What the UAE's decision on listing co-ops will mean for the market

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The UAE's decision to permit the listing of co-operative societies on the country's capital markets will widen the pool of investors and boost liquidity, analysts said.

The decision, first announced in February, was approved by the Cabinet on Monday, and will "attract strategic partners and introduce new forms such as digital and financial co-ops”, Sheikh Mohammed bin Rashid, Vice President and Ruler of Dubai, said.

“Co-operatives are a successful economic model that can be built upon and developed.”

The decision to allow co-operative listings comes after attracting investors within and beyond the UAE to the local bourses.

"The increased participation improves investor confidence in stocks, which then leads to more buying activity and can also help push prices higher," said Bal Krishen, chairman and chief executive of Century Financial.

"The rise in activity further spurs liquidity, which improves the efficiency of trading and better service issuers and investors in their markets."

Both Abu Dhabi and Dubai will benefit from the regional IPO boom, as companies vie to raise capital to fund their expansion. The Abu Dhabi Securities Exchange, the second-biggest Arab stock market, was third best performing market globally last year, one of its most successful, and is up about 67 per cent since the start of this year. The Dubai Financial Market is about 32 per cent higher year-to-date.

Nine companies listed on the ADX last year. They include Adnoc Drilling, which raised $1.1billion in October, as well as Fertiglobe, the world’s largest seaborne exporter of urea and ammonia combined, which reaped about $795 million. The number of new investors who registered on the exchange in 2021 grew eight-fold to 18,938, while trade volumes increased five-fold to Dh739bn.

Dubai plans to list 10 government and state-owned companies on the DFM to increase the market's size to Dh3 trillion ($816.7bn). It also launched a Dh2bn market maker fund to encourage listings and enable secondary trading.

Last week, the Dubai Electricity and Water Authority announced it will list 6.5 per cent of its shares on the DFM, becoming the first government entity to issue an IPO on the bourse. Dewa said it will make 3.25 billion shares available in the offering, all of which are being sold by the government of Dubai.

The sale of minority stakes in government-related entities is a "positive trend that is further developing the debt and equity markets" of the UAE, creating revenue generation opportunities for the government and increasing market transparency due to disclosure requirements for issuing entities, S&P Global Ratings said in a note on Monday.

"The trend is also evidence of the strong financial position of the GREs [government related entities]. We see the sales as credit neutral for the GREs as long as their strong underlying financial positions do not change significantly and the government remains the majority controlling shareholder," it said.

The latest decision to list co-operatives will also allow local bourses the option to establish special platforms to list and trade the associations, said Mohammed Shaheen, chief executive of Seven Capitals.

"For investors, the move is important because it will increase the diversity of local stocks. It will further boost access to funding for small and medium-sized enterprises. Developing a more diverse investors' base would help in increased liquidity, while driving a greater variety of listings would also bring in more liquid retail investors."

Overall, the step to permit co-operatives to list will make the financial market environment more dynamic and help strengthen the regulatory environment of the sector, Mr Krishen said.

"The listings will initially target local investors as they are more aware of the local co-operatives established in the country. However, the increased liquidity will eventually have a domino effect on even the international investors willing to tap into the UAE markets."

The move could definitely drive up listings as new avenues of funding becomes available, analysts say.

"A major factor motivating the co-operative societies have been the need to raise additional funds and better governance standards," said M R Raghu, chief executive of Marmore Mena Intelligence.

"Further expansion of current businesses and funding for new forms of co-ops like digital and financial is expected to drive more listings."

Impact on the co-operatives market in the UAE

Co-operatives, which are primarily supermarkets and retail businesses, are expected to benefit from the increased exposure and financing that a listing provides.

"[The decision] will allow co-operatives to benefit from the advanced services provided by the UAE’s financial markets in terms of transparency, flexibility and speed of procedures, and will also enhance the economic return on co-operative activities," said Mr Shaheen.

"In addition, the resolution offers plenty of benefits to shareholders in terms of preservation of rights, enabling sound practices in trading operations and ensuring their ease and reliability."

The UAE had 42 co-operatives with 200 branches operating across the country, with a total capital of more than Dh3.1bn and net profit of Dh1bn as of the end of 2020, state news agency Wam said.

The country intends to increase their contribution to the gross domestic product to more than 5 per cent by 2031 from less than 1 per cent in 2018.

"Co-operatives are successful business models that can be built upon and developed for new horizons. Their listing on the local bourses will allow them to attract strategic partners," said Mr Krishen.

"Moreover, the decision would enable these associations, which are mostly government-owned, to raise funds needed to expand and diversify their activities. The country aims to improve the regulatory environment for the co-operative sector and enhance its competitiveness."

Listing of co-ops will also mean they are better governed, Mr Raghu said.

"This will in turn help them focus on long term sustainability and drive economic returns thereby, increasing their share in UAE’s gross domestic product and helping in diversification plans."

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