Posted by Joshua on Tuesday, August 21st, 2007
Alison Brooks, who wrote this fine article on Syria's stock market for Syria Today, allowed me and my family to share her apartment with her in Damascus this summer. Here is a picture from this summer.
Alison Brooks reports on the preparations for the opening of the Damascus Stock Exchange
Syria Today, August 2007
Observers of Syria’s multifaceted insurance, banking and capital markets reform programme, launched in 2005, are now fixing their gaze on what many hope will be the jewel in its crown: the Damascus Stock Exchange (DSE).
The launch of the DSE is officially set for the first quarter of 2008, but even that may be optimistic given the exacting preparations required by the various would-be market players.
Whenever the opening bell rings, public interest in the new stock market promises to be keen. “We did our own internal study of Bank Audi Syria customers,” says Bassel Hamwi, vice chairman of the DSE as well as head of the Lebanon-based private bank which has been operating in Syria for two years. “We discovered that 72 percent of our sample not only know that a stock market is about to be launched, but also plan to invest in it.” Hamwi points out that Syrians have always been traders: “They are comfortable taking measured risks and they especially like equity-type risks.”
There are currently few investment outlets in Syria, apart from real estate and bank deposits. Many Syrians ignore the banks and prefer to take holdings in companies. This is why most over-the-counter IPOs which have taken place here, both before and after the establishment of a regulator, have been heavily oversubscribed. However, of the hundreds of large and successful – mostly family-owned – companies in Syria, a mere 46 have completed IPOs. The new stock market is therefore expected to absorb large amounts of liquidity, as has been the case with other Arab stock markets.
“Syria is an unusual case,” Hamwi says, “of putting the cart before the horse. Stock markets are typically very organic types of structures, which grow from the ground up – and then comes the regulator. In this country we are doing it backwards. We are starting with the regulator and the regulator is building the market.”
That regulator is the Syrian Commission for Financial Markets and Securities (SCFMS). The commission has now done most of the groundwork, including publication of the licensing regulations and code of practice for financial intermediaries. However, decisions are still being made and goal posts can still be moved.
For example, by early June the commission had issued provisional licenses to six financial intermediary companies, four of which are majority foreign-owned. Then, on June 17, the SCFMS announced that Syrian individuals or corporations would have to be majority stakeholders in all financial intermediary firms. Previously, no percentage had been specified.
This announcement took many by surprise. One of the four foreign-owned firms is Pioneers Syria which, while having some Syrian shareholders, is majority owned by the giant Pioneers Egypt. Says Khaled al-Tayeb, a vice chairman of parent company Pioneers Holdings and board member of Pioneers Syria: “The decision was indeed unexpected. But it is not a problem and we will of course comply with all regulations. What is important for us is to be on the ground from the beginning, contributing our broad experience and know-how to help make Syria’s new capital markets initiative a success.” Pioneers Syria is licensed to carry out the full gamut of services: dealing, brokerage, underwriting, investment management, investment trusteeship and safe custody.
Nationality is an issue which works both ways, however. Mahmoud Sukkar is the CEO of Fortune Financial Consultants, a Syrian company with experience as a broker in online markets for a range of financial instruments. Fortune has applied for a license to offer both brokerage and consulting services. Sukkar personally put together the comprehensive application file required by the commission and was confident that it would meet with approval. While the application was not rejected, Sukkar was told that he needed as a partner a foreign brokerage firm licensed in one of the neighbouring countries which already have a stock market such as the Emirates, Dubai, Jordan, or Egypt.
“I think we should separate ownership from management,” says Sukkar, who has just completed a Masters degree at the Arab Academy of Financial Sciences. “I already had job applications from Jordan, from real experts, PhDs. I had the staff lined up when I made my application. So the commission should have no problem. Why are they asking for foreign ownership?”
Human resources deficit
Clearly, the commission would rather be safe than sorry. With the exception no doubt of Sukkar and a handful of people like him, the level of financial knowledge and expertise among Syrians is extremely low, for the simple reason that no capital markets as such have existed until now. Recruitment and training will both be significant challenges for the DSE itself and for the financial intermediaries on whom the new market will depend. Partnership with an experienced foreign company offers the advantage of a built-in training opportunity for new Syrian staff who can work alongside experienced colleagues and even enjoy a training stint in the partner’s country.
Indeed, much advice and training will be needed even by the Syrian companies hoping to be listed on the new exchange. For starters, almost all of them will have to change their legal status from general partnerships to limited liability companies as an initial step before turning them into joint stock companies. But the greater challenge will be for them to adopt standard accounting practices that not only separate personal and family funds from company funds, but that also truly reflect their financial performance.
“In the past,” explains Hamwi, “companies were structured on a tax-management basis. That was the sole purpose of the company. You have 40-odd years of tax-management practices, to be generous, and you are talking about every kind of tax conceivable. The tax environment was such that people really had to be creative.”
Not one to miss an opportunity, Sukkar has decided that his company, Fortune, will focus initially on providing advice to companies, to help them make the transition. “I don’t think brokers will do great business, at least in the first two years, as the volume of transactions will be insufficient. We think the best business in the beginning will be financial consulting.”
In the new environment, if they want a stock market listing, companies will have to publish balance sheets that truly reflect the state of the business. They will need to increase their stated capital and when they do this, there will be a new and higher tax assessment. However, a new law is expected which will help family companies to make the transition either by levying a nominal flat tax on them, perhaps 1 percent, or by exempting them altogether. In addition to the tax incentives being offered, there are many advantages to having a listing, including ease of exit and entry and enhanced attractiveness to investors, resulting in a better quality of equity.
For these reasons, it is expected that many companies will seek a listing. Others may balk however at the high levels of transparency and disclosure required. If the “carrot” of tax and other incentives fails, it is possible that a “stick” will be employed at some stage, such as making a listing mandatory for certain types of companies.
On the investor side, whether participation in the Syrian stock market will be mainly institutional or mainly retail remains to be seen. Views differ on this question, even among the DSE Board of Directors who are still debating this and other issues. Some see it as almost purely a retail market, envisaging people in the villages buying and trading shares. Others prefer to start with an institutional market where Syria’s banks, insurance companies and new asset managers would be the main investors, and work their way towards a retail market.
Prudence will prevail
Whichever way it goes, there is a clear trade-off between achieving financial market liquidity and efficiency, on the one hand, and achieving economic and financial stability on the other. It is evident by now that both the DSE and the commission are more concerned with the latter than with the former.
Mohammad al-Jlilati is vice chairman of the SCFMS Board of Commissioners. He said that while there was no single model for the DSE, the commission studied the regulations and the legislation applying in all the Arab countries that have stock markets: Abu Dhabi, Saudi Arabia, the Emirates, Dubai, Kuwait, Doha, Egypt and Jordan. “We looked at all these regulations and chose those which best fit our conditions,” he said.
When asked about how the commission would address the problem of insider trading, which contributed to the spectacular collapse of the stock market in the Gulf last year, he explained that monitoring for such activities would be strict: “Any board member or employee or auditor who relates insider information to an investor will face up to three years in prison.” According to Jlilati, when a company is about to release its financial results, the commission will for 10 days monitor the financial dealings of people associated with the company. In addition, if ever the SCFMS is convinced that a deal has been done on insider information, the transaction will be cancelled and the perpetrator prosecuted.” But in the absence of morality,” says Jlilati, noting that similar regulations were in place in the Gulf States, “no law in the world can stop the leaking of insider information. What we have done is take the best international standards and incorporate them into our regulations.”
All indications are that the new stock market will be highly regulated and only allow the “best of the best” companies to be listed on the Big Board. Volatility will be kept in check by means of 2 percent up and down limits. “There may not be a lot of liquidity initially,” concedes DSE vice chairman Hamwi. “But then, over time, you start allowing higher volatility in the market. You start allowing more margin trading. You start allowing leverage, you introduce more instruments, etcetera.”
“We at the DSE need to first prove that we are worthy of the trust of the investors, that we’re worthy of the trust of the commission, that we’re worthy of the trust of the companies who are going to list and also of the brokers and other intermediaries,” he adds.
Two parallel markets
The commission has issued a draft of its proposed listing requirements for comment, but has not yet finalised them. What is clear is that there will be two markets initially: the main stock market and a parallel, alternative market, each with its own listing requirements and trading rules. According to the draft proposals, to be listed on the main stock exchange, a company will need a three-year track record, fully paid-up capital of SYP 300m, and at least 200 shareholders. In addition, it will need to have recorded an average net profit equal to 5 percent of its capital in the previous two years. For the alternative stock market, the requirements are somewhat looser: one year of operation, SYP 100m of capital, and 100 shareholders. However, trading regulations may be less favorable.
“It is not clear yet whether all companies will have to start out in the alternative market,” says Raed Karawani, a partner in the Karawani Law firm, which represents a number of brokerage firms seeking licenses from the commission. “Presumably if a company meets the requirements for the main market, it can be listed there from the outset. But the commission will be very strict with things like disclosure, transparency, and compliance.”
Indeed, very few companies are likely to meet the requirements initially, though Syriatel is mentioned as a possible exception. “The idea,” Karawani says, “is to get as many companies as possible to list their shares on the alternative stock market initially. This will give them time to move up the learning curve in terms of trading regulations and corporate governance, as they also become more aware of the advantages of a listing on the main market.”
An effective and globally integrated financial structure is critical if Syria is to improve economic efficiency, better allocate resources, and foster growth and social prosperity. The Damascus Stock Exchange promises to contribute significantly towards such benefits.
Alison Brooks is an experienced financial trainer with a Masters degree in International Finance from Georgetown University and a licence in Arabic from the Sorbonne Nouvelle. She moved to Syria last year to refresh her Arabic and hopes soon to offer capital markets training here.
Issue: August 2007
Also see the very good article on Syria's Private Universities in the same issue of Syria Today by Phil Sands and Obaida Hamad