Axiom Telecom's abandoned share sale has reaffirmed investor concerns that the state of the local markets is too illiquid to withstand a successful flotation.
The mobile phone retailer, based in Dubai, pulled out of the first initial public share offering (IPO) in the country in more than two years citing widespread concerns about "market conditions and liquidity".
Its IPO was heralded as a catalyst for investor interest in local stocks and the return of desperately needed liquidity.
Axiom narrowed the price range to 0.80 US cents to $1, from a top price of $1.15, managing to just scrape a fully covered listing.
But in a move that intended to avoid the sluggish retail demand of past IPOs in the region, Axiom's 35 per cent share sale was pitched solely at institutional investors on NASDAQ Dubai , the emirate's second bourse after the Dubai Financial Market.
It was a fundamental flaw in the company's strategy, analysts said.
Mohammed Ali Yasin, the chief investment officer at CAPM Investments, pointed to the importance of retail investors for new listings. "It's in the interests of everybody to include retail because institutions won't find anybody to sell to as they exit," Mr Yasin said.
Retail investors are required to "flip" a stock initially as they buy and sell small shares creating the liquidity and interest needed to draw in long-term institutional investors.
In a further blow to Axiom's IPO, fewer than 100 institutional investors subscribed, a small number compared to offerings that have attracted the interest of thousands of investors elsewhere in the world.
The US was the dominant source of interest but overall three quarters of the demand came from outside of the GCC.
"There was the most scepticism in the UAE, which was a factor of market conditions. That is really why I think UAE investors didn't come in. The market is obviously choppy right now. A lot of deals are getting withdrawn," said Dr Christopher Laing, the managing director and head of MENA for Deutsche Bank, which was one of the bookrunners and the main global co-ordinator for the sale.
Dr Laing said negative perceptions about NASDAQ Dubai contributed to the limited interest from the region. The exchange has had to face the failure of flotations in the past.
In 2008, Damas, the jewellery group, priced its shares at the bottom end of the range for its IPO but has since been hit by a series of regulatory and legal wrangles as it fights to restructure a debt pile. Its stock has been suspended for the past few weeks.
"The issuer didn't want another Damas … that lists and barely trades," said Rami Sidani, the head of MENA portfolio management for Schroders in Dubai, who also placed a bid for Axiom on the lower end of the range.
Many investors saw limited potential for Axiom shares to grow as there has been so little stock trading activity on the exchange recently. Shares for DP World, which has bucked the trend, have risen 45 per cent since June, to $0.59.
"[Axiom] has a very solid offering and the valuation was compelling but unfortunately this was not enough because of the negative history of NASDAQ with all the companies tanking," said Fadi al Said, a senior fund manager at ING.
The country's two regulators are also posing a problem for the region's investors.
The Dubai Financial Services Authority has attempted to bring western standards to the UAE by encouraging a bookbuilding process to develop. This is seen as the most transparent way of selling shares as it allows the investor to decide what is a fair price. But the Securities and Commodities Authority (SCA), the other main regulator in the UAE that covers the Dubai Financial Market, insists on an opening price of Dh1 per share for every company that lists.
NASDAQ also has the benefit of a lower minimum requirement of 25 per cent for the number of shares a company needs to float, compared with the SCA, which asks for at least 55 per cent flotation. The differences between the exchanges have been a point of contention for fund managers and investors on the ground. A merger by the two exchanges in July put in motion a more unified regulatory system but this is not enough at present to rebuild companies' confidence.
"The fact you have to abide by two different regulators and they contradict cannot continue. We cannot have regulators competing with each other at the cost of successful market," said Mr Yasin.
The UAE's absence on the MSCI's emerging market index has also contributed to the muted investor take-up. "If you're an emerging markets player you've got the choice of 3,000 companies to invest in. You don't need to invest in the UAE," said Chet Riley, an analyst at Nomura.
The country's status as a frontier market, which makes the market more volatile, has not filled institutional investors with confidence, he said.