Under new management: The government aims to privatise the stock exchange

In an effort to ensure increased efficiency and the expansion of Kuwait’s capital markets, the government is working to privatise the Kuwait Stock Exchange (KSE) before the end of 2013. The plan to float the bourse – the oldest in the GCC region – is closely linked with the recent structural and regulatory overhaul of the wider capital markets sector. Indeed, Kuwait’s new Capital Markets Law (CML), which was passed in February 2010, included an official plan to privatise the market and has served as a blueprint for the privatisation effort in recent years. “If Kuwait wants to be competitive in the future we will need to boost our know-how and expertise in financial markets,” said Saleh Al Falah, the chairman of the Capital Markets Authority (CMA), the regulatory body that was established by the CML in 2010. “It is well-known that private stock exchanges run better than public exchanges,” he said.

FACING DELAYS: While the listing is scheduled to go ahead before the end of 2013, it could still potentially be delayed for a variety of reasons. Indeed, the privatisation effort has already been postponed once. Under the CML, the listing of the bourse was originally expected to take place in the first quarter of 2012. Due to widespread opposition to the plan among KSE employees, however, the government rescheduled the effort until 2013. In mid-2012 the CMA announced that the privatisation effort faced a legal obstacle. Namely, under the CML the regulator is prohibited from carrying out commercial activity, which could potentially obstruct the firm’s ability to oversee the listing of the exchange. Perhaps the most pressing challenge currently facing the KSE, however, is the lack of investor confidence in the market over the past four years.

Activity at the exchange dwindled after the global economic downturn: at the end of 2012, trading value was down $100bn from 2007-08. Historically low activity is considered a hindrance to listing. However, market liquidity compared year-on-year rose by 76%, with turnover reaching 87bn shares during the first half of 2013. During that period, the KSE price index was the third-best performing market in the GCC region, posting a gain of 31%, following the DFM General Index and ADX General Index, which added 37% and 35%, respectively. On the other hand, the KSE Weighted Index was up 7%, reflecting the speculative nature of trading and high trading by retail investors that accounts for some 65% of value traded in the market.

BOURSE KUWAIT: Despite these issues, the privatisation of the bourse is considered a national priority, not to mention an essential component of Kuwait’s ongoing economic development plan. The capital markets have seen a number of major changes in recent years, including a new regulatory framework laid out in the CML, the enforcement of the new rules by the CMA and the launch of a new technical trading system (see overview). Despite these upgrades, however, many companies listed on the exchange do not yet operate in accordance with international best practice, particularly when it comes to corporate governance, risk management and financial reporting.

Indeed, since it took over as regulator the CMA has both suspended and delisted a number of firms for failing to disclose past financials. Additionally, the regulator has worked to discourage insider training, which has been a persistent problem at the KSE. Privatising the exchange is widely considered to be the most efficient way to address these issues.

A private KSE – which would potentially be rebranded as Bourse Kuwait – would not be able to rely on government assistance, and instead would be required to compete with other exchanges in the region and around the world. This would, in turn, result in improved transparency and accountability, not to mention fiscal discipline, both at the level of the management of the exchange itself and potentially among listed companies. “As the CMA grows, we want to be sure that we take our time and do what is right for the country and the market,” said Al Falah. “Stamping out insider trading, increasing transparency and creating a level playing field for everyone are our main objectives.”

MOVING FORWARD: Under the CMA’s privatisation plan, 50% of the KSE will be sold to listed companies, with an ownership cap of 5% per firm. The remaining 50% of the exchange will be floated in an initial public offering (IPO) for Kuwaiti nationals. In January 2012 the regulator announced that it had appointed HSBC Holdings, a major UK-based financial services company, to advise on the privatisation effort. Similarly, in February 2012 the CMA announced that DLA Piper, a US-based international law firm, would serve as a legal advisor on the initiative, after accepting bids from a handful of other major international law firms.

The appointment of legal and financial advisors in early 2012 led to complaints from the bourse’s workforce, a substantial percentage of which is averse to moving to the private sector. As of early 2013 the exchange had around 300 employees. One of the positive effects of privatising the KSE, from the government’s point of view, would be the creation of a new, large private enterprise. However, Kuwaitis generally prefer to work in the public sector. Government employees benefit from higher pay, a shorter working week and job security, as compared to many local private sector workers. With these and other concerns in mind, in mid-2012 KSE employees threatened to strike. Consequently, the CMA announced that it would postpone the project until the following year. “There has been a lot of staff unrest,” Issam AD Alusaimi, an information technology consultant at the KSE, told local press. “The employees have lost patience and trust. Many of them are taking legal action.” The CMA has managed to stave off strikes and most other legal actions by negotiating directly with the opponents of the initiative.

In mid-2012 the CMA announced another hurdle to privatisation. When the CML came into effect in 2010, ownership of the KSE was technically transferred to the new regulator. As a regulatory body, the CMA is prohibited from taking part in commercial activities of any sort. With this in mind, the authority is not allowed to manage the listing of the KSE directly. In February 2013 the CMA announced they had set up a new state-owned firm, which would take control of the KSE and administer the public offering. The swift resolution of the legal issue is considered to be a signal of the CMA’s seriousness when it comes to privatising the exchange.

LONG-TERM IMPACT: So long as the CMA is able to effectively negotiate any other issues that might come up during the privatisation process, the KSE is expected to become Bourse Kuwait – a commercial entity – sooner rather than later. The exchange would be only the second privately managed bourse in the GCC, after the Dubai Financial Market, which went through the privatisation process in 2007, at the height of the regional real estate boom. With this in mind, and considering its financial profile, Bourse Kuwait would likely be well positioned to compete with other exchanges in the region for new listings and other business.

Perhaps more importantly, however, the establishment of a new, streamlined, private bourse in Kuwait is widely expected to lead to a substantial jump in market activity over the course of the coming decade. The KSE has been in transition – in a variety of ways – since the 2007-08 global economic downturn, when the market contracted substantially. Subsequent regulatory and structural changes have had a negative effect, as listed companies have had to work to be sure they comply with new requirements, for example.

The privatisation of the KSE is the final major change to Kuwait’s capital markets sector for the near future. Once the newly privatised bourse is up and running and the CMA has addressed any major outstanding concerns, the government is looking forward to a substantial improvement in investor sentiment, and, consequently, steady recovery in terms of market activity. While the project had yet to be completed at time of publication, the prospect of the establishment of a private exchange in Kuwait was already having a positive impact on some investors. “Kuwait should not only privatise the stock exchange, but create multiple exchanges to encourage competition,” said Adnan Al Bahar, the chairman and CEO of The International Investor, a local sharia-compliant investment company. “If they are well managed, investors from all over will be encouraged to take advantage of the many opportunities available here.”

IN THE VANGUARD: The way in which the regulator negotiates the ongoing privatisation effort is being closely watched around the region, as the sale of the KSE will likely be one of the first of what could potentially be a large number of major privatisation projects in the country in the coming years. Most immediately, the long-planned privatisation of Kuwait Airways – the country’s national carrier – is expected to move forward after receiving parliamentary approval in January 2013. The government has been in talks to privatise the airline since the mid-2000s. Under the country’s privatisation law, which passed in May 2012 and served as a framework for upcoming government liberalisation projects, some 35% of the airline will be sold to investors. Meanwhile, 40% will be offered to Kuwaitis through an IPO, 20% will be retained by the government and 5% will be distributed to the firm’s employees.