What is the future for IPOs in the Middle East?

When the history of the bursting of the Great Arabian stock market bubble is written in the future, particular attention will be paid to the role of IPOs. The phenomenal public response to IPOs with banks lending huge amounts of money to fund speculation will surely be a point of major interest to analysts.

For the IPOs brought the masses into the capital markets and fuelled their appetite for share ownership. And they also encourages a generation of new investors to borrow as much as possible and to risk their shirts in the market.

IPOs also played an equally important role in the recent crash of Arabian stock markets. Most directly the insistence of the authorities in continuing with IPOs while markets were coming down made the crash deeper than it otherwise would have been, as investors sold shares in the market to fund IPO applications, draining liquidity from the market at a vulnerable time.

IPOs dry up

Gradually and reluctantly the flow of IPOs dried up as capital markets became worried about what was happening. The damage to investor confidence has been enormous, and yet hopeful IPO candidates still pop up in the press on an almost daily basis.

IPOs are usually only a feature of booming stock markets as they allow company owners to sell shares for an amount higher than would normally be the case in, for example, a private equity deal. They may well also genuinely intend to use this new capital to expand their company in a booming market.

However, IPOs are usually much less attractive to company owners when share prices are depressed as they are today. The price of their company's shares will be lower, and the aftermarket in the shares weak, so why sell unless you need to raise capital urgently, or have just forgotten how capital markets work?

IPO reform

What is really needed is for the capital market authorities of Arabia to convene an IPO conference, and discuss how best the IPO process can be reformed.

Clearly encouraging millions of people to borrow huge amounts of money from the banks to chase IPOs is not a good idea. It is bad for the stability of the capital markets themselves, as we have just seen, and there is a further risk that such wild lending could cause a banking crisis in the future.

Surely a new regime for the pricing of IPOs needs to be adopted so that they are not dumped cheaply into the market and thus attract huge oversubscriptions. Bank lending for IPOs could be limited but the best way to approach this is to price IPOs on market lines as in the more advanced markets.

Ironically the new Dubai International Financial Exchange has adopted this approach to IPO pricing but is now suffering from the general malaise caused by the collapse of other regional markets and their IPOs.

With IPO reform the Arabian capital markets can gradually resume the flow of new companies joining the market, which is healthy for the local economy and the company's concerned, and there will be no repeat of the IPO madness which history will judge as an important component of the recent Arabian stock market crash.