil and China do not enjoy long history.

Brazil tops the score for Capital Market Authority CML enables regulators implement regulations in an effective manner.



For the GCC countries, most of them do not have a CML and for those that have, the history has been recent. For instance, the Doha Securities Market has an internal regulations committee which oversees the various functions of the stock market. The law of Doha Securities Market (DSM) provides the rights and responsibilities of DSM alone. It does not provide a wholesome framework on how the entire capital market will be governed and the laws to protect investor interests. On the other hand, Kuwait’s “Amiri decree’s and By-law’s organizing Kuwait Stock Exchange” provides an operational framework for the stock exchange and is a law recognizing the stock exchange.

In the overall analysis for CML, Egypt and India top the scores followed by Russia and China. Qatar, Bahrain and Kuwait trail as they do not have a formal CML.

Country Availability of CML (50%)

Name of Law currently in

practice

Year of Enforcement

(50%) Score (0-10)

BRIC

Brazil Available Law governing

the CVM 2002 3

Russia Available

Law on securities markets 1996 6

India Available SEBI Act 1992 8

China

Available

Securities Law of the peoples

Republic of China 1999 5

MENA

Egypt Available Capital Market

Law 1992 8 GCC

Saudi Arabia Available Capital Market

Law 2003 2

UAE Available

Federal Law Concerning

ESCA 2000 4

Kuwait

Not available

Amiri decree’s and By-law’s organizing

Kuwait Stock Exchange 1983 0

Oman Available Capital Market

Law 1999 5

Bahrain Not available Bahrain Stock exchange Law 1987 0

Qatar

Not Available

Doha Securities

Market Internal Regulations 1995 0

Source: Respective stock exchange websites

Egypt and India score the highest for CML.



1.6

1.6

1.2

1

1

0.8

0.6

0.4

0

0

0

India

Egypt

Russia

China

Oman

UAE

Brazil

Saudi Arabia

Kuwait

Bahrain

Qatar

Figure 4: CML Score

Source: Markaz Analysis 3. Stock exchange In this section, we review the efficacy of stock exchanges in each of the markets under review through the following sub-parameters.

Sub-parameters Explanatory notes Sub-Weight

A. History Examining the number of years of existence 20% B. Structure To understand the ownership structure 20% C. Clearing House Effectiveness of the clearing house present 10%

D. Products Offered Variety of products offered by the stock exchange 20%

E. Brokers Number of brokers available 10% F. Settlement Cycle Time taken to execute and finalize trades 10% G. Transaction Charges Cost aspect 10%

A. History Some of the stock exchanges in our universe enjoy over a century of existence! (Brazil, India and Egypt) while others like Qatar and Russia have been in existence only for a few years now. Among GCC, Kuwait had a head start having established its stock exchange in the year 1983 followed by Saudi Arabia and UAE in 1984. Year Formed Score (0-10) BRIC Brazil 1890 8 Russia 1995 1 India (BSE) 1875 8 China 1990 3 MENA Egypt 1903 7 GCC Saudi Arabia 1984 5 UAE 2000 0.75 Kuwait 1983 5 Oman 1988 4 Bahrain 1989 4 Qatar 1997 1 Source: Respective stock exchange websites

Some of the stock exchanges enjoy over 100 years of existence. Kuwait was the first to establish a stock exchange in the GCC region.



B. Structure The ownership structure of stock exchange impacts its ability to function as a viable entity. Most of the stock exchanges in the world were formed as a self-regulating body with a non-profit structure. This model has undergone a radical shift in the past few years. Presently, stock exchanges are being increasingly seen as a profit making entity themselves as this is expected to make them function on efficient lines. The process of a self regulating structure evolving into a listed profit making structure (termed as demutualization) is considered to be a superior structure.

Country Stock

Exchange Ownership structure

Major Stake holders

Score (0-10)

BRIC

Brazil Bovespa Joint stock company Brokerage firms 7

Russia RTS Non-profit organization

RTS Group(Financial Institutions) 6

India National Stock Exchange

Joint stock company owned by companies

IDBI, IFCI, LIC and SBI among other FI's 7

China Shanghai Stock Exchange

Non-profit organization

Brokers and other members 6

MENA

Egypt Cairo and Alexandria SE Government N.A 3

GCC

Saudi Arabia Tadawul

Joint stock company owned by the government N.A 4

UAE Dubai Financial Market,

Independent Judicial personality N.A 3

Abu Dhabi Share Market

Kuwait Kuwait Stock Exchange

Independent Judicial Personality Various Ministries 3

Oman Muscat Stock Market

Independent Legal Entity N.A 3

Bahrain Bahrain stock Exchange


Qatar Doha Securities Market


Source: Respective stock exchange websites Brazilian and Indian stock exchanges are structured as joint stock companies owned by distinct independent entities. However, they are not listed. Russian and Chinese stock exchanges are organized as non-profit entities owned by group of financial institutions and brokers. Egypt stock exchange is fully owned by the government and hence scores low in our assessment.

Stock exchanges are evolving from a self regulated structure to profit making entities.

Most of the stock exchanges are owned by the governmentin GCC.



Among the GCC, we see that the stock exchange ownership structure is mostly that of government. UAE has proved to be an exception in that the DFM is an independent joint stock company recently listed in the exchange. DFM is the only listed exchange in our universe even surpassing BRIC countries. In the recent past, Saudi Arabia has announced the formation of Capital Market Company (CMC) that will take over the functions of Tadawul stock exchange. However, the Capital Market Company will be owned by Public Investment Fund (PIF), which is a fully-owned government entity. Eventually when the CMC will be listed through a public offering, the ownership structure may change for better. C. Clearing house The effectiveness of the clearing houses is directly co-relational to shorter cycle times in the securities market. Clearing houses stand as counter party risk guarantors to each and every trade executed in the market.

Country Clearing house Major shareholders Score (0-10)

BRIC

Brazil

Brazilian Clearing and Depository Corporation

Clearing agents representative of Brokers and banks, Bovespa

7

Russia RTS Clearing centre Fully owned by RTS Stock exchange 7

India National Securities Clearing Corporation

Wholly owned subsidiary of NSE 7

China

China Securities Depository and Clearing Corp. Ltd.

Owned by the stock exchanges. Shangai and Schnzen own 50% each.

7

MENA

Egypt

Misr Clearing, Settlement, Depository & Registry Company

CASE 5%, Banks 50%, Brokerages 45% 7

GCC Saudi Arabia

Securities Depository Center A part of Tadawul 4

UAE Clearing Depository and Settlement DFM's department 4

Kuwait

Kuwait Clearing Company(KCC), Gulf Custody Company(GCC)

KCC is a part of KSE, GCC is promoted by brokers and FI's

4

Oman

Muscat Depository and Securities Registration Company

MSM - 40%, FI's and Brokers - 60% 7

Bahrain Clearing and Settlement Unit

Part of Bahrain Stock exchange 4

Qatar Central Registration System Part of DSM 4

Source: Respective stock exchange websites

Clearing house also requires independence in structure as they perform one of the vital functions of the capital market. While in some cases, the ownership can be diverse and therefore independent; in other cases the

Effectiveness of a clearing house is directly co-relational to the shorter cycle time in the markets. Clearing houses act as counter party risk guarantors for trades executed in the exchanges.



stock exchanges themselves own the clearing house. In such cases, the independence of stock exchange will determine the independence of clearing house. We believe that ownership of clearing house by financial institutions/brokers is preferable as they provide confidence in the entire system. Also institutional participation reduces the intensity of default risk, especially arising out of institutional trades. BRIC countries score high on this parameter as clearing houses in these countries are owned by brokers and banks. Egypt also provides a case of independent clearing house. In the case of GCC, most of the clearing houses are owned by the stock exchanges which themselves lack independent ownership. D. Products offered Stock exchange effectiveness can also be measured by the range of products offered. These range from stocks, bonds, derivatives, and commodities. BRIC markets offer a wide range of products including cash and derivative products. Egypt and GCC countries lag behind significantly on this. Only Kuwait provides limited derivative products (call options and futures), while debt market products are virtually absent.

Cash

Market Derivatives OTC*

Equ

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Deb

t

Stoc

k Fu

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s In

dex

Futu

res

Opt

ion

s

Deb

t In

tere

st

rate

C

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Score (0-10)

BRIC Brazil Yes Yes Yes No Yes Yes No No Yes 6 Russia Yes Yes Yes Yes Yes Yes Yes Yes Yes 9 India Yes Yes Yes Yes Yes Yes No Yes No 7 China Yes Yes Yes Yes No Yes No No No 5 MENA Egypt Yes Yes No No No No No No Yes 3 GCC Saudi Arabia Yes No No No No No No No No 1 UAE Yes Yes No No No No No Yes No 3 Kuwait Yes No Yes No Yes No No No No 2.5 Oman Yes No No No No No No No No 1 Bahrain Yes Yes No No No No No No No 2 Qatar Yes No No No No No No No No 1

* We have taken into consideration only those OTC markets which are regulated by the stock exchange


Stock exchanges can be measured by the range of products offered. UAE is the only country to offer commodity trading in the GCC.



E. Brokers Stock exchange capabilities are measured by the number of intermediaries (especially brokers) present in the market. While absolute numbers may be misleading due to varying size of the respective markets, a relational aspect with respect to the size of the market offers some insight. Clearly India stands out among BRIC countries as it boasts of more than 500 brokers. China ranks poorly on this count. Relative to its size, Egypt scores well. GCC markets exhibit no uniformity on this. Oman and UAE scores very well followed by Bahrain. However, Saudi Arabia and Kuwait and Qatar score poorly.

Country Number of

brokers Market cap (USD Bn)

M. Cap per

Broker Score (0-10)

BRIC Brazil 130 710 5.46 4 Russia 212 965 4.55 4 India 510 819 1.61 8 China 138 918 6.65 3 MENA Egypt 123 94 0.76 9 GCC Saudi Arabia 23 326 14.17 0.5 UAE 58 168 2.90 5 Kuwait 14 143 10.21 0.75 Oman 19 13 0.68 9 Bahrain 13 20 1.54 5 Qatar 7 60 8.57 1 Source: Markaz Analysis & stock exchange websites

F. Settlement Cycle

Settlement time Score (0-10)

BRIC Brazil T+3 6 Russia T+0 , T+4 7 India T+2 7 China T+1 7 MENA Egypt T+2, T+3 7 GCC Saudi Arabia T+0, T+1 8 UAE T+2 7 Kuwait T+0 8 Oman T+3 6 Bahrain T+2 7 Qatar T+2 7 Source: Markaz Analysis & stock exchange websites

The higher the access points to the markets the better it is for the investors. Some of the stock exchanges have already moved to a T+0 settlement cycle and rest are in the process.



Shorter trading cycles always tend to generate lower liquidity risks. This is due to lower Value at Risk (VaR). In our research of various markets, we see that the GCC markets have strong systems in place. This can be attributed to the mature and robust banking sector in the GCC regions. Absence of margin trading and short selling in GCC, though not a desirable feature, indirectly motivates towards a speedier settlement cycle. Among the GCC countries, Saudi Arabia and Kuwait score the highest. G. Transaction charges Transaction charges significantly impact active portfolio managers and retail investors. When benchmarked with BRIC’s, GCC region has higher costs of brokerage and commissions.

Transaction charges Cost (%)

Score (0-10)

BRIC Brazil 0.04% 6 Russia 0.05% 5 India 0.03% 7 China 0.01% 8 MENA Egypt 0.50% 0.5 GCC Saudi Arabia 0.12% 4 UAE 0.30% 1 Kuwait 0.13% 3 Oman 0.40% 0.75 Bahrain 0.28% 1 Qatar 0.28% 2 Source: Markaz Analysis & stock exchange websites

In summary, India tops the list followed by Russia and Brazil in terms of stock exchange structure. Qatar, Kuwait and Saudi Arabia trail behind.

0.72

0.66

0.61

0.54

0.46

0.43

0.36

0.34

0.33

0.28

0.27

India

Russia

Brazil

China

Egypt

Oman

UAE

Bahrain

Saudi Arabia

Qatar

Kuwait

Figure 5: Stock Exchange Score


GCC markets have strong systems in place. The transaction charges in the GCC region are high as compared to the BRIC markets



4. Information Disclosure Stock exchange provides the first point contact for information concerning companies listed in its exchange. High quality of information disclosure will spur foreign investment. Exchanges provide a variety of information and in multiple languages. In our review, we looked for corporate level information like contact details of companies, corporate actions, board meetings, financial results, shareholding pattern, etc. We also looked for index data including description of methodology. Above all, we also examined language capabilities. (Appendix 3) Among the BRIC economies, India scores very high in terms of range of information disclosed as well as quality of information disclosed. However, other BRIC countries score poorly on information disclosure. Egypt provides good measure of information on companies in its website. There are wide variations noticed in GCC. While Oman scores well, Abu Dhabi and Qatar lag behind. In the overall analysis, India top scores followed by Oman and Egypt. Qatar, China and Brazil lag behind.

0.97

0.8

0.75

0.7

0.65

0.6

0.5

0.4

0.3

0.3

0.3

India

Oman

Egypt

Bahrain

UAE

Saudi Arabia

Kuwait

Russia

Brazil

China

Qatar

Figure 6: Information Disclosure Score


5. Primary markets Capital market’s main role is to allocate capital efficiently. One of the important parameter to achieve this goal is the ability to access capital at the right price. Primary market refers to the process of efficient capital rising by companies (both equity and debt). We look at two factors: listing requirement and pricing mechanism with equal weights.

A. Listing requirements Listing requirements provide for certain conditions that companies should meet in order to be able to list. The more stringent these requirements are, the better it is for investor protection. There are visible gaps between the listing requirements of GCC and BRICS. We see that almost all the BRIC countries require a minimum of three years of financial details before the IPO. However, GCC countries require less than two years of financial data. Apart from this, some exchanges permit green-field (new projects) IPO’s too. This we believe is detrimental and carries higher amount of risk as new projects do not have track record. UAE and Kuwait score better than others on this parameter.

There are wide variations in the GCC when it comes to information disclosure. The listing requirements of GCC in comparison with BRIC, is lenient. Some countries in the GCC allow green field IPO’s too.



Country

IPO/Listing (Financial criterions) Score (0-10)

BRIC

Brazil

3 years annual statements, Opinions of independent auditors, Discussion of financial results and providing the causes for changes, price determination and the assumptions 7

Russia Minimum of 3 years existence, out of last 3 years 2 years of positive balance sheet. 7

India

Net tangible assets of at least USD 0.67 Mn in last 3 Financial Year’s of which not more than 50% is held as cash, net worth of Rs. 0. 2 Mn 7

China Minimum of RMB 50 Mn capital, 3 years of business and 3 years of profits 7

MENA

Egypt

Financial statements for 3 years, capital not less than LE20 Mn, net profits for 3 years not less than 5% of paid in capital 7

GCC Saudi Arabia

Financial statements to be submitted no clause on the period 3

UAE

Net assets more than 20% of paid up capital, realized net profits at an average of 5% of paid up capital during the last two years, Paid up capital not less than 50% of equity not less than AED 20 Mn 6

Kuwait Paid up capital of USD 34.58 Mn, 7.5% Return on Capital for 2 years before IPO. 2yrs financials. 6

Oman

Three markets - Regular, parallel and Third markets have separate rules. The parallel markets and the third markets do not require any financial background. 3

Bahrain Paid up capital should not be less than BD 200,000, financial position should be sound 5

Qatar Min paid up capital is at least QR 10Mn, LFY financial statements 3

Source: Markaz Analysis & stock exchange websites

B. Pricing Mechanisms IPO pricing mechanism in GCC region is mostly fixed pricing (usually 10 riyals or 50 riyals). The idea behind embracing such a practice is to use stock markets to redistribute oil wealth among the citizens. However, the fallacy of such an approach is becoming apparent as this under pricing of IPO’s has often been overdone to such an extent that investors expected all IPO’s to provide immediate “super-rich” positive returns on listing. Globally, in developed markets IPO pricing is usually done through a lengthy process in what is now being described as “book-building”. This process involves the lead managers and company business executives to go on road shows to assess the level of interest for the issue. This enables them to set price levels. A market driven pricing structure like the book-building provides for a robust price discovery mechanism for IPO’s and hence is

Most of the BRIC countries require at least three years of historical financials for the companies going public.

Book-building provides an efficient way of pricing IPO’s.



encouraged by regulators. Almost all the BRIC countries have these mechanisms in place and score high on this parameter. (Figure 7) It is heartening to note that Saudi Arabia is moving towards a book-building process soon. This may temporarily impact Saudi banks as they will be deprived of “float money”. Some of the countries like India are experimenting with the concept of IPO rating, where leading credit rating agencies provide a rating on the prospective IPO’s. This will be a step in the right direction for GCC regulators, as this is bound to help financially unsophisticated minority investors.

Country Type of Pricing mechanisms available Score (0-10)

BRIC

Brazil Book building, Green shoe option, Fixed price at par, Fixed price at premium 8

Russia Book building, Green shoe option, Fixed price at par, Fixed price at premium 8

India Book building, Green shoe option, Fixed price at par, Fixed price at premium 8

China Book building, Green shoe option, Fixed at par, Fixed at premium 8

MENA Egypt Fixed price at par and premium 4 GCC

Saudi Arabia

Fixed price at par and Fixed price at premium, Price is flexible (par value is SAR 10(fixed) + premium can differ),price to be approved by Government 4

UAE

Fixed price at par and Fixed price at premium, Price is flexible (par value is AED 1(fixed) + premium can differ),price to be approved by Government 4

Kuwait

Fixed price at par and Fixed price at premium, Price is flexible (par value is KWD 0.1(fixed) + premium can differ),price to be approved by Government 4

Oman

Fixed price at par and Fixed price at premium, Price is flexible (par value is OMR 1(fixed) + premium can differ),price to be approved by Government 4

Bahrain Fixed price at par and Fixed price at premium, price fixing is flexible, price to be approved by Government 4

Qatar

Fixed price at par and Fixed price at premium, Price is flexible (par value is QAR 10(fixed) + premium can differ),price to be approved by Government 4

Source: Markaz Analysis & stock exchange websites

In the overall analysis, Russia and UAE top the list, while Bahrain and Egypt lag.

Saudi Arabia is moving towards a book-building process soon.



Figure &: Primary Market Score

0.350.35

0.350.45

0.5

0.5

0.550.75

0.750.75

0.75

Saudi Arabia

Oman

Qatar

Bahrain

UAE

Kuwait

Egypt

Brazil

Russia

India

China

Source: Markaz

6. Foreign Investment Foreign Institutional Investment (FII) in the stock market has always been a sticky subject. Opening up the market to foreign participation not only enhances the profile of the market, but also brings in new capital to the economy. However, it has often been rightfully alleged that this foreign money always tends to be “hot” in nature unlike Foreign Direct Investment (FDI). Hence, regulators have imposed restrictions to limit the effect of “hot money” impacting local stock market. However, opening up the bourse to FII will enhance the research coverage of the market as well as transparency norms. GCC stock markets prohibit foreign investment in varying measures. While some stocks are off-limits even to GCC citizens, others are off-limits to foreign investors. The Foreign-Inclusion-Factor (FIF) that reveals the extent to which foreign investors can invest is presented below. (Refer Appendix 4 for GCC wide data)

% FIF Saudi Arabia 5% Abu Dhabi 22% Dubai 24% Kuwait 46% Oman 52% Bahrain 61% Qatar 24% Source: Markaz Analysis

It can be seen that Saudi Arabia is the most closed market while Bahrain is the most open stock market to foreign investors. Most of the BRIC economies have liberalized their economies in the last five to seven years and have welcomed foreign investor participation. This had led to a steady growth in the capital markets during the same time frame. Egypt has the most liberalized norms for foreign investment, followed by China and India. All GCC countries lag behind

The GCC region, especially KSA showcases lesser amount of accessibility for foreign investments.

Most of the BRIC markets have liberalized norms for foreign investments.



Restrictions on Foreign investors Score (0-10)

Brazil: Non-residents can invest in the stock, fixed-income and derivatives markets and in any other investment modalities available to residents. There are no restrictions on the transfer of resources from one market to the other nor on portfolio composition 7Russia: International investors can buy and sell shares on RTS using the vehicle called RTS Classical Market – DVP and free delivery RTS market with settlement in USD. RTS Classical Market currently has about 270 local companies listed that foreign investors can buy. Another interesting potential possibility for foreign investors is the derivatives market on RTS Stock Exchange called FORTS (Futures and Options on RTS). 7India: Foreign Investors can buy into any company listed on the bourses. Sectoral caps are applicable. The limit can be extended up to 49% per sectoral cap if the general body of the company approves it. 7China: QFII can invest in RMB denominated shares listed on China’s stock exchanges, or A-Shares; Treasuries; convertible bonds and enterprise bonds, and other financial instruments as approved by the CSRC. 7Egypt: International investors, being individual or institutions, can invest in Egyptian securities with neither limitations on capital mobility nor foreign exchange restrictions. 9Saudi Arabia: In 1997, participation in the Saudi equity market was opened to foreigners, by permitting foreign investment through the Saudi Arabian Investment Fund (SAIF) in London. A law of 1999 allows non-GCC foreigners to invest in Saudi equity markets through open-ended mutual funds offered by Saudi banks, and granted GCC citizens the right to invest in the Saudi equity market without restriction. 2UAE: Dubai Financial Market – Can hold up to 49% of either a listed or unlisted company (and up to 100% in companies incorporated in “free trade zones”). However, all companies that have issued shares to the public have a clause in their Articles of Association restricting the ownership of their capital by non-resident investors from 20% to 49%. 3Kuwait: Kuwaiti companies must obtain permission from the Kuwaiti government before being considered eligible for non-resident investment. Once obtained, collective share ownership by foreign investors may reach 100% of the shares of a listed company. Foreign investors must obtain CBK approval if they intend to own more than 5% of a Kuwaiti bank. 6Oman: Foreign investors can acquire up to 70% of the shares of a listed company, although some companies have limited foreign investment. In certain special circumstances and with government permission, can be increased up to 100%. Treasury Bills are not available to foreigners, but government bonds are available. 6Bahrain: Foreigners, including overseas investors, are allowed to acquire collectively up to 49% stake in all Bahraini listed companies, with the exception of two companies representing the food industry, i.e., Bahrain Flour Mills Company and Delmon Poultry Company. There are six listed institutions that allow 100% foreign ownership namely, Arab Insurance Group, Arab Banking Corp, Bahrain Middle East Bank, Bahrain Shamel Bank, Investcorp Bank, and Taib Bank 6Qatar: Effective 3 April, 2005,foreign investors can invest in all listed companies but with a cap of 25 per cent 3



0.9

0.7

0.7

0.7

0.7

0.6

0.6

0.6

0.3

0.3

0.2

Egypt

Brazil

Russia

India

China

Kuwait

Oman

Bahrain

UAE

Qatar

Saudi Arabia

Figure 8: Foreign Investment Score


In the overall analysis, China leads the table on primary market followed by India. Among GCC countries, Kuwait leads the table while Saudi Arabia lags. 7. Institutional investment

AUM*

(USD Mn) M. Cap

(USD Mn)

Assets of Mutual Funds

as a percentage of

M. Cap Score (0-10)

BRIC Brazil 375783 773601 48.58% 8 Russia 4020 165000 2.44% 2 India 50280 774110 6.50% 4 China 110000 917500 11.99% 6 MENA Egypt 638 93490 0.68% 0.5 GCC Saudi Arabia 22452 326000 6.89% 4 UAE 1612 168000 1.00% 1 Kuwait 5200 143000 3.64% 2 Oman 37 13150 0.28% 0.5 Bahrain 16 20170 0.08% 0.25 Qatar 68 60940 0.11% 0.25 * AUM - Summation of fund size, in some GCC markets, Funds have not disclosed their size, due to which the figures might be low. Source: Markaz Analysis

Institutionalization of the markets represents the extent of investment by institutions. Institutional investors predominantly tend to be mutual funds and other types of investment institutions like pension funds, foreign institutional investors, insurance companies, central banks, commercial banks, etc. The extent of institutional investment reflects market sophistication, as institutional investors most often invest after conducting careful analysis of companies. It is believed that institutional investments tend to soften the extent of market speculation. Increasing institutional participation will also lead to increasing confidence levels of retail investors

Higher institutional participation provides stability to the markets.

Brazil and China lead the pack with greater amount of institutional investments.



as institutions tend to provide higher liquidity. Institutional investors also have the ability to effect change in company management and enforce corporate governance standards to protect minority shareholder interest. In the GCC context, calculating the extent of institutional participation is rendered difficult due to lack of organized data. As per recent IIF report, Saudi Arabian institutional investors constitute about 10% of the investor base. Mutual funds are the closest proxy for institutional investments as other types of institutions normally tend to invest through mutual funds. Apart from this, the regulations of certain countries in our universe of study also recommend to invest via mutual funds.

Among the BRIC’s, Brazil and China lead the pack. This can also be due to the sudden spike in investor interests in these countries. For instance, in 2006 alone the assets under management of the Chinese mutual fund industry witnessed a growth of 83 per cent. Investors in China invested amounts to the tune of USD 49.63 Bn in 2006. GCC markets continue to witness lower institutional participation. This phenomenon can again be tied back to various other parameters such as access to the markets and also the availability of breadth for financial institutions to operate. In the overall analysis, Brazil and China top the list. GCC markets lag significantly.

0.8

0.6

0.4

0.4

0.2

0.2

0.1

0.05

0.05

0.025

0.025

Brazil

China

India

Saudi Arabia

Russia

Kuwait

UAE

Egypt

Oman

Bahrain

Qatar

Figure 9: Instiutional Investment Score


8. Market Breadth and Depth Capital market maturity can also be measured through market depth and breadth. A. Breadth Breadth denotes the number of companies listed in the stock market. The higher the number of companies, the lesser the risk concentration and more the availability for investors. For our analysis, we have considered both the number of companies listed as well as increase/decline in the number of companies listed between 2002 and 2006. Among BRIC stock markets, India clearly scores above others as it boasts of nearly 5000 companies. India is distantly followed by China and Brazil. Compared to BRIC’s, most of the GCC stock markets are smaller in size in terms of number of companies. However, there have been sizeable additions over the last 5 years as primary markets witnessed rapid growth. Kuwait outclasses others in terms of number of companies, as well as growth in the companies, followed by UAE. Bahrain is very dormant in this measure.

Due to lack of organized data, calculation of institutional participation is difficult.

India has a good breadth in its market structure.



No of Cos as of

No of Cos

Score (0-10) (50%) 2002 2006

CAGR (%)

Score (0-10) (50%)

Final Score (0-10)

BRIC Brazil 350 5 412 350 -4.00 0 2.5 Russia 283 5 236 283 9.51* 5 5 India 4796 8 5650 4796 -4.01 0 4 China 842 6 715 842 4.17 2 4 MENA Egypt 290 4 795 595 -13 0 2 GCC Saudi Arabia 81 1 67 81 4.86 2 1.5 UAE 93 1 47 93 18.60 8 4.5 Kuwait 165 3 88 165 17.02 7 5 Oman 131 2 96 131 8.08 4 3 Bahrain 42 0.5 42 42 0.00 0 0.25 Qatar 36 0.5 23 36 11.85 6 3.25 Source: Markaz Analysis & stock exchange websites * since 2004

B. Depth Depth of the market denotes the size and liquidity of the markets. Liquidity is measured through turnover velocity (Value traded/Average market cap). It should be noted that a high turnover velocity indicates good measure of liquidity; extremely high turnover velocity implies high levels of speculation and hence may be penalized in our scoring. Most of the BRIC stock markets are fairly deep, especially China. Egypt fares poorly on this measure. Saudi Arabia has very high turnover velocity, representing speculation. Bahrain and Oman suffer from illiquidity and small size. (Figure 10)

Country Turnover velocity *

Score (0-10)

(Weight 50%)

M. Cap (USD Bn)

Score (0-10)

(Weight 50%)

Weighted Score (0-

10) BRIC Brazil 47% 3 710 7 5 Russia ^ 4% 1 965 9 5 India 62% 5 819 7 6 China 87% 6 918 8 7 MENA Egypt 51% 3 94 3 2.5 GCC Saudi Arabia 288% 4 326 4 4 UAE 63% 5 168 3 4.5 Kuwait 41% 3 147 3 3 Oman 21% 2 13 0.25 1.12 Bahrain 8% 1 20 0.25 0.62 Qatar 27% 2 60 0.25 1.12 * Calculated by taking an average of 06 & 05 Market cap ^ Russia (RTS) has lower volumes in its regular markets. The volumes are fairly large in its

OTC markets, for which, the data has been reported only from Feb’07.

A very high turnover velocity does not correspond to a very healthy market; neither does a very low turnover velocity.

Most of the GCC markets have witnessed a growth in the breadth of the markets between 2002 & 2006.



0.70

0.65

0.50

0.50

0.33

0.30

0.28

0.25

0.16

0.11

0.06

India

China

Brazil

Russia

Egypt

Kuwait

UAE

Saudi Arabia

Oman

Qatar

Bahrain

Figure 10: Market Breadth & Depth Score


9. Overall Score

1.622.17

2.77

4.07

5.045.10

6.166.256.436.59

7.65

0.00

2.00

4.00

6.00

8.00

10.00

QatarBahrainKuwaitSaudiArabia

OmanUAERussiaBrazilChinaEgyptIndia

Figure 11: Overall Score

Source: Markaz Analysis Our analysis brought out significant difference in performance across various parameters. GCC markets mainly lose out in terms of regulatory structure. India lags behind Brazil and Egypt in terms of CMA. This is due to the fact that SEBI was formed post 1990 and prior to that Reserve Bank of India was controlling majority of the capital market affairs. Except for UAE which has been ranked above one of the BRIC economies (Russia), the other GCC markets form the bottom end of the chain. This can be attributed either to structures which are still emerging (Qatar, Bahrain & Kuwait) or structures which have emerged and are in the process of evolution.

Related to the formation of CMA, is the CML. Majority of GCC markets have underperformed our selective universe, except for Oman and UAE, which have ranked just above Brazil. Oman ranks at the same level as China too. This is due to the fact that both these countries have a CML in place and have evolved over the same period of time. Most of the GCC markets are ranked lower than the BRIC and Egyptian market in the stock exchange parameter. In most places in the GCC Ex-DFM, the stock exchanges continue to be influenced by the governmental structure. This, we believe, reduces the efficacy of the exchange. On the other hand, inclusive of DFM, the average costs of transactions in the GCC region are almost double that of the average cost of transaction in the BRIC.

India emerges on top. GCC markets lose out in terms of regulatory structure. GCC markets fare better in information disclosure.



Apart from this, the breadth of products available is low as compared to the peers in the BRIC region. BRIC markets have at least thrice the number of product classes available for investors to use as compared to investors in the GCC markets. We believe that, this can be related to the pro active introduction of newer product classes by the exchanges aided by independent decision making and execution authority. However, in some of the aspects the GCC markets have fared better than BRIC peers. When we look at information disclosure, Kuwait ranks higher than its peers in Russia, Brazil and China. Five of the six GCC countries rank higher than the three BRIC markets. However, there continues to be an apparent gap between the best practice and majority of the GCC markets. The market breadth and depth of Kuwait and UAE rank above Brazil. An important figure to note is that of the Russian markets. Even though, the Russian market (RTS) has least liquidity score (Depth of the markets table – Parameter - Turnover velocity) in the regular markets as compared to all other exchanges, it still scores the second from the top in the breadth and depth of the markets mainly due to the consistent increase in the number of companies. This can be attributed to the speedier execution of reforms in the last three to four years by FFMS of Russia. It has to be noted that Russia, (very marginally lesser than India) raised the largest amount in its IPO offerings in our comparable universe during 2006.

Individual parameter Scores

CM

A

Stoc

k Ex

chan

ge

Cap

ital

Mar

ket

Law

Info

rmat

ion

D

iscl

osu

re

Pri

mar

y M

arke

ts

Fore

ign

Inv

esto

r

Inst

itu

tion

al

Par

tici

pati

on

Mar

ket

Bre

adth

&

dep

th

BRIC Brazil 9.75 6.50 3.00 3.00 7.50 7.00 8.00 3.75 Russia 8.00 5.60 6.00 4.00 7.50 7.00 2.00 5.00 India 9.00 7.30 8.00 9.70 7.50 7.00 4.00 5.00 China 9.00 5.00 5.00 3.00 7.50 7.00 6.00 5.50 MENA Egypt 9.50 4.85 8.00 7.50 5.50 9.00 0.50 2.50 GCC Saudi Arabia 7.00 3.65 2.00 6.00 3.50 2.00 4.00 2.75 UAE 8.50 4.40 4.00 6.50 5.00 3.00 1.00 4.50 Kuwait 0.00 3.08 0.00 5.00 5.00 6.00 2.00 4.00 Oman 7.50 3.88 5.00 8.00 3.50 6.00 0.50 2.06 Bahrain 0.00 3.50 0.00 7.00 4.50 6.00 0.10 0.44 Qatar 0.00 2.40 0.00 3.00 3.50 3.00 0.25 2.44 Source: Markaz Analysis

Russia scores second from the top in the breadth and depth of the markets. Russia (marginally lesser than India) raised the largest amount in its IPO offerings in 2006.



In the final race, India emerges as a well placed market in terms of capital market structure followed by Egypt and China. Emergence of Egypt in the top of the order is quite surprising but truly deserving. For the GCC, UAE and Oman clearly are leading the way in many respects. Saudi Arabia is not far behind with Kuwait in the middle. The laggards clearly are Bahrain and Qatar.

10. The Road Ahead

Capital markets are evolving quite rapidly, both in the international sense and regional sense. As we write this report, we have seen Dubai Financial Market getting listed in its own stock exchange! We believe that this process is highly dynamic and we will strive to keep up with the pace. The findings of this report should be viewed in the context of aspirations of regional capital markets to develop into full-fledged financial centers. However, the gaps that we notice are quite significant to put a dent in this aspiration. Some of the gaps are structural like the absence of CMA/CML. Some of the gaps in the area of information disclosure and foreign investment are important as well, though they may not be structural. Authorities have the twin challenging of increasing the market breadth and depth and at the same time ensure orderly growth. During the last few years, we have seen many small steps being taken primarily to address market volatility issues. Notable among these are allowing foreign residents to trade directly in the exchange, tougher provisions against insider trading, monitoring bank exposure (direct and indirect) to stock market through consumer loans, mandating companies to refund IPO over subscriptions within two weeks, etc. There were also measures to improve corporate governance in listed companies, though they remain voluntary with no mandatory compliance insisted. However, these steps remain small compared to big steps that are required as addressed in this report. GCC regulators may have to work on many fronts simultaneously in order to move up in the ranking.



Appendix 1: Fact sheets

Brazil Russia

CMA Securities & Exchange

Commission CMA Federal Financial Markets Service

Year of CMA Establishment 1975 Year of CMA Establishment 2003

CML Law governing the CVM CML Law on securities

markets Year of CML 2002 Year of CML 1996 Stock Exchange Bovespa Stock Exchange RTS

Products offered Equity, Debt, Derivatives Products offered

Equity, Debt, Derivatives, Commodities

Number of Brokers 130 Number of Brokers 212 Settlement Cycle T+3 Settlement Cycle T+0 , T+4

Clearing House Brazilian Clearing and

Depository Corporation Clearing House RTS Clearing centre Market Capitalization (USD b) (Dec 2006) 710

Market Capitalization (USD b) (Dec 2006) 965

Value Traded (USD Bn) 276 Value Traded (USD Bn) 28.937

Number of companies listed 350 Number of companies listed 398

Foreign Investment Not restricted Foreign Investment Not restricted

Institutional participation (%) 49 Institutional participation (%) 2.44

India China

CMA Securities & Exchange

Board of India CMA

China Securities Regulatory Commission

Year of CMA Establishment 1991 Year of CMA Establishment 1991

CML SEBI Act CML

Securities Law of the peoples republic of

China Year of CML 1992 Year of CML 1999

Stock Exchange National Stock Exchange Stock Exchange Shanghai Stock

Exchange

Products offered Equity, Debt, Derivatives,

Commodities Products offered Equity, Debt, Derivatives

Number of Brokers 510 Number of Brokers 138 Settlement Cycle T+2 Settlement Cycle T+1

Clearing House National Securities

Clearing Corporation Clearing House

China Securities Depository and

Clearing Corp. Ltd. Market Capitalization (USD b) (Dec 2006) 819


Value Traded (USD Bn) 424.251 Value Traded (USD Bn) 738.859

Number of companies listed 4796 Number of companies listed 842

Foreign Investment Sectoral caps Foreign Investment Not restricted

Institutional participation (%) 6.5 Institutional participation (%) 11.99



Appendix 1: Fact sheets contd..

Egypt Saudi Arabia

CMA General Capital Market

Authority CMA

Saudi Arabian Securities and Exchange Commission

Year of CMA Establishment 1978


CML Capital Market Law CML CML Year of CML 1992 Year of CML 2003 Stock Exchange Cairo and Alexandria SE Stock Exchange Tadawul Products offered Equity, Debt Products offered Equity Number of Brokers 123 Number of Brokers 23 Settlement Cycle T+2, T+3 Settlement Cycle T+0, T+1

Clearing House

Misr Clearing, Settlement, Depository & Registry

Company Clearing House Securities Depository

Center Market Capitalization (USD b) (Dec 2006) 94


Value Traded (USD Bn) 48.143 Value Traded (USD Bn) 1400 Number of companies listed 290

Number of companies listed 81

Foreign Investment Not restricted Foreign Investment Restricted Institutional participation (%) 0.68

Institutional participation (%) 6.89

UAE Oman

CMA Securities and Commodities

Authority CMA Capital Market Authority Year of CMA Establishment 1999


CML Federal Law Concerning ESCA CML CML Year of CML 2000 Year of CML 1999 Stock Exchange Dubai Financial Market, Stock Exchange Muscat Stock Market Products offered Equity, Debt Products offered Equity Number of Brokers 58 Number of Brokers 19 Settlement Cycle T+2 Settlement Cycle T+3

Clearing House Clearing Depository and

Settlement Clearing House

Muscat Depository and Securities Registration

Company Market Capitalization (USD b) (Dec 2006) 168


Value Traded (USD Bn) 126 Value Traded (USD Bn) 3 Number of companies listed 93


Foreign Investment Partially restricted Foreign Investment Partially restricted Institutional participation (%) 1.01




Appendix 1: Fact sheets contd..

Bahrain Qatar CMA Not Available CMA Not Available Year of CMA Establishment N.A

Year of CMA Establishment N.A

CML Bahrain Stock exchange Law CML

Doha Securities Market Internal

Regulations Year of CML 1987 Year of CML 1995

Stock Exchange Bahrain stock Exchange Stock Exchange Doha Securities

Market Products offered Equity, Debt Products offered Equity Number of Brokers 13 Number of Brokers 7 Settlement Cycle T+2 Settlement Cycle T+2

Clearing House Clearing and Settlement Unit Clearing House Central Registration

System



Value Traded (USD Bn) 2 Value Traded (USD Bn) 20



Foreign Investment Partially restricted Foreign Investment Partially restricted Institutional participation (%) 0.08


Kuwait CMA Not Available Year of CMA Establishment N.A

CML Amiri decree’s and By-law’s organizing Kuwait

Stock Exchange Year of CML 1983 Stock Exchange Kuwait Stock Exchange Products offered Equity, Derivatives (Minimal) Number of Brokers 14 Settlement Cycle T+0

Clearing House Kuwait Clearing Company(KCC), Gulf Custody

Company(GCC) Market Capitalization (USD b) (Dec 2006) 147 Value Traded (USD Bn) 59.4 Number of companies listed 165 Foreign Investment Not restricted Institutional participation (%) 3.64



Appendix 2: Capital Market Authority Structures

Brazil Comissão de Valores Mobiliários (SEC)

India Securities & Exchange Board of India

UAE Emirates Securities and Commodities Authority

China China Securities Regulatory Commission

Russia Federal Financial Markets Service

Egypt General Capital Market Authority



Oman Capital Market Authority

Saudi Arabia The capital market authority

Kuwait Kuwait Stock Exchange Commission

Bahrain Bahrain Monetary Authority

Qatar Doha Securities Market


Appendix 3: Information Disclosure

General Investor specific Indices Historic Score

Stock Exchange

Languages Available

Contact information of the company

Corporate Announcements & Insider/ institutional trades

Board Meetings

Financial Results

Corp Actions

Share holding pattern

Quarterly results published as on

Indices data Historic

Methodology of calculation of indices

Historic Data of stocks

Bovespa (Brazil)

Espanol, Portugese and English (partially) Available

Available (In Portuguese)

Available (In Portuguese) Available

Available (In Portuguese) Not available Not available Available Available Not Available 3

RTS (Russia) Russian/English Available

Linked to Reuters(In Russian) Not available

Not available

Not available Not available Not available Available Available Available 4

NSE (India) English Available Available Available Available Available Available

As published, updated real time Available Available Available 9.7

SSE (China) Chinese, English (Very minimal)

Not available Not available Not available

Not available

Not available Not available Not available Available Available Available 3

CASE (EGID) (Egypt) English, Arabic

Not Available (Paid) Available Available

Available (but scanty) Available

Not Available(Paid) Real time Available Available Available 7.5

TADAWUL (Saudi) Arabic, English Available

Available (Arabic)

Available (Arabic) Available

Available (Arabic) Not available Delayed Available Not Available Available 6

DFM (Dubai - UAE) Arabic, English Available Available Available

Available (Partly English) Available

Not Available (Scanty) Real time

Not available Available Not available 6.5

KSE (Kuwait) Arabic, English Available Not Available Not Available Available Not Available Not Available Delayed Available Not Available Available 5

MSM (Oman) Arabic, English Available Available Available Available Available

Available (Archiving not available) Real time Available Available Available 8

BSE (Bahrain) English Available Available Available Available Available Not available Real time Available Available Not available 7

QSE (Qatar) Arabic, English Available Available Available Available Available Not available Delayed Not available Available Not Available 3

ADSM (Abu Dhabi - UAE) Arabic, English Available Available Available

Available (Partly English) Available

Not Available (Scanty) Real time

Not available Not available Not available 2


Appendix 4: Foreign Investor Participation – Country wise break-up

Country/Company Market Cap (USDMn)

Number of shares (Mn)

% Government

% Institutions/ Corporations

Private Free float (%)

GCC Permissible

Non-GCC foreign permissible

Saudi Arabia SAUDI TELECOM CO 39868 2000 80.00% 0.00% 0.00% 20.00% 100% 0% AL-RAJHI BANK 38341 675 45.00% 0.00% 0.00% 55.00% 0% 0% SAMBA FIN GROUP 23681 600 43.43% 8.55% 0.00% 48.02% 100% 100% SAUDI ELECTRIC 15000 4167 81.24% 0.00% 0.00% 18.76% 100% 0% Total 246411 12104 62% 7% 31% 5% Market Cap of universe 326000 % of total 76% Notes: Samba - Foreign Investors - Minimum Investment SAR 50,000 | All companies except Samba - Only GCC companies, individuals not allowed Bahrain AHLI UNITED BANK 2921 2730 30.39% 13.90% 0.00% 55.71% 100% 49% BAH TELECOM CO 2645 1200 75.01% 3.80% 0.00% 21.19% 100% 49% INVESTCORP BK 1892 1 0.00% 79.73% 0.00% 20.27% 100% 100% ABG 1695 630 0.00% 34.06% 28.24% 37.70% 100% 49% ARAB BNKING CORP 1620 1000 83.63% 0.00% 0.00% 16.37% 100% 100% Total 15765 8450 36% 23% 38% 61% Universe market cap 21013 % of total market cap 75% Oman BANK MUSCAT 2564 832 36.83% 28.55% 2.78% 31.84% 49% 49% OMANTEL 2416 750 77.00% 0.00% 0.00% 23.00% 49% 49% NAT BANK OF OMAN 1205 80 25.92% 55.85% 0.00% 18.23% 49% 49% OMAN INTERNL BK 638 75 3.88% 24.51% 10.07% 61.54% 35% 35% RAYSUT CEMENT CO 612 200 31.70% 16.00% 10.00% 42.30% 75% 75% Total 11550 3912 32% 26% 39% 52% Universe Market cap 16150 % Of market cap of Oman 72% Dubai EMAAR PROPERTIES 20916 6096 31.88% 0.00% 0.00% 68.12% 49% 49% EMR BNK INTL LTD 8508 2332 76.81% 0.00% 0.00% 23.19% 0% 0% DB ISLAMIC BK 7050 3000 29.80% 1.07% 25.41% 43.72% 15% 15% MASHRIQ BK 6368 87 0.00% 0.00% 87.00% 13.00% 0% 0% Emirates Int Tele Co 6350 4000 60.00% 20.00% 0.00% 20.00% 22% 22% Total 65237 26845 29% 16% 50% 24% Universe Market cap 86,408 % of total market cap 75%



Appendix 4: Foreign Investor Participation – Country wise break-up (Contd..)

Country/Company Market Cap (USD Mn)

Number of shares

outstanding (Mn)

% held by Government

% Institutions/ Corporations

Private Free float (%)

GCC Permissible

Non-GCC foreign permissible

Qatar INDUSTRIES QATAR 12296 500 70.12% 4.24% 0.00% 25.64% 25% 25% QA NAT BK 7386 162 50.00% 1.00% 0.00% 49.00% 25% 25% QA TELECOM 6710 100 55.00% 1.00% 0.00% 44.00% 27% 27% QA COMM BK 3489 140 0.00% 2.00% 10.00% 88.00% 25% 25% QA ISLAMIC BK 3292 119 0.00% 1.52% 0.00% 98.48% 25% 25% Total 45864 1672 36% 6% 46% 24% Universe market cap 60940 % of total 75%

Abu Dhabi EMIRATES TELECOM 20818 4538 60.00% 0.00% 0.00% 40.00% 0% 0% NATL BK OF AD 8316 1224 73.00% 0.00% 0.00% 27.00% 25% 25% AD COMMERCIAL BK 6644 4000 65.00% 0.00% 0.00% 35.00% 25% 25% FIRST GULF BK 4254 1250 1.71% 1.20% 87.00% 10.09% 15% 15% UNION NATL BK 3106 1563 60.00% 0.00% 0.00% 40.00% 40% 40% Total 56065 27817 35% 10% 42% 22% Market cap of universe 74263 % of total market cap 75% Kuwait MOBILE TELE CO 18429 1275 24.42% 0.00% 0.00% 75.58% 49% 49% NATIONAL BANK KT 13741 2048 3.00% 0.00% 16.00% 81.00% 40% 40% KWT FIN HOUSE 11272 1715 43.53% 0.00% 0.00% 56.47% 49% 49% GULF BANK 4948 862 0.00% 56.10% 0.00% 43.90% 40% 40% NAT MOBILE TELE 4913 458 23.70% 28.72% 0.00% 47.58% 49% 49% Total 105941 26002 11% 26% 59% 46% Universe Market Cap 147000 % of total market cap 72% Note: The % of total market cap and other aggregate percentages are calculated by taking all the shares listed in the respective exchanges. An indicative list is provided here.


Appendix 5: GLOSSARY OF IMPORTANT TERMS BRIC: Stands for Brazil, Russia, India and China

Benchmark: A standard, used for comparison.

Bond: A debt instrument issued for a period of more than one year with the purpose of raising capital by borrowing. Generally, a bond is a promise to repay the principal along with interest (coupons) on a specified date (maturity). Some bonds do not pay interest, but all bonds require a repayment of principal.

Book Building: The process of pricing a share. In this methodology, a floor rate and a cap rate is set, which is called as the price band. Interested investors are required to bid at any price point within the band along with the volume they are ready to commit. This process of pricing takes into consideration the view of the pricing from investors.

Brokers: An individual or firm which acts as an intermediary between a buyer and seller, usually charging a commission. For securities and most other products, a license is required.

Capital Market: A market where debt, equity or commodities securities are traded.

Clearing house: An agency associated with an exchange, which settles trades and regulates delivery.

Commodity: A physical substance, such as food, grains, oil and metals, which is interchangeable with another product of the same type, and which investors buy or sell, usually through futures contracts. The price of the commodity is subject to supply and demand.

Derivatives: A financial instrument whose characteristics and value depend upon the characteristics and value of an underlier, typically a commodity, bond, equity or currency. Examples of derivatives include futures and options. Advanced investors sometimes purchase or sell derivatives to manage the risk associated with the underlying security, to protect against fluctuations in value, or to profit from periods of inactivity or decline.

Demutualization: A conversion in which a mutually owned entity becomes a shareholder-owned company

Emerging Markets: A financial market of a developing country, usually a small market with a short operating history.

Enforcement: The process of implementation of rules and regulations established by the regulatory authority and investigation of any violations.

Foreign Inclusion Factor: The percentage of shares that can be bought by a foreign investor.

GCC: Gulf Co-operation Council countries comprising Saudi Arabia, UAE, Kuwait, Qatar, Oman & Bahrain.

Green shoe: A provision in an underwriting agreement which allows members of the underwriting syndicate to purchase additional shares at the original. This is a useful provision for underwriters in the event of exceptional public demand. The name comes from the fact that Green Shoe Company was the first to grant such an option to underwriters. also called over allotment provision.

Intermediaries: The number of facilitating functional firms in the stock exchange. E.g: Brokers, Clearing houses

Institutional Investments: Investments of firms. E.g: Mutual funds, pension funds.

Licensing: The granting of permission to list the shares in the stock exchange, to raise money via Initial Public Offering.

Margin Trading: Using money borrowed from a broker/dealer to purchase securities.

MENA: Middle East and North Africa

Primary Market: The market through which new issues are raised.

Regulator: A government organization that monitors companies operating in a regulated industry.

Retail Investors: Investors who are neither firms nor high net worth individuals. These investors tend to trade in small quantities as compared to others.

Stock exchange: An exchange on which shares of stock and common stock equivalents are bought and sold.

Supervision: A process wherein the regulatory authority ensures the compliance of various entities to established rules and regulations.

Self regulating body: A Non-government organization which has statutory responsibility to regulate its own members through the adoption and enforcement of rules of conduct for fair, ethical and efficient practices.

Stock: An instrument that signifies an ownership position (called equity) in a corporation, and represents a claim on its proportional share in the corporation's assets and profits. Ownership in the company is determined by the number of shares a person owns divided by the total number of shares outstanding.

Speculation: Taking large risks, especially with respect to trying to predict the future; gambling, in the hopes of making quick, large gains.

Short selling: Borrowing a security (or commodity futures contract) from a broker and selling it.

Trading cycle: The period of time between the initiation of a transaction and the payment/receipt of money/stocks Transaction charges: The commission charged for executing a trade through a broker on the exchange.

VaR (Value at Risk): value at risk (VaR) is a measure of how the market value of an asset or of a portfolio of assets is likely to decrease over a certain time period (usually over 1 day or 10 days) under usual conditions. Source: www.investorwords.com



Markaz Latest Published Research

Sl No

Title Release Date

Research Highlights

1 GCC Equity Funds: The Asset Allocation Challenge

September 2006 Issues behind asset allocation for GCC equity funds. The report examines the asset allocation pattern among GCC equity fund managers.

2 GCC Leverage Risk: How real it is?

November 2006 Examining the risk behind increased exposure of the GCC financial system to stock market. The report considers four key variables: Size, Asset Intermediation, Cross border activity and Capital market representation. The report also analyses the linkage between bank credit growth and interest rate margin.

3 GCC for fundamentalists: A top-down framework

December 2006 Establishing a framework involving fundamental variables affecting GCC stock markets. The report examined nine important variables: economic factors, valuation attraction, economic liquidity, fund managers average, earnings growth potential, moving average, investor sentiment, geopolitical developments and market liquidity.

4 Managing GCC Volatility: Strategies and Tactics

February 2007 Devising risk-based portfolio strategy to benefit from the high-risk environment of the GCC stock markets. The report discusses four strategies: Relative vol, Contrarian, Technical and Options-based strategy.

5 Derivatives Market in GCC: Cutting a (very) long market short

March 2007 Examining the need for introduction and growth of derivatives market in GCC. The report examines the limitations of GCC capital markets and how introduction of derivatives can overcome some of these limitations.

To obtain a copy, contact: Kuwait Financial Centre “Markaz” - Client Relations & Marketing Department Tel: +965 224 8000 Ext. 1804 Fax: +965 2414499 Postal Address: P.O. Box 23444, Safat, 13095, State of Kuwait Email: [email protected]



Disclaimer This report has been prepared and issued by Kuwait Financial Centre S.A.K (Markaz), which is regulated by the Central Bank of Kuwait. The report is intended to be circulated for general information only and should not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction. The information and statistical data herein have been obtained from sources we believe to be reliable but in no way are warranted by us as to its accuracy or completeness. Opinions, estimates and projections in this report constitute the current judgment of the author as of the date of this report. They do not necessarily reflect the opinion of Markaz and are subject to change without notice. Markaz has no obligation to update, modify or mend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate, or if research on the subject company is withdrawn. This report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance. Kuwait Financial Centre S.A.K (Markaz) does and seeks to do business, including investment banking deals, with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.

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