Gulf Arab governments must reform rules for initial public offerings quickly to restore confidence among investors and companies that are increasingly abandoning a model distorted by last year's stock market crash.

A system that once triggered scuffles among investors and subscription rates as high as 800 percent is now deterring firms from selling shares. Retail investors are losing money on IPOs, using most of their returns to pay off bank loans.

"Gulf IPO regulations are archaic and have created serious inefficiencies. They haven't been keeping up pace with the markets," said Shakeel Sarwar, head of asset management at Bahrain-based SICO investment bank.

Regulators, especially those in the United Arab Emirates and Saudi Arabia, are now working on reforms to draw institutional investment and make share sales more attractive for companies.

Governments in the world's biggest oil-exporting region had designed IPO rules around retail investors, hoping to give citizens a greater share of wealth by encouraging investment in state-controlled firms such as Saudi Telecom Co.

Regulators set the offer price, which often bore little relation to demand, virtually guaranteeing investors a profit when Gulf markets were rallying in tandem with oil prices in 2004 and 2005.

In 2005, shares from 10 IPOs in the United Arab Emirates surged by an average of 561 percent on their first trading day, according to UAE investment bank The National Investor. That year stock benchmarks in the six Gulf Arab oil producers and Egypt rallied by an average of 70 percent.

"Like the Californian gold rush of the 1840s, anywhere you dug you found gold," The National Investor said in a note.

Scuffles broke out at banks accepting applications when Sharjah-based Dana Gas sold shares in 2005 and Qatar deployed riot police to control crowds at Islamic bank Masraf al-Rayan's IPO early last year.

The certainty of a quick profit encouraged investors to borrow to buy into IPOs, driving up subscription rates. In 2005 the IPO of Aabar Petroleum Investments was 800 times oversubscribed.

It also increased the cost of buying shares in IPOs. When bourses tumbled in 2006, with four of the seven Gulf benchmarks falling more than 35 percent, investors began to lose money.

The average return on the first day of trading for five UAE IPOs in 2006 and 2007 fell to 104.4 percent, TNI data showed. Saudi Kayan Petrochemicals Co.  rose 27.5 percent above its offer price when trading began in June after the Gulf's second-biggest IPO.

The average oversubscription rate for Gulf IPOs fell to 6.5 times in the first six months of this year from 60 times in the year-earlier period and 73 times in 2005, said Imad Ghandour, principal at UAE private equity firm Gulf Capital.

"IPOs are not skyrocketing as before. It's not a one-way street and people are realising this," Ghandour said.
    Only banks appear to be benefiting from the status quo. TNI estimates UAE lenders earned up to 1 billion dirhams ($272.3 million) in interest alone in one month from investors who bought into the Dubai Financial Market IPO last year.

"Instead of benefiting the investor and the issuer, regulations only benefit banks, who make a lot of money without a lot of risk," Sarwar said.

While regulators fix the price of most Gulf IPOs, the value of the company determines the number of shares sold. Gulf IPO companies had an average price-to-earnings ratio of 22 last year compared with a 2006 P/E of 15 for the seven Gulf markets.

"Companies are thinking it's not a good deal to sell at 13 times earnings, we might as well keep it private," Ghandour said.

The value of IPOs expected in the region through 2010 has fallen by half to $15.3 billion in the last nine months, according to Gulf Capital.

Although more firms are turning to bonds for funding, the debt market