This article was published by Al Habtoor Information & Research in Al Shindagah Magazine back in 1997, and we believe that its content is very relevant to the current situation.The United Arab Emirates has been experiencing a surge in initial public offerings of stock. This will have a major impact on the economic future of the private sector. Khalaf Al Habtoor comments.

The increasing number of initiatives to create public shareholding companies represents a quantum leap in the United Arab Emirates. The long-awaited announcement of plans for the opening of a stock exchange represents an endorsement by the UAE government of this trend. Local firms will now be under pressure to go public in order to, not only access a new capital market, but to gain credibility in the globalising international economy.

We believe that this trend is very positive. Public shareholding is the only option available for the private sector of the UAE to grow beyond the limited scope of the existing family businesses and sole proprietorships that have so far dominated the first decades of our nation's economic life. It should be realised though that the transformation that will be caused by increased public share holding will not happen overnight, it must be managed carefully and in harmony with the overall economic, social and intellectual evolution of our society.

These changes could not have happened twenty or even ten years ago. Likewise, it would have been impossible for such public offerings to occur due to directives from above. This trend actually represents the current state of health of the UAE development process. The organisations that have served the economic ups and downs of the past two decades have proved their management capabilities. And, it must be said, survival has often reflected the considerable expertise accumulated over generations by the merchant families of the Emirates.

The move towards public shareholding is an economic milestone in the development of the UAE. This trend is based on the maturation of previous economic phases. It is imperative therefore that both, the public and private sectors safeguard this phenomenon by implementing strategies that will promote the prosperous expansion of public ownership.

The Initial Public Offerings (IPOs) of shareholding companies in the Emirates have been quite successful thus far. Each offering has garnered a response rate of subscription, which far exceeded the amount of capitalisation required. It is prudent therefore to consider the following:

The tremendous response rate indicates a general and positive interest in share ownership by the public. The repeated enthusiastic responses to IPOs serve as a survey of savers' interest to invest in local companies with a solid financial base. We can infer that these investors want to benefit from the advantages of liberalising our local economy.

The response rate to the IPOs is testimony to the purchasing power of our society. The magnitude of the available liquid capital reflects the economic stability of the UAE, which is the direct result of the sound economic policies pursued by our government since the establishment of the federation 33 years ago. Our business sector has grown and flourished without the government having to resort to protectionist policies, and its success can be attributed in large measure to competition in an open business environment.

The subscription rate also indicates confidence by local investors in the future of our economy. Where a man puts his money is a real indication of his hopes and fears. In this case, it seems much hope and little fear.

Last but not least, the response rate reflects a mature investment trend. Savers in the UAE evidently want to diversify their portfolios across several economic sectors rather than follow the more risky policy of putting all their eggs into one basket.

Decision-makers in both, the public and private sectors of the UAE should consider the implication of this shareholding trend. We need to ensure the stability that will act as protection and insurance against the negative macro-economic forces that will constantly threaten the gains we have achieved.

In the context of the recent IPOs and the positive subscription rates, there is actually little alternative to the establishment of a stock exchange. The institution will not only provide a forum for trading, but will also function to regulate the new market and to guard against unethical or unsound practices which would undermine the stability of the UAE economy.

The stock exchange will feature bodies that will specialise in management analysis, classification and control. The market will establish procedures for corporate transparency, and will ensure that there is accurate disclosure about the vital statistics of listed companies or new IPOs. For example, the stock exchange will issue quarterly reports summarising the economic data of listed companies, compiled through standardised procedures.

The establishment of the stock market will broaden the participation of the public in equity ownership. The trust that each investment represents cannot be squandered. The management of each listed company must function in such manner, as to maintain the confidence of the shareholders. One consequence of this oversight is to force management to abide by sound principles. The scrutiny functions as an incentive to perform to a higher standard.

The number of stock markets throughout the Arab world is increasing steadily, and they are beginning to maintain open channels to each other. These markets are recording considerable capital growth rates due to a steady expansion in the number of stocks listed, and the increasing willingness of Arab investors to bring their money home. It's high time for the Emirates to benefit from this trend with a formal equity trading institution.

The anticipated opening of the Emirates' Stock Exchange will of course not only be limited to IPOs of new enterprises. The existence of the market will encourage established local corporations, even the large family owned enterprises, to consider raising capital by issuing shares. This in our view will serve several purposes.

From the point of view of the nation, the trend of widening equity ownership will increase general awareness of economic issues. It will bring locally owned capital home to let it work for the future of our economy. From the point of view of the local enterprise, the requirement of transparency and the responsibility of reporting to shareholders will improve management performance.

The establishment of the UAE Stock Exchange will also foster the creation of a locally based investment industry. These specialised organisations will play a crucial role in developing and maintaining the links between an expanding pool of investors and the management of the listed companies. The investment companies will also offer objective reporting on economic data, and will have to function according to internationally acceptable criteria. Such activities can only be a healthy addition to our national economic development.

The economy of the United Arab Emirates has achieved an amazing record of progress in the three decades since the establishment of the Federation. Under wise leadership, economic policies have been implemented which have created a liberal market environment. A sophisticated national infrastructure has been created at enormous cost. The private sector has thrived. The establishment of a national stock exchange will now consolidate the trend of successful stock offerings.

The success of IPOs demonstrates the potential of the planned market to attract home the surplus capital of a potentially wide investor class. Local establishments must now consider the option of transforming themselves in order to gain access to a new source of capital. In addition there is the logic of improving management procedure.

There is yet another important rationale for local enterprises to issue shares. The process will in effect return something to the country that has asked relatively little of us. The wider the circle of Emirate citizens that benefits from equity ownership in our strong economy, the more stable, and prosperous will be the future of our young nation.