The upgrade of the Qatar Stock Exchange (QSE) to the MSCI Emerging Markets Index in May 2014, which was followed by a similar upgrade by Standard & Poor’s (S&P), was the reward of a long process of technical and regulatory reform. The genesis of this process dates back half a decade: in 2010 Qatar’s adoption of the NYSE Euronext Universal Trading Platform established it as the first jurisdiction outside NYSE Euronext’s core markets to use the cash trading application suite. Just a year later the QSE bagged another regional first with the adoption of a full delivery-versus-payment system, which, after being enhanced twice in 2012, brought the county into line with international best practice with regard to the protection of investors’ assets.
LONG-TERM EFFORT: The work of the authorities was key to the index upgrades that were to follow, but some of Qatar’s listed companies also played a crucial role in helping the exchange meet the criteria demanded by organisations such as MSCI and S&P to enhance its rating. One of the sticking points in the process of assessment that preceded the MSCI upgrade, for example, was the question of Qatar’s limit on foreign ownership of its listed companies: most of the large-cap companies on the QSE restricted foreign ownership of their stock to 25% of the free-floating, non-government-held shares, but in the run-up to the upgrade some of the nation’s largest firms – the Commercial Bank of Qatar and Qatar Islamic Bank – requested that up to 25% of their market capitalisation be made available to foreign investors. The MSCI acknowledged these efforts when it elevated the exchange to emerging status.
Thanks to these changes, the QSE is a much-improved institution in terms of the enhanced liquidity and the liberalisation and technical capacity of its settlement and trading regimes, with fewer restrictions on foreign ownership. In a more general sense, the exchange’s new categorisation is a recognition of Qatar’s economic stability and development model, and effectively places the country in line with other emerging markets like China, South Africa, India, Brazil and Russia.
ONGOING PROCESS: The successful bid to elevate the QSE from frontier to emerging status has not, however, lessened the need for continued market reform. International best practice is a constantly moving target, as regulators around the world respond to demand for increased investor protection, enhanced corporate governance and more regulatory clarity. In a region where exchanges are developing at a rapid rate – both the Abu Dhabi Securities Exchange and the Dubai Financial Market were upgraded at the same time as the QSE – competition for capital is intense, and therefore the continuation of the process of regulatory reform set in train five years ago forms a central front in a battle for limited liquidity. The last year, therefore, has seen several further moves by the government and the Qatar Financial Markets Authority (QFMA) that are divided into two main areas: efforts to improve corporate governance and to boost liquidity in the market.
On the governance side, the QFMA has made regulatory alterations with a view to enhancing transparency and procedural integrity. The changes were made in the corporate governance code of the main and secondary market, and have established a new and more stringent regime vis-à-vis the establishment and conduct of boards of directors. Henceforth, members of the board are to be held collectively responsible for legal transgressions, are barred from exposing themselves to conflict of interest, and are prohibited from being absent from more than three board meetings in a row without a valid reason. The new corporate governance measures also establish conditions that should be met by prospective board members, such as a lower age limit of 21 and a requirement that they hold shares in the company, to be deposited with the QSE.
In terms of its efforts to boost liquidity on the market, the QFMA has been particularly busy over the past year, starting with the cementing of its stance on foreign ownership. An emiri decision from May 27, 2014, granted final approval to an amendment on the existing regulation governing restrictions on non-Qatari participation on the QSE, raising the ceiling for foreign ownership for all listed companies from 25% to 49%. Moreover, companies will no longer be required to seek an exemption from the 25% limit from the Council of Ministers as was the previous practice, subject to their correctly amending their memoranda and articles of association to allow for 49% non-Qatari ownership. The new regulation formalises the principle of using the total share of a company’s market capitalisation to calculate the foreign ownership percentage, not just the free-floating shares – a measure that the MSCI suggested in the period before the QSE’s upgrade. From 2014 onwards citizens of the GCC have also been removed from the “foreign investor” classification and treated equally to Qatari citizens with regard to share ownership, thereby providing yet more opportunity for inward investment from beyond the region.
“The MSCI upgrade and the increase in foreign ownership limits have both been positive moves for the market, but it is still not enough. In order for Qatar to have fully functioning capital markets, more companies need to list on the exchange. By mid-2015 it is anticipated that small and medium-sized enterprises should be able to list, although this is rather tricky and businesses should be vetted with a five- to 10-year track record. Qatar has received a lot of investor interest in the past year, so now is the time for initial public offerings if we want to maintain this interest,” Yousef Al Obaidan, acting CEO of The First Investor, told OBG.
MARGIN TRADING: The implementation of margin trading regulations was another potential liquidity-booster to emerge in 2014. Under the new measures financial services firms are permitted to fund a percentage of the share value purchased for their clients, a practice which will significantly increase the purchasing power of investors. The move is an important one for two principal reasons: the increased volume and diversity of transactions has the potential to facilitate fair and smooth price discovery, thereby limiting the capricious tendency of a low-liquidity market; and margin trading is generally seen as an essential step to the introduction of derivatives trading such as futures and options. The arrival of margin trading regulations in Qatar might also be seen as a demonstration of confidence by the QFMA in its own regulatory regime. Margin trading carries greater risk than straightforward transactions as it allows investors to purchase more than their own resources would normally allow and exposes them to higher potential losses. Leveraged investments in poorly regulated markets are liable to become highly problematic when markets move significantly, and thus regulators have spent recent years assessing how this function can be introduced responsibly. The advances in process, technology and corporate governance made by the QSE and QFMA in that time have allowed for the introduction of margin trading at an important stage of the exchange’s development.
MERGERS & ACQUISITIONS: Finally, the QFMA has taken steps over the past year to improve the deal-making opportunities between the exchange’s listed companies. Qatar already had in place a framework that was considered amenable to friendly takeover bids, and in 2013 it saw seven mergers or acquisitions, according to Zawya – a relatively high number by global standards. However, a lack of detail with regard to hostile acquisitions has prompted the QFMA to introduce new mergers and acquisition regulations, which it finalised after consultations with concerned parties. The rules address issues such as the protection of the target company’s shareholders, hostile acquisition and compulsory acquisition processes, cross-border acquisition and the required level of disclosure to shareholders.
The recent regulatory changes have sought to strike a balance between enhancing the integrity of the market and boosting its liquidity. These goals have the same end: a well-regulated market is better able to attract sustained investment rather than “hot” money that evaporates as quickly as it arrived. With the QSE’s rise to emerging market status, and the increased interest of international investors, this process will continue to play a central role in the development of the exchange.
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