Regulators encouraged to allow foreign investors to buy more shares

15 December 2013

Locally domiciled funds could allow UAE to retain control over voting rights

The UAE could benefit from allowing foreign investors to buy stocks reserved for local ownership through UAE-domiciled funds, says Jacques Visser, partner at the Dubai office of law firm Dechert.

“We are in discussion with UAE regulators about allowing these restricted shares to be made available to local funds, with a local manager that would retain control over the voting of such shares in corporate actions. Even if it involves foreign investors’ money, there is no reason to be concerned about foreign investors controlling local companies.”

Currently most investment funds approved by the Emirates Securities and Commodities Authority operate under the European Union’s UCITS-directives and are domiciled in Luxembourg.

Since these are considered to adhere to some of the highest standards possible investors may be cautious of moving their money to a locally regulated fund instead, but according to Visser that will be addressed as well.

“We’re doing gap analysis in how regulation for local funds compare to standards abroad and within the GCC to assist local regulators. Building an attractive funds jurisdiction is an organic process, but if you do the right things it will pay dividends over time. Singapore and Malaysia, for example, seems to have models that are working, which the UAE could mirror.

“It is also becoming increasingly difficult for non-European fund managers to operate funds from a European platform because of the high costs and the high level of regulation involved.  New European Union directives make it easier to set up a fund elsewhere and market into Europe on a private placement basis. A UAE-based fund could certainly provide an alternative to that.”

Foreign investors currently have limited access to UAE stock markets as the government has set a foreign ownership limit of 49 per cent on all stocks. The most direct way to address that would be if authorities raise the limits, which it is under increasing pressure to do as the UAE prepares for its MSCI upgrade to emerging markets status in May 2014.

Chris Harran, also a partner at Dechert in Dubai, adds that local funds could experience further growth if higher investment into foreign markets is allowed as well.

“UAE regulators could opt to mirror the UCITS model more closely by allowing full investment outside of the UAE instead of imposing a limit to the amount of assets that can be invested abroad. This would control risk and also help ease restrictions such as the percentages allocated to where you can make investments.”

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