Let’s get one thing straight from the start: there is nothing wrong, illegal or immoral about investment banks using derivative products to maximise their positions in stocks traded on the UAE markets (as presciently reported in Monday's Emirates Business).
If foreign banks feel the need to camouflage their shareholdings via the use of innovative structures like “total return swaps” then it is entirely up to them. They are infringing none of the Emirates Securities and Commodities Authority rules because Esca does not currently have any authority over these products.
You might even regard it as a compliment to the recent strength of the UAE markets that banks like Merrill Lynch, Goldman Sachs or HSBC are prepared to use their ingenuity in such a way to get as many shares as they can in stocks like Emaar or Arabtec.
But there is a reason why the UAE authorities imposed restrictions on foreign shareholdings in the past – a very understandable desire to protect ultimate ownership and “creeping control” – of companies regarded as national assets. It is not protectionist – many European firms have rules against foreign takeovers, and the Americans, after the US ports scandal, are not in a position to lecture anybody on protectionism.
Esca has two options in the current situation: it can change the rules to include such derivatives within the scope of its authority; or it can lobby the government to change company law, allowing more shares to go on sale to satisfy foreign demand for UAE stock. For example, etisalat is not currently allowed any foreign shareholders.
I recommend they take the first course now – it is in nobody’s interest to have such confusion in the regulatory process; but they should simultaneously embark on the latter as well. The UAE has nothing to fear, and all to gain, from greater foreign investment.
Foreign ownership rules need clarification