UAE markets need time to take on tighter ethical rules

SCA chief says corporate governance is new to the region and that occasional irregularities are to be expected.

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Occasional irregularities in local markets are to be expected as companies become accustomed to tighter ethical standards, says the chief executive of the regulator.

Conflicts of interest among executives, breaches of minority shareholder rights and insider dealing are often cited as weaknesses in the UAE business culture.

"It will take time," said Abdullah al Turifi, the chief executive of the Emirates Securities and Commodities Authority (SCA). "You cannot prevent mistakes from happening, but you can decrease the size of the damage that comes from these issues. Corporate governance is still a new introduction for the UAE."

Mr al Turifi, speaking on the sidelines of the regulator's annual summit in Abu Dhabi, also said he anticipated up to five UAE companies would go public this year as market conditions improved.

The SCA, which was created 10 years ago, has been tightening its laws and regulations as markets declined after the financial crisis. Last month, Riad Kamal, the chief executive of Arabtec Holding, was banned from buying shares on UAE markets for six months for trading in Arabtec shares during a prohibited period, which many observers interpreted as a tightening of regulation. Mr al Turifi said the decision spoke for itself and declined to comment further.

A steady stream of negative catalysts has reduced confidence and liquidity on the country's exchanges since the onset of the property price fall at the end of 2008, pushing institutional and foreign investors to the sidelines.

The UAE's bourses have also underperformed their regional peers. Last year, Dubai's main index, the Dubai Financial Market, lost 12 per cent and the Abu Dhabi Securities Exchange fell 1.8 per cent. But the Qatari index, buoyed in part by Qatar's winning bid to host the FIFA 2022 World Cup and government investment, gained 24 per cent. Saudi Arabia, the Arab world's largest economy, rose 8.3 per cent.

Mr al Turifi said most of the problems could be attributed to the financial crisis and not problems unique to the UAE. "We hope the sluggish volumes do not last too long," he said. Other observers said the SCA would play a key role in reversing the trend. "One common problem that foreign investors tell us is that the level of transparency and protection for minority shareholders is very weak, which is a big drawback in their lack of confidence in the markets," said Khaled al Masri, the head of investment at Rasmala Brokerage in Dubai.  "They still have a long way to go."

Market players have been calling for a merger of the country's local bourses in an effort to boost liquidity and as a precursor to a potential inclusion to MSCI's emerging market index.

Mr al Turifi said the SCA did not have a position on a proposed merger but acknowledged the bourses were exploring a range of potential changes. "Any decision that the two exchanges come to, we will welcome, whether it's a merger or a different type of structure where they can link together, such as the Euronext system," he said.

Mr al Turifi said he had not seen a Goldman Sachs report commissioned to study a potential merger.

At present, the UAE is classified as a frontier market, which institutional and foreign investors regard as more volatile and therefore less attractive as an investment destination.

"As with any maturing market, consolidation needs to take place, and in the UAE the question is whether or not there is enough room for three exchanges, two market regulators and the UAE Central Bank," said Andrew Tarbuck, a corporate partner at the Dubai law firm Latham & Watkins. Separately, Mr al Turifi said he expected up to five companies from the insurance and services sector to go public by the fourth quarter, as market conditions improve.

"The markets are ready for new listings, and we encourage them," he said.