New market rules needed

12 May 2006
GCC markets saw another bruising week of trading activity, with all the main bourses experiencing major declines.

Saudi Arabia's Tadawul All-Share Index (TASI) lost 19 per cent over the course of the week, closing at 10,164 points on 10 May, a 39 per cent drop year-to-date. The Dubai Financial Market (DFM) General Index dropped below the 500 mark to close at 479 points on 10 May, down more than 50 per cent since the beginning of the year. And the Abu Dhabi Securities Market (ADSM) General Index closed at 3,042 points, down more than 30 per cent year-to-date. 'This is more than just a major correction,' says Mohammed Ali Yasin, managing director of Emirates Securities.

The slump has prompted calls in the UAE for rules to be modified to stop the decline. A 35-strong group of fund managers and brokers representing 25 institutions in the UAE has sent a list of recommendations to the Economy & Planning Ministry and the Securities & Commodities Authority outlining measures to stem the tide. The recommendations include establishing a fund-of-funds, modifying the share buyback law and a three-month postponement of initial public offerings (IPOs).

The proposed fund-of-funds would join bank and government funds under one umbrella. 'The market should be dictated by a composite of funds. A fund-of-funds would be independent of one bank and create liquid blue-chip stocks as well as demand and bids for lower stocks,' says Yasin.

The group is also seeking modifications to the 2003 law governing share buybacks. The move would permit more companies to purchase their own shares to protect the price. Under current legislation, the market price must be lower than the book price for companies to buy their own stock. 'Companies could jump in and use cash from special reserves. Funds don't have cash and high net-worth individuals are stuck. You need liquidity to move the market,' says Yasin. On 9 May, First Gulf Bank was reportedly the first listed company to buy back shares.

In addition, the committee is requesting a freeze on IPOs to match a decline in investor demand. 'Investors have lost their appetite for IPOs' says Yasin. 'If they don't stop, the IPO market will die.'

Margin trading continues to create volatility with investors dumping stocks at market close. In early May, the Central Bank of the UAE asked banks, brokerages and financial institutions to submit quarterly reports on their exposure to the stock markets, including details of their loans and guarantees to institutional and retail investors.

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