In ancient Arabia tribes often lived in complete isolation, answerable to no one but themselves. To ensure security and safety, each tribe would elect a sheikh – a head or chieftain – responsible for policing the members of the tribe, administering justice and acting as a watchdog over all tribal activities.
The days of tribes wandering the Arabian desert may be over but tribal traditions can still play a part in developing Gulf nations and their institutions, especially when it comes to the murky world of business.
The Kuwait Stock Exchange has for some time now been acting like a tribe without a sheikh. With little real regulatory authority, narrow powers of adjudication and limited capacity for monitoring the nearly 200 firms listed, the Kuwait bourse has suffered one embarrassment after another in recent months.
The scandals provoked widespread concern over the credibility of the Kuwaiti bourse and impelled the government to draft plans for a capital markets authority. But as with all plans for reform in Kuwait, the process of creating a regulatory authority for the KSE will be lengthy and rife with competing proposals from competing groups.
Concern over the bourse’s credibility dates back to March of last year. A drastic drop in all the regional stock exchanges, including a 14.3 percent decline in the Kuwaiti bourse in that month alone, sent investors scrambling. In Kuwait, the most politically free of all the Arab Gulf states, traders and investors held protests in front of the KSE building in downtown Kuwait City calling for regulation and reform.
The KSE needs to be on par with international markets and abide by international norms. “Right now it doesn’t have the proper guidelines for the listed companies to fulfill,” argues Chandresh Bhatt, a senior financial analyst at Global Investment.
It’s difficult to argue with Bhatt’s point. Take, for instance, last year’s Al-Ahlia Investment probe. In 2006, the chairman of Al-Ahlia, Abdulsalam Al Awadi, was removed by the Central Bank after discrepancies were found in Al-Ahlia’s reports for 2005. According to KSE officials, the entire episode highlighted the problems with KSE regulations – or lack thereof.
Banks and investment houses trading securities on the bourse are still supervised by the Central Bank – not the KSE. Listed firms are required to disclose accounts every three months and once a year for the full fiscal year. But it’s the Central Bank – not the KSE – that they disclose to, even as they trade on the open market. It was only after the Central Bank filed Al-Ahlia’s disclosures with the bourse that the discrepancies came to light.
By late September, nothing had materialized on the regulation front but another scandal had rocked investor confidence. Al-Kharafi Group’s hostile takeover of a political rival’s firm, Al-Mal Investment, caused a stir when it was alleged that Al-Kharafi failed to abide by KSE disclosure laws. In November, the KSE responded by imposing a six-year trading ban on ten Al-Kharafi-owned companies, shaking investor confidence in the stability of the bourse. (In April 2007, eight months after the takeover, an Administrative Court in Kuwait overturned the KSE ban.)
Throughout December and into the new year, diwaniyas in Kuwait buzzed with talk of the takeover and its impact on the bourse. Rumors about political backbiting and influence overriding law and order further eroded investors’ trust in the fairness of the Kuwaiti bourse.
To counter the controversy, the minister of commerce, Falah Fahad Al-Hajri, and the KSE introduced new rules early this year. For instance, the KSE now requires all firms wishing to list to have paid-up capital of at least 10 million Kuwaiti dinars ($34.6 million) and to have made profits two years consecutively exceeding 7.5 percent of capital.
Other measures include requiring companies raising capital by more than 50 percent to wait 12 months before applying to list and that at least 30 percent of shares must be floated in a public subscription. None of these rules apply, however, to firms already listed.
The measures make sense. But it’s unclear how the KSE will enforce them. Many listed firms are holding companies, with several subsidiaries. Without independent auditing of each company’s books – and at the same time – it’s possible that firms might play a kind of shell game, shifting capital from one firm to the next when a quarterly report is due in order to meet the capital requirement.
Understanding all too well the obstacles the bourse faces, the move is on for an independent regulatory authority. In March, Al-Hajri called for the creation of a capital markets authority. He announced that the Ministry had drafted a law to set up a regulatory authority and restore faith in the KSE. Al-Hajri, in his capacity as commerce minister, is technically the highest official at the Kuwait Stock Exchange. His ministry and the KSE don’t, however, always see eye to eye.
According to Wafa Al-Rasheed, the KSE technical director and spokeswoman, there are two draft laws now before the cabinet. “We’ve drafted the law. The [Commerce] Ministry drafted another law and both laws are being given to the Council of Ministers and we’re just waiting for the parliament to discuss or choose whatever law they want to choose,” she says.
Both aim to separate the KSE from regulation. Both aim to create a capital markets authority capable of implementing international standards for securities exchanges. But from which standpoint and which method? The differences are in the details. According to Al-Rasheed, the KSE draft law, prepared with the help of Britain’s International Securities Consultants, focuses on regulation for an emerging market. The Ministry’s plan, composed with the help of SEC folks in Washington, doesn’t take into account Kuwait’s unique economic model, complains the KSE.
The two drafts must now be evaluated and likely melded together by the cabinet. This could take months. Once finalized, the cabinet must then submit the draft law to the parliament. Notorious for its sluggish pace and pork barreling, the parliament isn’t expected to even consider the draft law before November. Optimistically, a capital markets authority wouldn’t begin regulating Kuwait’s bourse until at least one-and-a-half to two years from now.
Other hurdles are the pending tax law and private firms law. According to Al-Hajri, a capital markets law cannot be passed without the parliament first approving a new tax law and a new law for private enterprise. Despite pressure from the government, the parliament has dragged its feet for years over the question of taxes. Recent developments suggest that the parliament may consider lowering the 50 percent tax on profits levied against foreign firms doing business – and trading stocks – in Kuwait, but it’s likely to come at the expense of instituting an income tax law, at least against expatriates. In the meantime, the KSE can do little but continue to do what it’s doing and hope for the best.

In April, a survey by British bank HSBC found that Kuwait’s stock exchange remains the most popular among institutional investors, with 28 percent of those questioned choosing Kuwait compared with 19 percent selecting Dubai and 17 percent putting money into Saudi Arabia. At the end of the first quarter, the KSE oversaw nearly 200 listed companies, with a market capitalization of more than 31 billion dinars. Local finance house Al-Shall Investment expects capitalization to top 45 billion dinars by June 2007.
“We have way too many responsibilities and too few powers,” says the KSE’s Al-Rasheed. “Our SEC, under the existing legislations, cannot send insider traders to jail because we don’t have the judiciary powers. The investment houses, banks, etcetera are under the supervision of the Central Bank and we face the problems of their mal doing.”

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