In 1971, the UAE was formed. A young country growing at a phenomenal pace, it faced unique challenges in managing hyper-growth.
One of the main challenges was to ensure that Emiratis were not swept aside in the midst of the deployment of global businesses into the country as they sought to benefit from the economy.
Balancing the demand for global goods and services with the imperative to ensure that Emiratis participate in the booming economy of the 1970s, the Government put in place several regulations to keep a balance between the then-experienced global businesses with deep resources and the young and evolving Emirati businesses.
A major regulation in this arena was the exclusive agency requirements enacted into law. The idea behind this should be clear to everyone – first and foremost, global conglomerates would not be able to play divide and conquer with fledgling Emirati businesses.
As these massively resourced companies entered into the UAE with deep and long experience in agency and franchise agreements and backed with world-class lawyers, the UAE government regulations helped to balance the scales and create a fair and equitable playing field by enacting this law. A monopoly position increases the negotiating power of a company offsetting what would have been the unfair advantage of a global conglomerate.
Another major regulation clearly enacted to help create a level playing field between a young Emirati business culture and a potentially aggressive international business expansion into the UAE was the requirement that UAE companies be majority-owned by Emiratis. It is clear that the purpose of this rule was to ensure that UAE assets, including various sectors of the economy, did not change ownership at a time of hyper-growth when valuations might be unfairly held low. Such an idea makes eminent sense in a young, fast-growing country, and certainly does not entail the unfortunate belief that it leads to unfair commercial terms. After all, in any other market a company would have to pay about 50 per cent in taxes.
The next requirement is related to publicly listed companies. The law states that for an IPO, 55 per cent of the company must be offered to the public. This means that if the company being IPOd was a family-owned firm, a common scenario in the UAE, then the founding and managing family would lose formal control of the company that they built. On the other hand, this ensured a higher level of corporate governance for new investors as the management were no longer the major investors.
These rules, representative of many more, were enacted to create balance at the time of the birth of the UAE. Today, the country is a global competitor, a sought-after commercial base with competent and experienced local companies, many of which are global leaders.
As the UAE completes the transition from a newly born country to a global leader on the economic front, the founding regulations need to be revisited and upgraded to support the continued growth.
The first is the exclusive-agency requirement. This has given birth to commercially strong UAE businesses. This rule needs to be upgraded for two reasons. The first is that continued monopoly profits can lead to a commercial laziness and inefficiency of other business lines that remain dependent on the monopoly subsidy.
The second reason is that the initial family groups that have benefited from state-mandated monopolies need to allow other Emiratis to benefit. This can be effected by taxing monopolies to help fund independent Emirati entrepreneurs, or limiting the number of monopolies held by any single person or group. The idea of opening up agencies completely needs to be resisted for now, as the family groups that have benefited from these monopolies would have an unfair advantage against new Emirati entrants.
The majority UAE ownership rule is no longer necessary, as the country has provided education, training and multiple sources of support, such as the Khalifa Fund for Enterprise Development and Dubai SME, for aspiring Emirati businessmen. This should be replaced with a simple corporate income tax, say 20 per cent, on foreign shareholdings to continue to fund entrepreneurial opportunities. This is a win-win scenario.
The final issue, that of requiring a 55 per cent offering to the public for an IPO, is of particular urgency to review. The original corporate governance concerns are now prudently managed by the professional Securities and Commodities Authority at the federal level and many effective organisations at the emirate and free zone level. The many successful family businesses in the UAE should be encouraged to IPO so as to create the funding necessary to become the regional and global players that they clearly have the potential to do.
This can be accomplished by changing the minimum float, but can also be done by allowing multiple classes of shares. Otherwise, UAE-based companies are going to be handicapped and unable to fulfil their potential.
The rules set 40 years ago have had a massive beneficial impact on the economy of the UAE. A careful review and update can lead to a continuation of the hyper-growth with no increase in risk.
Sabah Al Binali is an active investor and entrepreneurial leader, with a track record of financing, building and growing companies in the Mena region
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