Dramatic moves to reform the UAE bourse

The first meeting of the new board of the Emirates Securities and Commodities Authority, as it is now known, this week brought some unexpected surprises that will transform the UAE bourse over the next few years into a far more active capital market.

First, the ESCA is to make public listing on the UAE bourse compulsory for all public shareholding companies. This will mean that the number of quoted companies will swell from 38 to 97, more than doubling the number of listed firms.

Secondly, the ESCA has formed an e-link committee, chaired by Central Bank Governor Sultan bin Nasser Al Suwaidi, to report back on progress in linking the Abu Dhabi Securities Market and Dubai Financial Market. The fact that these two markets are not linked is clearly ridiculous, and the cross-listing of all UAE shares in both trading floors is highly desirable.

Third, the new board - which is chaired by UAE Minister of Economy and Commerce Sheikh Fahim bin Sultan Al Qasimi - is finalizing a draft law on the listing of Islamic bonds and debt instruments on the local stock markets.

This is all great news for the UAE bourse which is the third largest in the Arab world but suffers from very low trading activity. Only around $3 million of shares change hands a day, a tiny amount for a stock market with a market capitalization of $39 billion.

But other reforms are needed, if the UAE is to get the sort of dynamic capital market it deserves. The ESCA should also consider making it compulsory for listed companies to admit foreign shareholders up to a certain limit.

This would encourage international funds to invest in the market, and raise standards of equity research and increase trading activity. It is fine to increase the number of shares available in the market, but the next logical step is to increase the pool of investors. Why should UAE investors be free to invest in London but the City not be welcome to invest in the UAE?

Another idea is to end the restriction that prevents local banks from investing more than five per cent of their capital in shares and bonds. Again the onus is on increasing the flow of capital into the market and removing stifling restrictions. What was a good idea many years ago is not necessarily relevant now.

However, the new board of the ESCA has made a bold move in forcing public shareholding companies to list on the bourse. Now it needs to keep this momentum going, for a dynamic stock market is vital if the UAE is to develop and diversify its economy successfully.