QE needs to find ways to raise ownership cap

The Global Index provider MSCI, after denying the ‘Emerging Market’ status for the fourth time to Qatar Exchange (QE), has asked the bourse to look at different ways to increase the Foreign Ownership Limit (FOL) levels, the key criteria set by it to get the status.

It wanted Qatari authorities to review how other markets within the current MSCI Emerging Markets Index have resolved similar issues in the past by implementing alternative mechanisms resulting in increased FOL levels.

“Even if not desirable from a governance perspective as it may disadvantage foreign investors compared to domestic ones, countries have increased the share in their equity market accessible to foreign investors using alternative mechanisms such as increasing the FOL level in industries deemed to be of less strategic nature, India for instance, or introducing specific shares classes fully open to foreign investors that preserve all economic rights but limit voting rights like countries like Brazil, Mexico and Thailand”, MSCI suggested.

MSCI welcomed the positive developments on the Qatari equity market with the implementation of a proper false trade mechanism. “This new mechanism is expected to remove the requirements for international institutional investors to operate with a dual account structure. The effectiveness of this new mechanism to guarantee the safeguarding of investors’ assets and to allow for the elimination of the dual account structure requirement still needs to be fully assessed by international institutional investors”, the index provider noted.

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In addition, it also wanted the introduction of new regulations allowing for securities borrowing and lending (SBL) agreements, which was also raised by market participants as a way to resolve the dual account structure issue.

MSCI’s annual market classification review report said the issue of FOL levels imposed on Qatari companies is the only remaining impediment to the reclassification of the MSCI Qatar Index to Emerging Markets. The MSCI Qatar Index should meet all requirements for inclusion in the MSCI Emerging Index, provided the false trade mechanism recently introduced on the QE is successfully tested over time.

According to the review report, the total free float adjusted market capitalization of the MSCI Qatar Index available to foreign investors is $10bn. “In an extreme scenario, were the Qatari equity market to witness a net foreign capital inflow of $10bn or more, the share of free float available to foreign investors would be reduced to zero. This would make all current index constituents ineligible, leading to the discontinuation of the MSCI Qatar Index,” the report said.

source: The Peninsula