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Kuwait - Forming an Independent Capital Markets Authority

Monday, 08 March 2010 15:27

Early last month, Kuwait's parliament passed new legislation for the establishment of an independent authority to oversee and regulate the country's securities exchange. While no official date has been set, the law calls for the formation of an independent, five-member Capital Markets Authority (CMA) whose role will be to "ensure total transparency and prevent insider trading and other illegal practices". The new law also calls for the creation of a special tribunal tasked with handling legal disputes, and stipulates strict jail terms and hefty fines for violators.

From the time of its establishment in the early 1970's, the Kuwait Stock Exchange (KSE) has been both managed and monitored by a government-appointed administration. In addition to the formation of a separate and independent regulator, the new law also calls for the bourse itself to be transformed into a private shareholding company, with 50% of its shares made available to Kuwaiti citizens. 

With a capitalisation of around $102bn and more than 200 listed companies, the KSE is the second-largest exchange in the Gulf after Saudi Arabia. However, in 2009 the bourse's value fell by 10%, partly a result of over-leveraging by a number of investment companies. Numbering in excess of 100, many of these investment firms took out short-term loans to finance long-term projects, often in real estate, whose value eventually plummeted as a result of the global financial crisis. The end result for many was accumulated debts and an inability to repay the original loans.

The establishment of a strict and independent CMA could serve to boost overall transparency and disclosure in the bourse, resulting in greater interest from foreign and institutional investors. At present, the amount of corporate data listed companies are required to disclose is considered low in comparison to neighbouring markets with independent regulators already in place.

In addition, a CMA should help curve market manipulation and insider trading, an issue that many have cited as a worrisome trend in recent years, with some companies accused of falsely or inappropriately releasing unconfirmed market news in order to influence their share prices.

It is this lack of perceived transparency that has swayed off foreigners from investing heavily in the KSE in the past, with foreign ownership in the bourse usually hovering below 10%. Overall, institutional investors are something bourses around the world strive for, as they tend to bring stability through being less speculative and susceptible to rumours than individual investors.

Lloyd C Maddock, the CEO for HSBC Kuwait, told OBG, "At the moment foreign investors in the bourse are sorely under-represented. The market is showing some signs of gradual recovery, and the CMA will certainly bolster investor confidence, when it comes into effect. There has also been recent clarity surrounding capital gains and dividend tax, and these factors together should hopefully attract greater foreign investment into the exchange, going forward."

While any move serving to establish a credible regulator with the intent of raising transparency and disclosure is undoubtedly welcome by the financial community, many are reserving their judgement until the appointees for the five board positions are revealed, as well as the timetable leading up to operational status.

Arif Mansoor, the general manager of Qatar National Bank (Kuwait), told OBG, "The CMA is a welcome initiative, but like any announcement, we need to witness how it will function. For a CMA to serve its intended purpose, it must be truly independent and have the power to enforce punishment to violators. So we need to wait and see how things play out."

Overall, the very fact that the law was passed through parliament serves as a positive signal to the market that Kuwait is committed and working to bring about economic reforms.

Over the past couple of years, the Kuwaiti government and parliament have been embroiled in disputes resulting in political stalemates and a wide freeze in the introduction of new legislation. This during a critical global period when many countries were quick to enforce greater market regulation and introduce fiscal spending to help encourage economic stability and create positive momentum for faltering economies.

The new CMA law finally made its way through parliament around the same time that a $107bn four-year fiscal spending package aimed at stimulating the economy was also approved. According to Maddock, "We are now seeing progress that if you had spoken to me a year ago, I would not have anticipated to happen. Assuming the CMA and capital expenditure projects proceed, we could see Kuwait quickly emerge as one of the most lucrative growth markets in the region."

Global Arab Network

This article is published in partnership with Oxford Business Group

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Published comments are the opinions of private individuals and do not reflect the views of Global Arab Network