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"We would expect to take a leading role in Dubai International Financial Exchange (DIFX)," Mukhtar Hussain, HSBC joint-CEO for Corporate, Investment Banking and Markets in the Middle East & North Africa, told Reuters in an interview.
Dubai, a thriving trade and tourism hub in the energy-rich UAE, wants to extend its reach into financial services through Dubai International Financial Centre (DIFC), a state-run free zone that opened in 2004 and will include DIFX. DIFX opens in September promising corporate disclosure and market transparency regulations on a par with those of New York, London and Hong Kong to attract international investors, issuers and intermediaries. The Arab world is home to around a dozen national stock exchanges with a reputation for patchy regulation and offering only limited access to foreign investors. DIFC wants to attract the biggest brokerages and investment banks as members, and listings from companies across the Middle East, Africa and south Asia.
The exchange said yesterday that it was in "advanced talks" with a number of international banks to act as brokers and market makers, but declined to name them. HSBC is one of only a handful of global investment banks active in the Arab world, with a dedicated unit in Dubai since 1995, and Hussain said HSBC "would hope to be one of the founder members."
Hussain said HSBC's Middle East investment bank would see a "significant increase" in the value of deals it advises on this year, particularly initial public offerings (IPOs).
"Equity capital markets activity is rising substantially," he said, particularly in Saudi Arabia and the UAE.
HSBC advised the Abu Dhabi government on a privatisation programme that included the 294 million UAE dirham ($80 million) IPO of food company Agthia. It is also advising Saudi Arabia on the forthcoming IPO of dairy group Al-Marai.
"The sheer welter of liquidity is a factor in increasing the number of issues" across Arabia, fuelled by high oil prices and repatriation of funds since September 11, 2001, he said.
The Shuaa Capital Arab Composite Index, which tracks stocks across the region, has risen 66 per cent so far this year, and bankers estimate that the UAE will see about 10 billion dirhams ($2.7 billion) of stock market listings in 2005.
Hussain welcomed the recent growth of Arab stock markets, but warned that the boom carried risks, and called for the "development of a more orderly market."
He said demand from investors still outweighed supply from issuers, contributing to some IPOs being heavily oversubscribed.
The IPO of the UAE's Aabar Petroleum Investments, which closed in April, was about 800 times oversubscribed after many investors took out bank loans to buy shares.
Hussain said the practice of allocating IPO shares on a pro-rata basis, common in the Arab world, "can lead to very high degrees of margin lending."
"A failed issue would damage the market greatly," he said. "There is plenty of international experience that when markets correct -- and they can correct suddenly -- a change in conditions during the subscription process can put investors at risk."
For the Agthia IPO, HSBC stipulated a minimum allocation of 1,000 shares per investor, rather than pure pro-rata allocation. The issue was eight times oversubscribed.
Hussain called on governments to promote the listing of îanchorî stocks such as utilities, which he said would add stability and depth to Middle East capital markets.
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