Playing the market: New incentives add to the advantages of listing

These are exciting times for Oman’s capital markets, as a number of recent initiatives aimed at broadening activity are coming into play. The introduction of Islamic finance will likely have an energising effect, as will new systems and standards governing the markets’ daily operations. At the same time, establishing Oman as a regional and international player in capital markets is still under way, while exchanges across the Gulf look to firm up their respective positions on global investor maps. The major range of government-backed projects currently under way or in the pipeline in the sultanate will help greatly with this, as will Oman’s solid economic fundamentals.

Sector Bodies

The sector’s main supervisory and regulatory body is the Capital Markets Authority (CMA), which was set up via the 1998 Royal Decree No. 80/98. Its remit covers all licensed intermediaries and joint stock companies operating within Oman. Subsequently, the insurance sector was added to the CMA’s portfolio of responsibilities, with an expectation that mortgage finance might also come under its wing at a future date. Indeed, in the long term, the CMA may change into a full-fledged financial services authority, losing its specific capital markets appellation, although continuing to govern them.

The CMA has the task of implementing the Capital Markets Law, which was amended in 2011. It also provides circulars, as and when they are needed, covering a range of subjects, from new anti-money laundering regulations to updated arrangements on disclosures.

In addition, the CMA runs the Oman Centre for Corporate Governance. Set up in 2009, the centre plays an important role in promoting best practices among listed companies – and in the sultanate as a whole. This is done through workshops, conferences and a resource centre, which undertakes research and provides companies with information on corporate governance systems and practices. The centre’s outreach function is seen in the industry as an important part of preparing more companies for possible listing.

Two other entities – the Muscat Securities Market (MSM) and the Muscat Clearing and Depository Company (MCDC) – fall under the CMA’s direct supervision.

This followed the market reorganisation of 1998; prior to this, the three bodies’ functions had been united in one entity, the original MSM, which had been established by Royal Decree No. 53/88 in 1988. This posed considerable risks, which the financial volatility of that time had exposed. When the MSM was restructured by two further royal decrees in 1998, the sector was reordered with the CMA now in charge. The division of powers and responsibilities secured a more risk-managed environment for the markets. The MSM continues to have its own regulations covering functions such as listings and issuances, although the CMA retains the ultimate authority over MSM’s decisions.

The MCDC, on the other hand, was established in 1999 as a private company, with a majority of its shares (60%) owned by the MSM, and the rest in the hands of listed banks and other financial intermediaries.

Integration

The CMA also has responsibilities under sections of the Commercial Companies Law, with regards to determining whether a company qualifies for listing. This gives the CMA a role within the Ministry of Commerce and Industry (MoCI), the overall body in charge of administering the Commercial Companies Law. Similarly, the CMA also participates in administering some functions of the banking law, although the banks are supervised by the Central Bank of Oman. In the past, the MoCI has held the chair of the CMA, although in late November 2012, Yahya bin Said Al Jabri, chairman of the Special Economic Zone at Duqm, took over as chairman of the CMA board. Policy integration continues at the highest levels, however, through close cooperation between the MoCI and the CMA.

Awareness Creation 

The CMA has a third function, added to supervision and regulation, which is to increase awareness of the capital markets and their usefulness to businesses and the economy. Under this remit, the CMA undertakes regular campaigns to raise interest in the markets among entrepreneurs and the wider public.

Market Structures

The MSM consists of several different markets: the regular market, the parallel market and the third market. All three are then broken down into the same three sectors – financial, industrial and services. The companies listed on these three boards can be differentiated by their financial robustness and the degree of the requirements each board sets. The regular market has the highest level of requirements in terms of company record and financial position, with high profitability key, while the parallel market has fewer requirements. The third market is reserved for companies facing financial distress.

Thus, under the Capital Markets Law, regular market companies must demonstrate net profits for two years, have paid-up capital of no less than OR2m ($5.2m), with shareholder equity not less than this paid-up capital, and the company’s shares must be traded for no less than 30 days per year with an annual turnover per share of no less than 5%.

Parallel market companies, meanwhile, must be newly established joint-stock companies and investment funds, with shareholder equity no less than 50% of paid-up capital. This market includes companies that do not meet the requirements of the regular market, but are more robust than those on the third market. The requirements concerning the latter are that shareholder equity be less than 50% of paid-up capital, that an entity be a closed joint-stock company or that it fail to meet the other boards’ requirements.

Listed

At the end of the first half of 2012, the regular market had 22 traded securities in its financial sector, 17 in its industrial sector and 18 in its services sector. Following a number of rights issues, the number of listings rose by October 2012, with the financial board showing 26 listings, the industrial sector showing 19 and the services sector showing 24.

The parallel market, meanwhile, had nine traded securities in its financial sector at the end of the first half of 2012, including the recently launched Bank Nizwa, Oman’s first Islamic bank to hold an initial public offering (IPO). There were 16 traded securities on its industrial sector board and nine in its services sector. By October, these boards showed more companies listed, with 18 registered in the financial sector, 26 in the industrial sector and 16 in the services sector.

In the third market, the first half of 2012 figures for traded securities showed two in the financial sector, eight in the industrial sector and one in the services sector. In October 2012 the number of listed companies in these three sectors on the third market was nine, 25 and four, respectively.

MSM 30

In addition to these markets, there is also the MSM 30 Index, which puts together the most liquid companies in the market, also divided within the same three sectors. The MSM 30 was established in 1992 with the intention of using it to create a benchmark for the market as a whole. The index includes only the free float of the companies and uses a 10% cap to ensure that smaller companies are also listed. The MSM also includes a small bond market. Only six government bonds and eight corporate bonds were listed in November 2012. Yet the first half of 2012 figures showed 7,364,424 individual bonds traded over those six months. This demonstrates one feature of the bond market – that there is little trading of bonds once they have been purchased. This market may increase in 2013 with the introduction of Islamic bonds or sukuk (see analysis).

Market Performance

While Oman was not directly exposed to the international financial contagion that began with the US subprime crisis in 2007, it was not entirely immune from its impact on international money markets and global confidence.

Yet the sultanate was better protected from the storm than many Gulf economies, having pursued a conservative developmental strategy for many years. Like its neighbours, Oman is also primarily an oil and gas sector economy, with international investors involved in this industry clearly committed for the long term. Indeed, although oil and gas prices declined in the first years of the crisis, they began rising again, with the barrel price at $92 in mid-October 2012 after hitting a $110 high earlier in the year and averaging $106.70 in 2011. This has in turn fed into the wider economy in the form of increasing government expenditure and higher disposable incomes. This also meant that the MSM was not badly hit by the crisis, with 2009 and 2010 seeing strong recovery. CMA figures show 17% and 6% growth in the MSM 30 Index in those two years, respectively. The Investment Stabilisation Fund (ISF), set up in 2009 by the Omani government, also helped. The MoCI put up OR60m ($156.4m) to establish the fund, which was launched with Bank Muscat and Oman Arab Bank as portfolio managers. The fund attracted some OR52m ($135.5m) from other investors, giving it a highly successful level of public-private participation, which acted to shore up investor confidence in the market in the face of the continuing global downturn. By the end of 2010, the ISF had helped stabilise the market, as well as achieved 7.2% growth in its net asset value. Yet 2011 saw this growth story falter across the MSM. Opening the year at 6754.92 points, the MSM 30 Index closed 2011 at 5695.12.

Global Feeling 

This decline was due to a number of factors. First was an overall drop in the profit level of many listed companies, particularly on the regular market. This was partially connected to a second reason for the MSM’s decline – the political turbulence elsewhere in the region that became known as the Arab Spring. Adding to the negative investor sentiment this produced was the continuing eurozone crisis; while Oman was not directly exposed to the European downturn, it affected international investor confidence and generated a global risk-adverse mood.

Once again, the ISF demonstrated its usefulness here, offsetting selling pressure from foreign investors during the first quarter of 2011 in particular. Thus 2011 ended with Omani institutional investors as net buyers and foreign and GCC institutional investors as net sellers; the MSM figures showed a net buy for the former of OR81.1m ($211.4m), or 52% of total buying value, while the net sell for the latter was OR56.2m ($146.5m).

All individual participants, Omani or foreign, also ended as net sellers, with local Omani individual investors accounting for 63.8% of total selling.

Market Value

The year also saw a decline in market value, from OR10.9bn ($28.4bn) in 2010 to OR10.34bn ($26.9bn) in 2011. This was partly because the number of listed companies fell, from 119 listed at the end of 2010 to 114 at the end of 2011, while the number of brokerages also declined, from 23 to 21. One bright spot was the bond market, with the number of bonds traded in 2011 up some 25% on the year before.

In 2012 the MSM 30 Index maintained roughly similar levels to the end of 2011. At close of business on October 10, the index was at 5648 points. At the end of the first half of 2012, on June 28, it stood at 5698.83.

By the end of the first half of 2012, the MSM 30 had a market capitalisation of OR11.1bn ($28.9bn), up some 8.43% on the OR10.3bn ($26.8bn) recorded at the end of the first half of 2011. Trading activity on the MSM 30 over those six months peaked in April, when turnover reached OR126m ($328.4m) with a volume of 613.5m shares traded. Over the entire six months, turnover was OR559.97m ($1.5bn), down some 15.31% on the OR661.23m ($1.7bn) recorded for the first half of 2011, but the number of trades was up, year-on-year, with the first half of 2012 total reaching 2.227bn, 36.75% up on the 1.629bn traded in the first six months of 2011.

In terms of sector performance, the financial industry recorded the most activity on the MSM 30 in terms of the number of shares traded. This reached a total of OR1.47bn ($3.83bn) over the six-month period, or 65.93% of all the shares traded in the first half of 2012. Turnover in this sector was OR259.93m ($677.4m).

The industrial sector was second in terms of activity, with 412.27m shares traded in the six months, and a turnover of OR121.1m ($315.6m), while the services sector recorded a total of 339.29m shares traded and a turnover of OR171.08m ($445.8m).

Trends

In regional, international and historical contexts, these figures form part of a consistent overall pattern. Looked at in the long term, the daily average turnover in both value and volume traded grew steadily from 1989 to 1996, when they experienced a major surge, peaking in 1997. This was in a much more unregulated market, however, with the surge falling away quickly, and by 2001, the two indicators had returned to roughly pre-1996 levels. After that, a steady rise in both statistics saw turnover peak in 2008, when the global financial crisis hit, at OR3.39bn ($8.83bn), with this figure then steadily declining to OR990m ($2.58bn) in 2011. The number of shares traded peaked slightly later – as investors sold off in 2008 and 2009 – but then also went into decline.

Yet this trend began to reverse in the first half of 2012, with both turnover and the number of trades increasing in the second quarter of 2012, quarter-on-quarter. Turnover for the second quarter of 2012 was OR291.4m ($759.4m), up on OR268.53m ($699.8m) in the first quarter of 2012, while the number of trades went from 898.578m to 1.32bn. This latter trend in the second quarter of 2012 was an encouraging sign, despite the fact that first quarter of 2011 results were much higher, creating an aggregate for the first half of 2011 that was higher than the first half of 2012. In the regional and international context, recent years have also not been good for equities markets globally. With the exception of the Saudi Arabian exchange, the Tadawul, all the GCC exchanges saw declines in their main indices in the first half of 2012, in comparison with the first half of 2011. Indeed, the MSM 30’s downward drift was at the low end of regional decline. This picture was repeated on all Middle East and North African markets, with the exception of the Tunisian Tunindex, and on the global markets, with a few exceptions, such as the NASDAQ and Standard & Poor’s 500. The FTSE 100 fell 6.3% in first-half 2012, in comparison with the first half of 2011, while the DAX was down 13% and the CAC 40 dropped 19.7%.

This indicated a global risk-adverse sentiment in the face of continuing European difficulties, the slowdown in Asian growth and the slow recovery of the US. The Omani authorities also recognise that steps have to be taken inside the sultanate if the capital markets are to achieve their potential strength and utility.

Increasing Dimensions

Indeed, few would dispute the size of that potential, given the availability of many valuable resources, the number of blue chip corporates and the prevalence of high standards of living throughout the Gulf. Still, some problems remain. “While the region has big surpluses,” Ahmed Saleh Al Marhoon, director-general of the MSM, told OBG, “the exchanges are generally small.” Although companies report increasing profits, indices do not always reflect these healthy bottom lines. At the same time, the region often shows extreme sensitivity to sentiment, producing short-term volatility on indices.

Oman’s market also possesses many of these characteristics. One factor underlying this is that the sultanate lacks a sufficiently wide and deep market, with the number of listed companies and the range of sectors they cover needing to be significantly expanded. Thus, a major part of the government and the CMA’s capital markets master plan aims to encourage more listings. This can be challenging. Many of the main economic entities in the sultanate are either government units or large, family-owned enterprises. Regarding the former, a privatisation programme was begun prior to the 2008 crisis, and then eased off during that uncertain period. Very measured privatisations are probable in the future.

Family-owned businesses, meanwhile, whether large or small, often have concerns about control and legacy when it comes to listing. For small and medium-sized enterprises, there may also be capacity issues, with listing requiring more sophisticated corporate governance and accountability. The benefits of raising financing from the markets may not be widely appreciated or accepted, with businesses typically looking to other family members and the banks to satisfy funding needs.

Large institutional investors, such as pension funds, are also generally inactive in the market. Where they do purchase shares, they often see them as long-term assets and do not engage in active trading with them. This further diminishes liquidity in the market.

The CMA and MSM are thus engaged in a continuous programme of building awareness, meeting entrepreneurs and organising roadshows to try and boost listings. At the same time, some particular developments in the Omani financial sector have also been helping with this, generating a new mood of optimism regarding fresh IPOs on the MSM.

Turning The Corner

After the royal decree allowing Islamic banking was issued in 2011, a new wave of activity began among the sultanate’s banking stocks, with a string of successful IPOs as the result. Two newly dedicated Islamic banks – Bank Nizwa and Al Izz International Bank – gained licences, which oblige them to list on the MSM.

In May 2012 Bank Nizwa launched its IPO, with the intention of raising OR60m ($156.4m); it was oversubscribed 11.3 times, demonstrating major investor appetite. The bank offered 600m ordinary shares at an offer price of OR0.102 ($0.266) per share, which went live on the exchange’s parallel market the following month, jumping 12.75% on the first day of trading.

Al Izz, meanwhile, opened its IPO to public subscription in September 2012. This offering aims to raise OR40m ($104.2m) from 400m ordinary shares also given an offer price of OR0.102 ($0.266). Expectations that this offering would be heavily oversubscribed by the time it closed were fulfilled in November 2012.

The impact on the market of these new entrants does not stop there, though. The new Islamic banking regulations also allow for existing conventional banks to establish Islamic banking windows, and many have done so. The windows are required to possess paid-up capital of at least OR10m ($26.1m), meaning that the conventional banks have also been obliged to raise their capital bases. One bank in particular, Bank Muscat, has entered the Islamic field with a capital base for its window as large as either of the two dedicated Islamic banks, at OR150m ($390.9m).

There has been a flurry of rights issues on the MSM. In July 2012 Bank Muscat made an OR96.7m ($252m) issue to assist with its window and Ahli Bank also made an OR25m ($65.2m) issue. In September Bank Sohar followed with an OR10m ($26.1m) rights issue.

The Islamic finance sector is also set to see the introduction of takaful (Islamic insurance) companies with a draft law on this being debated in late 2012. According to CMA sources, three companies applied for licences to undertake takaful business by September 2012, with one of these likely to launch in early 2013. This would probably involve an IPO, although the exact details of the takaful law are yet to be decided. New regulations allowing Islamic bonds are also being debated, which may cause a surge of interest in the MSM’s debt market (see analysis).

However, some industry leaders believe the broader picture needs to be examined when considering the implementation of Islamic finance. Pradeep Asrani, managing director of Gulf Baader Capital Markets, expressed some of his doubts with regards to unforeseen costs and the effect of these on customers. Asrani said, “Islamic financial instruments should offer a good opportunity at the outset but in the long run the costs associated with these products may lose customers. We do hope Oman succeeds in the Islamic finance segment.”

New Listings 

In the conventional banking sector, Oman Arab Bank has plans to list in late 2012 or 2013, having made an agreement with the CMA to do so via a 25% share issue – lower than the 40% minimum previously required. The CMA has thus sent a message that it is willing to be flexible in order to encourage listings.

Meanwhile, capital market institutions have continued to advocate for more government entities to list. “We are focusing on developing the market through IPOs of existing companies or government or family companies, as well as by bringing new companies to market,” Al Marhoon told OBG.

This is beginning to happen in sectors such as finance, where the banks have been set a compulsory listing requirement for licences. This procedure has also been applied by the government in its privatisation plans. Telcos, and power and utility companies are all set IPO targets to be fulfilled within an agreed period of time.

Some see this procedure as being vital in other areas as well. “Infrastructure is a major part of the economy here,” said V Rajesh, the senior vice-president of Vision Investment Services, “yet there is no compulsion for infrastructure companies to IPO their shares. As a result, infrastructure companies do not have adequate representation in the stock markets.”

Outlook 

With increasing efforts on the part of market institutions and the introduction of Islamic finance, the capital markets should see a boost in activity in the year ahead. Much will depend on the international and regional scenario, of course, but Oman possesses the sound economic fundamentals necessary to withstand any overseas headwinds.

“The regulatory banking framework is very transparent and investors do not have issues in establishing operations in Oman,” Asrani of Gulf Baader Capital Markets told OBG. “When you look at the free zones in the sultanate, they showcase Oman’s abilities and are opening the domestic market to the world.”

Competition may drive more rights issues, while sukuk will be a welcome arrival for Islamic banks and the ability of their windows to boost credit growth. Meanwhile, the programme to convince businesses of the advantages of listing remains vital. There is much to play for in the sultanate’s emerging capital markets.