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01 October 2023

SCA urged to act against those involved in short selling

Ziyad Al Dabbas says it is too early to allow short selling in the UAE markets. (SALIM KHAMIS) 

By Abdel Hai Mohamad

Investors who engage in short selling should be named publicly as a deterrent, said experts.

Senior figures in the industry fear that the lack of transparency and a disclosure policy is harming confidence in the UAE's markets.

Short selling involves cashing in on falls in share prices and can drive down the value of equities.

"We have advised the Securities and Commodities Authority (SCA) several times to publicly disclose the names of people who practise short selling," Ziyad Al Dabbas, a financial consultant at the National Bank of Abu Dhabi, told Emirates Business.

"However, the SCA has not revealed the name of any violator. This means people dealing on the stock exchange continue to suffer from the effects of short selling. The SCA does not punish violators."

He said short selling has caused large falls in the markets. "A person who sells short aims to undermine the market because he wants prices to fall so he can buy large amounts of shares at a very low cost and sell them later at a higher price.

"Someone borrows a large amount of shares from hedge funds or investors for one or two months on condition that he returns them with a specific percentage of profit.

"Then he sells all the shares together, leading to a decrease in the price of the shares. He waits for prices to collapse and buys a larger amount of shares at lower prices, which helps to raise prices. He then sells the extra shares he bought, obtaining the higher prices. After he has generated his profits he returns the borrowed shares to their owners with the agreed share of the gains."

Al Dabbas said short selling violated SCA regulations, and added: "The SCA must combat this dangerous and negative practice. It is too early to allow short selling in the UAE as our markets are still emerging. They are less than eight years old and have not reached the stage where they can offer financial tools and derivatives. In addition the law covering buying on margin that was previously issued was not applied."

Hamoud Abdulla Al Yasi, General Manager, Emirates International Brokerage, criticised the SCA's stance on short selling.

"The SCA roars like a lion and bites like a mosquito. What is the benefit of the SCA's warning against short selling when those who practice it gain millions and investors suffer?

"The SCA knows that what lies behind these negative practices are the hedge funds that are responsible for the destruction of our financial markets over the last few years. Unfortunately, the SCA only warns without imposing penalties, despite the negative effects of short selling on the country's financial markets. The SCA has the power to impose penalties but it is reluctant to punish violators as it fears they will leave the market.

"The SCA should deal strictly with short selling. It must either prevent everyone from selling short or allow everyone to do it in accordance with regulations so it does not harm the markets and investors, especially small investors. If the current situation continues, we should be ready for a new financial crisis in our markets."

Al Yasi said everyone, including the SCA, knew that short selling took place.

"I have a client who asked a brokerage office to lend him shares worth millions of dirhams for one month provided that he returned the shares after that period.

"The situation in the financial markets is very difficult. Everyone wants to sell and there are no buyers, which enables short sellers to step in. They expose the market to the threat of new financial crises. Undoubtedly those violators are highly professional. They borrowed many shares when prices were good and succeeded in undermining the market to realise their personal interests. The question is: What is the SCA's role in controlling the market?"

Maha Kanz, a financial consultant at Abu Dhabi-based Al Fajr Securities, agreed with Al Yasi's criticism of the authority. "The SCA's failure to impose penalties on those who practice short selling underlines the absence of transparency and disclosure and makes investors lose confidence. The SCA sends warnings to brokerage companies, which shows that it knows who the violators are. But why does it not punish them?"

She said legislation should be introduced to stop short selling. "Legislation is important, but before it is issued the SCA should use its powers and punish violators."

Kanz said many developed countries introduced temporary bans on short selling last year as the financial crisis began to hit because the practice was undermining stock markets.

"Investors who sell short violate the SCA's regulations. Unfortunately, the SCA has not imposed penalties on them and this confirms the absence of justice and transparency in the markets."

She said the SCA should provide a suitable environment for margin trading.

"Margin trading has stopped recently due to the difficult conditions in the financial markets and the fact that brokerage companies are unable to lend money to their clients.

"In addition many people are threatened with redundancy due to the international financial crisis and share prices have fallen by large amounts. So it has become very difficult for clients to borrow from brokerage companies, which has put the brakes on margin trading," said Kanz.