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Waiting for the lift, Part I

Waiting for the lift, Part I

For years the UAE has said it wants to lift the ownership cap. What’s it waiting for? Part I of a series.

October 29, 2008 2:33 by

Scott MacMillan

Earlier this year, the UAE’s minister of economy gave foreign investors heartening news: “Within six months,” he said, the government would put forward a law to eliminate the 49 percent foreign ownership cap in certain sectors. No longer would foreigners be relegated to the country’s free zones, barred – in theory if not entirely in practice – from operating on the “mainland.”

That was in March. Six months have come and gone. Some wouldn’t be shocked if 2008 ends without law’s long-expected passage. “I’m into my seventh year in the UAE, and this has been coming since I arrived,” says Russell Vickers, a lawyer with the firm Trowers & Hamlins, which specializes in corporate and commercial law and has had an office in Dubai since 1991. “People are taking it with a pinch of salt, whether it will actually happen this year. It’s been said, but it was also said it would happen last year.”

Lifting the foreign ownership cap would have a number of effects on the UAE economy. It would likely boost foreign direct investment, to start. For publicly listed companies, it would also lead to higher standards of corporate governance as Western institutional investors delve into UAE shares. It would almost certainly raise liquidity levels on the capital markets and give a much-needed boost to local equities, which have disappointed investors by trading sideways for much of 2008, following a promising surge in the fourth quarter of last year. Bearish foreign investors have shied away from Gulf stocks despite analysts claiming it has strong fundamentals, with Dubai’s main index hitting an 11-month low in early September. Though rising fears of a Dubai real estate correction have hardly helped matters, analysts have blamed the markets’ poor performance, in part, on foreign ownership restrictions.

A move to open sectors such as health care and education, both of which are expected to be among the industries covered, would come as part of a wider shift in the Gulf’s business culture, where protectionist instincts have historically been strong. These instincts are now going head to head with a desire to draw foreign expertise out of the free zones and attract capital from Western institutional fund managers. In Saudi Arabia, where the Gulf market has historically been the most closed to foreign investment, the main Tadawul share index jumped more than 5 percent in a single day in August. That was after the Capital Markets Authority announced it would allow foreigners to “trade” shares without really owning them. Actual ownership and voting rights will still rest with licensed Saudi mediators, but otherwise..

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