Central Bank Circular No. 19 of 1997 establishes guidelines for banks, finance and investment companies to follow when lending funds to persons who wish to subscribe to shares of public joint stock companies. The growing number of initial public offerings of shares in public joint stock companies in the UAE represents an attractive and relatively new investment opportunity for UAE nationals.
The Circular directs that no loans be extended to purchase shares except against tangible securities, including shares in newly established or incorporated public joint stock companies. In case of a pledge by borrowers of assets other than shares, lenders should prioritize according to the quality and liquidity of the pledged assets.
Different loan rules apply to founders, to ordinary subscribers, and for the purchase of shares in companies incorporated in other Gulf countries. Loans to the founders of UAE public joint stock companies secured by pledges of their shares should not exceed 50% of the nominal share value, for as long as the founders are required to maintain ownership of those shares (at least two years under the Companies Law). After this, the founders are to be treated as any other shareholders.
In an initial public offering, loans must not exceed 10% of the nominal value of the subscribed shares, and must be accompanied by an undertaking to pledge the shares following their allotment. This 10% ceiling may be raised to 50% if the bank undertakes to refund excess funds directly to the lender.
Loans extended against the pledge of allotted shares in a newly incorporated company should not exceed 70% of their book value. This ceiling shall remain in effect for the first five years of the company's operation, after which the limit is 70% of the shares' market value.
For loans for the purchase of shares in companies incorporated in other Gulf countries, the 50% and 70% ceilings are replaced by a single 40% ceiling. Otherwise, the rules are the same, provided the borrowings comply with local laws.
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