Insider Trading

The term ‘insider trading’ typically evokes images of nefarious plots and shady dealings. And indeed, illicit insider trading often fits that description. However, it is important to recognize that legal forms of insider trading also exist, whereby the insiders of a company are allowed to trade in the securities of the company entirely within the parameters of the law.

Read More...

Investment Management in Oman

As the Sultanate continues its drive to diversify the national economy, the past few years have witnessed both the growth of existing companies and a flourishing of new ones. With expanding industries, a robust and conservative capital markets infrastructure and increasing trade, Oman stands poised to offer an array of attractive investment opportunities. Not surprisingly, a number of investment funds and investment managers, both domestic and international, are showing increased interest in Oman.

In order to establish or manage an investment fund, it is necessary to comply with the rules and procedures of the Omani laws and regulations that govern the capital markets sector. This article provides a brief overview of the legal and regulatory framework for the investment management sector and answers a pair of frequently asked questions.


The Legal and Regulatory Framework

The Capital Market Law, established by Royal Decree No. 90/1998, provides the legal framework for, among other things, the Muscat Securities Market, the authorities of the Capital Market Authority, and general regulation of Omani capital markets activity. With regard to investment funds, the Capital Market Law prescribes general organizational and operational requirements, while more detailed requirements are set forth in the Executive Regulations of the Capital Market Law issued by Ministerial Decision No. 1/2009.

However, we note that this legal framework is currently best suited to conventional investment funds such as mutual funds. Certain provisions of the Executive Regulations – for example, requiring subscriptions to a fund to be fully paid up front or requiring equal terms for all investor classes – could make it more challenging for some alternative investment funds, such as private equity funds or hedge funds, to operate in Oman. As the Omani authorities continue their drive to enhance the nation’s capital markets, we will continue to monitor the development of this legal framework.

Which kinds of capital markets activities require a license in Oman?

The Capital Market Law states that the following securities-related activities require a license from the Capital Markets Authority:

• promotion and underwriting of securities or financing of investment in securities;
• participation in the establishment, or in increasing the capital, of companies using securities;
• depositing, clearance, and settlement of securities transactions;
• the establishment and management of securities portfolios and investment funds;
• brokerage in securities; and
• management of trust accounts and custodianship of securities.

Note that establishment and management of investment funds are included on the above list and require a license from the Capital Markets Authority.

Are there general rules on a fund’s investment allocations?

The Capital Markets Law and the Executive Regulations prescribe an array of investment rules. Among these, the most general are:

• an investment fund shall invest at least 75% of its capital to achieve its main investment objectives;
• an investment fund that invests in securities:
o shall not hold more than 10% of the outstanding securities of any single issuer;
o shall not allow its investments in the securities of any single issuer to exceed 10% of the net asset value of the fund (this provision does not apply to index funds); and
o shall not borrow more than 10% of its net asset value; and
• an investment fund investing in real estate shall not borrow more than 30% of its net asset value.

Read More...

Anticipated Rule Change Could Spur IPOs of Family Owned Businesses

Family owned businesses play a central role in the economies of both developed and developing regions around the globe. Economic studies estimate that 40 percent of large companies in the United States and Europe are family owned. In the Middle East this percentage is even greater: more than 80 percent of Middle Eastern companies are owned or operated by a single family. However, the ownership dynamics within controlling families is quite fluid. Experts believe that over the next 10 years companies worth approximately US$1 trillion will be passed from one generation to the next within business-owning families.

In Oman, the central role of family owned businesses is even more pronounced. The local press has cited HE Yahya Bin Said Al Jabri, Executive President of the MSM, in reporting that 95 percent of Omani companies are family owned.

For this reason, safeguarding the future of Oman’s family businesses has been a key priority in the Sultanate’s economic development model. Recent plans announced by the Ministry of Commerce and Industry to lower capital dilution requirements suggest that the most promising future path for some family owned businesses may lie in tapping Oman’s public capital markets. This path leads directly to augmented share capital and strengthened corporate governance mechanisms.

According to a report in the Times of Oman, the government is preparing a new set of amendments to the Commercial Law which will lower the minimum capital dilution from 40 percent to just over 20 percent for family owned businesses undertaking initial public offerings (IPOs) on the Muscat Securities Market (MSM). By lowering the percentage of equity in the company that the law requires a family to relinquish, family owned companies should be more likely to float of portion of their shareholdings on the MSM.

The goal of these amendments and the policy behind them is that promoting public flotation will (i) strengthen family owned businesses by allowing them access to public investment capital; (ii) refine their corporate governance practices through adherence to listing standards; and (iii) streamline access to professional strategic and management advice that could fill potential succession gaps.

While Oman’s family owned businesses are currently among the strongest and most respected enterprises in the Sultanate, some family businesses may face vulnerabilities over the longer term. A leading professional services firm recently released a survey indicating that relatively few family businesses in the region survive beyond the third generation. That report also highlighted that only 16 percent of family owned businesses have instituted a clearly defined succession plan.

Another potential area of vulnerability for family owned businesses is the need for larger amounts of capital to compete in an increasingly international, big-player dominated environment. Concurrently, the more restrictive credit environment in recent years and some high-profile defaults by family owned businesses has made borrowing necessary capital much more difficult. Loosening the requirements for tapping the equity markets should afford family owned businesses another source of much-needed funds.

Similarly, as companies in many sectors grow larger, they often need a more formalised corporate governance structure in order to function properly. Becoming a publicly listed company and adhering to the MSM’s corporate governance standards should help provide structure and discipline to family owned companies.

Nevertheless, many family businesses have balked at the prospect of raising funds through IPOs. The current 40 percent capital dilution requirement has meant that any firm listing shares has had to give up a substantial ownership stake to public investors. Given that family control has been a central driver of success for many companies, few family businesses have been willing to relinquish that much ownership and such a degree of control. Further, bringing in outside investors and managers has been thought to risk disrupting the company’s culture and shifting focus from long-term development to short-term profits. Consequently, only eight percent of family businesses in the Middle East are publicly traded.

By lowering the minimum capital dilution percentage, the authorities’ objective is to enable family owned companies to bring in outside investors without giving up as much control. This change should enable more family owned businesses in Oman to partake of the advantages of public flotation, while mitigating its risks.

Read More...