The Big Buyback


Economic News

22 Jul 2010
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Qatar's government has moved to bolster the ailing stock market recently, with a plan to enable companies to buy back some of their own shares.

The move was approved in principle by the cabinet last month, with the finer details left up to the bourse's management to hammer out. As of June, companies can now buy back up to 10% of their shares from the Doha Securities Market (DSM). The ruling comes as part of a move to reverse the market's recent downward trend.

While the DSM began operations in May 1997, it was only opened up to trading by foreign investors in 2005, allowing them to own up to 25% of the equity of listed companies.

Gulf Cooperation Council (GCC) nationals, a group which had been allowed to trade on the DSM, were then given the opportunity to extend their involvement into the primary market. Since the DSM had seen growth rates of 65% in 2003 and 70% in 2004, these concessions were keenly taken up by outside investors.

However, stock markets all across the region experienced a severe correction earlier this year, compounded by panicked selling from inexperienced, private investors - many of whom had leveraged their investments in expectation of large profits.

Companies that analysts had been warning were grossly overvalued saw their share prices plummet. The recent move by the DSM, allowing companies to trade in their own shares, is widely hoped to prop up the market and increase investor confidence.

The ruling is not unprecedented in the region - Bahrain and Kuwait already have such concessions - while Qatar's move comes hard on the heels of similar rulings on the Abu Dhabi and Dubai stock markets.

For many investors the buyback opportunity comes just in time, allowing the market to pick up slightly before entering the typically slow trading of the summer months.

While intervention in the markets is rarely thought of as a long-term fix, with most in the free market preferring to see the value of a company's share prices reflecting the fundamentals of the business, immediately after the ruling the majority of the 33 companies listed on the DSM did see a rise in the value of their shares.

Some, however, still feel the government did not act quickly enough. They feel the authorities should have done more to prevent the correction earlier in the year and have expressed concerns over the now former Minister of Economy and Commerce's laissez-faire policy towards the stock market.

Another factor behind the DSM's troubles was the expectation of further lucrative initial public offerings (IPOs) later in the year, which meant the secondary market suffered a decline in liquidity. The "craze" for IPOs was not helped either by a number of rumours of "soon to come" floatation's. One local newspaper in particular sparked controversy when it ran a story about the future listing of Gulf Commercial Bank - even though an IPO for the bank had not been officially approved.

Over the last few years, the DSM has undergone a series of reforms, with the Financial Market Authority established in 2005 to oversee its operations. There has been a drive towards greater transparency and a ban on investors leveraging their investments in the primary market.

The DSM has also been trying to bolster investor confidence in other ways. Last week saw the DSM release a statement calling on companies to fax information likely to affect their share prices to its public and marketing relations department in order "to maintain transparency and protect investor interest".

At the same time, the DSM informed brokerage firms that it has now unified its trading platforms. While previously, transactions had been split between those smaller than QR5000 and transactions valued at over QR5000, the minimum value for trading is no longer specified. The move is expected to benefit smaller investors who were often suffering from delays in trading their shares.

Whether these changes to the DSM will see it return to the dizzying highs enjoyed by stock markets around the GCC earlier in the year, only time will tell.

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