The International Capital Markets Review: United Arab Emirates
The United Arab Emirates (UAE) was established in 1971 and comprises the seven emirates of Abu Dhabi, Ajman, Dubai, Fujairah, Ras Al Khaimah, Sharjah and Umm Al Quwain. Abu Dhabi is the capital and the site of a number of federal ministries, the Central Bank of the United Arab Emirates (the Central Bank) and other government institutions and agencies.
Under the UAE Constitution, each of the emirates retains substantial control over the conduct of government affairs within the emirate. With some exceptions, regulation of capital markets is generally a matter of UAE federal law.2
The legal system in the UAE (which includes federal laws and individual emirate laws, such as those of the emirate of Dubai) is still developing. UAE law does not recognise the doctrine of binding judicial precedent. In the absence of such a doctrine, the results of one court case do not necessarily offer a reliable basis for predicting the outcome of a subsequent case involving similar facts. Consequently, the UAE legal system may generally be regarded as offering less predictability than more developed legal systems.
In contrast, the Dubai International Financial Centre (DIFC) was established as a financial free zone with its own body of laws and regulations, which are largely separate from the UAE legal system. It also has its own courts. The DIFC laws and rules of court are largely based on English common law and the procedural rules currently in place in England and Wales.
Similarly, the Abu Dhabi Global Market (ADGM) was established pursuant to Abu Dhabi Law No. 4 of 2013 as a financial free zone in the Emirate of Abu Dhabi, with its own civil and commercial laws. The ADGM commenced operations in 2015.
The UAE Constitution provides for a federal court system, but permits each constituent emirate to opt out of this and maintain an independent court system. The emirates of Sharjah, Ajman, Fujairah and Umm Al Quwain have joined the federal court system. The emirates of Abu Dhabi (since 2006), Dubai and Ras Al Khaimah each maintain a separate court system. The UAE capital markets are young and still developing. There are currently three securities exchanges, all of which are less than 20 years old: the Abu Dhabi Securities Exchange (ADX), the Dubai Financial Market (DFM) and NASDAQ Dubai. In addition, the UAE is home to the Dubai Multi Commodities Centre and the Dubai Mercantile Exchange Limited. The creation of a second market, in which shares in private joint-stock companies would be eligible for trading, was launched in 2014.
Regulation of securities and financial markets in the UAE is a potential source of confusion to investors and financial institutions. Generally speaking, there are two regulatory schemes: the UAE federal regulatory scheme, and the scheme applicable in the DIFC (and to a lesser extent, the ADGM). With regard to the laws and regulations affecting capital markets, the DIFC and the ADGM are effectively different jurisdictions altogether, with rules and regulations that differ significantly from the UAE federal regulatory scheme.3 A detailed discussion of the DIFC and the ADGM schemes is beyond the scope of this chapter, which deals primarily with the UAE federal scheme.
Historically, the regulation of securities trading and transactions involving investment products was the domain of the Central Bank. The Central Bank is entrusted with the issuance and management of the country's currency, and regulation of the banking and financial sectors. A government agency, its capital is fully owned by the federal government and it has its headquarters in Abu Dhabi. The Central Bank acts as the UAE's central bank and regulatory authority, directing monetary, credit and banking policy for the entire country (other than inside the DIFC). The individual emirates do not have separate corresponding institutions. The Central Bank is also empowered to set the exchange rate of the dirham against major foreign currencies.
The Emirates Securities and Commodities Authority (SCA) was created in 2000. Until 2009, the SCA generally limited its regulatory oversight to publicly listed UAE companies and the public securities exchanges in the UAE. In recent years, the regulatory responsibility of the SCA has expanded considerably, and it is now the primary regulator of capital markets under the UAE federal scheme. The shift in regulatory responsibility over foreign securities from the Central Bank to the SCA has occurred gradually over time pursuant to an unpublished memorandum of understanding between the Central Bank and the SCA. The general public is informed of regulatory developments as and when the SCA publishes new regulations. In addition, the SCA has adopted regulatory procedures and practices, some of which are not published.
In June 2013, Morgan Stanley Capital International (MSCI), which maintains the most widely used equity index in the world, upgraded the status of the UAE capital markets from frontier to emerging market. This promotion became effective in May 2014 with the changes to the indexes. At that time, MSCI added nine UAE companies to its benchmark emerging markets index for the first time. Subsequent to the decision to upgrade the UAE markets, and in an attempt to meet listing conditions under MSCI indexes going forward (which requires, in addition to other conditions, that listing conditions include permitting foreign ownership at acceptable rates), a number of companies listed on the ADX and the DFM decided to raise the percentage of foreign ownership.
The year in review
i Developments affecting debt and equity offerings
One prominent development was the issuance of the SCA Board of Directors' Chairman Decision No. 9/RM of 2016 Concerning the Regulations as to Investment Funds (the New Fund Regulations), which replaced SCA Board Resolution No. 37 of 2012 Concerning the Rules of Investment Funds, as amended, and which became effective on 31 July 2016.
The New Fund Regulations continue to ensure that:
- the oversight of the licensing, regulation and marketing of investment funds in the UAE remains with the SCA, which also carries out oversight and prudential supervision tasks pertinent to the financial position of mutual funds established and licensed in accordance with the provisions of these Regulations;
- SCA approval is required for the establishment of a local investment fund, which is any investment fund established in the UAE, excluding the free zones, and licensed by the SCA;
- SCA approval is required for the marketing and promotion of foreign funds to investors in the UAE. The New Fund Regulations define a foreign fund as 'a mutual fund established outside the UAE, in a free zone, or in a financial free zone within the UAE'; and
- the marketing of a foreign fund to investors in the UAE requires the appointment of a UAE-licensed local promoter.
The New Fund Regulations do not apply to:
- the accumulation of funds for the purposes of investment in a joint bank account, concluding group insurance contracts, or participation in social security, employee incentive programmes or investment plans associated with insurance contracts, unless the investments or collected money are directed from plans of this kind to mutual funds; or
- funds established by federal or local government agencies, the companies fully owned by any of them or the foreign funds promoted to one of these entities. In addition, the New Fund Regulations specifically do not apply in the case of reverse solicitation.
While the New Fund Regulations provide that no foreign fund may be offered, marketed, advertised or distributed within the UAE prior to obtaining approval of the promotion from the SCA and appointing a local promoter, they do not specify who is eligible to be a local promoter, what the obligations of the local promoter are or the minimum subscription per single investor. The New Fund Regulations provide that the term of the SCA approval shall be one year and may be renewed with an application submitted to the SCA at least one month before expiry thereof. The SCA shall have the right to reject the application for renewal as required by the public interest.
The New Fund Regulations apply to both private and public placements. However, a distinction is made between public funds (either open-ended or close-ended funds established in the UAE that target all investors) and private funds (either open-ended or close-ended funds established in the UAE that target qualified investors).
An application for the licensing of a public open-ended mutual fund must be submitted by its founders or a corporate entity licensed by the SCA to practise the activity of establishing and managing such a fund in the UAE. The New Fund Regulations provide that a prospectus, with supporting documents, and a key investor information document must be submitted. It is prohibited to announce the start of initial procedures to obtain a licence for a fund, announce its licensing, subscribe in its units, promote it, distribute any promotional materials or announce any information in relation to the fund prior to obtaining the approval of the SCA for the licensing and announcement. The term of the licence for the fund shall be one year, and it may be renewed.
Similarly to public open-ended funds, the scope of investment in public close-ended funds includes tradable securities (stocks, bonds and cash instruments) and high-liquid non-tradable securities, financial derivatives on tradable securities to control the level of risks set out in the prospectus or for hedging in an amount not greater than the total net asset value subject to disclosure thereof, declared indexes and bank deposits to ensure liquidity with a maximum maturity of 12 months with licensed banks, subject to determining the investment ratio.
Public close-ended mutual funds have the following investment restrictions:
- the ratio of investment in securities issued by one entity may not exceed 10 per cent of the net value of the fund's assets or 10 per cent of the issued capital (whichever is less);
- the ratio of investment in unlisted securities may not exceed 10 per cent of the fund's net asset value;
- the ratio of investment may not exceed 20 per cent of the fund's net asset value in securities listed in a foreign market, provided that the market is subject to a regulator similar to the SCA;
- investment in financial derivatives is subject to a limit of no more than 1 per cent of the fund's net asset value;
- investment in another mutual fund is not permitted unless it is consistent with the investment policy of the fund and in a manner that serves the interests of unit holders; and
- engaging in foreign exchange operations is permitted only when they are incidental and with the objective of managing its investments.
The New Fund Regulations make provision for various types of mutual funds, including a master fund (a public mutual fund or part of a group of funds affiliated to an umbrella fund, provided the master fund meets certain criteria), a feeder fund (a public mutual fund or part of a group of funds affiliated to an umbrella fund excluded from investing in tradable securities and from some other investments as determined by the SCA, and that invests at least 85 per cent of its assets in the units of a public master fund or a public foreign fund) and an umbrella fund.
In January 2017, the SCA issued Chairman of the SCA Board of Directors' Decision No. 3/RM of 2017 Concerning the Organization of Promotion and Introduction (the Promotion Regulations). These Regulations appear to supplement but not necessarily replace those sections of the New Fund Regulations that relate to promoting foreign funds, as the Promotion Regulations do not stipulate that they replace the New Fund Regulations either fully or in part. While the Promotion Regulations reconfirm that any marketing of interests in foreign funds to investors in the UAE requires that such interests be registered with the SCA, they also reiterate that reverse solicitations set out in the New Fund Regulations still apply. The Promotion Regulations also specify a further exemption whereby a foreign fund need not be marketed by way of a private offering in the UAE by an SCA-licensed promoter if offered to a qualified investor. A qualified investor is:
- an investor capable of managing its investments by itself and on its own accord, such as:
- the federal government and local governments, government institutions and authorities, or the companies fully owned by any of the aforementioned;
- international bodies and organisations;
- a person licensed to engage in a commercial business in the UAE, provided that one of the purposes of its business is investment; or
- a natural person with an annual income of no less than 1 million UAE dirhams, or with his or her net equity, with the exception of his or her main residence, valued at 5 million dirhams and declaring that he or she has the adequate knowledge and experience – whether solely or through a financial consultant – to assess the offering documents, the advantages and the risks associated with or arising from the investment; and
- represented by an investment manager licensed by the SCA.
In addition to foreign funds, the SCA has assumed oversight responsibilities in relation to the marketing of most types of foreign securities in the UAE. Specifically, it has regulatory oversight with regard to matters pertaining to plain vanilla (non-listed foreign) security products, while the Central Bank still retains oversight authority with regard to sophisticated products such as credit-linked notes. Various new SCA regulations relating to funds have been enacted between 2016 and 2020:
- Chairman of the Authority's Board of Directors' Decision No. 10/RM of 2016 Concerning the Fees of Mutual Funds, outlining the fees payable to the SCA in respect of application fees and licence renewals for public and private mutual funds;
- Administrative Decision No. 49/RT of 2016 Concerning the Exchange-Traded Fund, regulating the incorporation and prospectus requirements for exchange-traded funds;
- Administrative Decision No. 52/RT of 2016 Concerning the Controls of Cash Investment Fund, regulating the investments permissible for CIFs;
- Administrative Decision No. 1/RT of 2017 Concerning Real Estate Investment Fund Controls;
- Administrative Decision No. 2/RT of 2017 Concerning Private Equity Fund Controls, which has introduced rules relating to the obligations of both general and limited partners and places restrictions on the investments a private ownership fund can make. This means that a fund must invest the majority of its monies in purchasing:
- shares in limited liability, joint partnership, joint venture or private shareholding companies; or
- securities of public shareholding companies that are intending to commence conversion into private shareholding companies or before the commencement of the liquidation process;
- Administrative Decision No. 3/RT of 2017 Concerning The Venture Capital Fund Controls;
- Chairman of the Authority's Board of Directors' Decision No. 4/RM of 2017 Concerning the Regulation of the Activity of Administrative Services for Investment Funds;
- Administrative Decision No. 57/RT of 2017 Concerning the Adjustment of Positions Mechanisms for Mutual Funds;
- Administrative Decision No. 58/RT of 2017 Concerning the Adjustment of Positions Mechanisms for Promotion and Introduction Activities;
- Administrative Decision No. 123/RT of 2017 Concerning the Regulatory Controls for Financial Activities and Services;
- Decision of the Chairman of the SCA Board of Directors No. 32/RM of 2017 Concerning the Regulation of General and Limited Partnership Funds;
- Decision of the Chairman of the SCA Board of Directors No. 5/RM of 2018 Concerning the Imposition of Sanctions;
- Decision of the Chairman of the SCA Board of Directors No. 12/RM of 2018 Concerning the XBRL;
- Chairman of the SCA Board of Directors' Decision No. 18/RM of 2018 Concerning the Regulations as to Licensing Credit Rating Agencies;
- Chairman of the SCA Board of Directors' Decision No. 19/RM of 2018 Concerning the Regulation of the Central Depository Activity;
- Chairman of the SCA Board of Directors' Decision No. 20/RM of 2018 Concerning the Issuing and Offering of Islamic Securities;
- Chairman of the SCA Board of Directors Decision No. 20/RM of 2018 Concerning the Offering or Issuance of Islamic Securities;
- Chairman of the SCA Board of Directors' Decision No. 8/TM of 2019 on the Mechanism of Investment Funds;
- Chairman of the SCA Board of Directors' Decision No. 21/Chairman of 2019 on Procedures of Anti-Money Laundering and Combating the Financing of Terrorism and Illegal Organisations;
- Administrative Decision No. 63/RT of 2019 Concerning Evaluation of In-Kind Shares of Investment Funds;
- Administrative Decision No. 59/RT of 2019 Concerning the Capital Adequacy Criteria of Investment Managers and Management Companies;
- SCA Board of Directors' Decision No. 36/RM of 2019 Concerning General Clearing Member Activity; and
- SCA Board of Directors' Decision No. 5/Chairman of 2020 Concerning Suitability and Appropriateness Standards.
In addition to regulations relating to investment funds, the SCA has been active on a number of other fronts. It issued a series of regulations governing market making, securities lending and borrowing, short selling and liquidity,4 as well as central clearing, cross-border securities trading, and efficiency and appropriateness controls for licensed companies and accredited persons in the securities industry.5
Market making is defined in these regulations as the activity of providing continuous prices for the purchase and sale of certain securities to increase the liquidity of securities in accordance with market-maker regulations.
The practice of market making requires a licence from the SCA. An applicant for a licence must be a corporate person with paid capital of at least 30 million dirhams (or the equivalent) meeting any of the following criteria:
- a company established in UAE with at least 51 per cent UAE ownership or the nationality of one of the Gulf Cooperation Council (GCC) states. One of its purposes must be to practise market making;
- a company established in the UAE and licensed by the SCA to operate in the field of securities, in which case the applicant shall be subject to the controls issued by the SCA concerning the prevention of conflicts between activities; or
- a commercial bank or investment company licensed by the UAE Central Bank, or a branch of a foreign bank, provided that the parent bank is licensed to practise this activity, and subject to obtaining the approval of the UAE Central Bank in any of these cases.
Any investor is permitted to lend securities owned by that investor, but the borrowing of securities, unless otherwise approved by the SCA, is permissible only when carried out by a licensed market maker practising market making or by the clearing department of an exchange in the case of a failure to deliver sold securities on the settlement date.
Licensed market makers are permitted to engage in short selling. Each exchange has the power to determine the securities eligible for short sales provided that short selling is not permitted until one month after a company's initial listing. In addition, short selling is not permitted for a subscription in capital increase shares or in covered warrants. More generally, each exchange has the power to create its own rules governing short selling procedures provided that these rules are subject to SCA approval.
Duly licensed market makers are also permitted to act as liquidity providers by entering into agreements with issuers of listed securities provided that the liquidity provider cannot at any time own more than 5 per cent of the listed securities. All liquidity provision agreements must be disclosed to the SCA, and the exchange on which the securities are listed and the exchange in turn shall disclose the agreement to the public.
The regulations address separating clearing and settlement functions, transferring securities ownership and depositories, and further permit the incorporation of companies, independent from securities exchanges, to handle clearing transactions under a licence from the SCA.
The regulations for central clearing houses provide that clearing transactions are no longer executed on securities exchanges. The regulations also regulate clearing transactions and redistribute the tasks carried out on the exchanges.
In June 2013, the SCA issued Board Resolution No. 38 of 2013 Concerning the Trading of Rights Issue for Capital Increases. A rights issue can be listed and traded subject to the provisions of this Resolution. A rights issue is defined therein as a financial instrument representing rights that are granted to a company's shareholders to have priority to subscribe for shares in that company's capital increase.
In January 2014, the SCA issued Board of Director's Decision No. 1 of 2014 Concerning the Regulations on Investment Management, which became effective on 28 February 2014. This Decision defines investment management as the management of securities portfolios for the account of third parties or the management of mutual funds.
With limited exceptions (the promotion of financial portfolios owned by federal and local government entities), any entity wishing to carry on or promote investment management activities in the UAE must obtain a licence from the SCA. Applicants must meet strict eligibility criteria and must have a paid-up capital of no less than 5 million dirhams and a bank guarantee of 1 million dirhams. There are also conditions to be met relating to technical and administrative staff, the entity's premises, required electronic and software programs, internal control systems and an operational guide for risk management systems.
In April 2014, the SCA issued two new sets of regulations: Board of Directors' Decision No. 16 of 2014 Concerning the Regulation of Sukuk (the Sukuk Regulations) and Board of Directors' Decision No. 17 of 2014 Concerning the Regulation of Debt Securities (the Debt Securities Regulations).
Sukuk are defined as tradable financial instruments of equal value that represent a share of ownership of an asset or a group of assets, and that are issued in accordance with shariah law.
Retail sukuk may only be issued in the UAE through public subscription, and approval must be obtained from the SCA before issuing or listing any sukuk on the market in accordance with the provisions of the Sukuk Regulations. Excluded from the provisions of these Regulations are government sukuk, and sukuk that will not be offered through public subscription or listed on the market. A condition for the principal listing of retail sukuk is that the applicant must be established in the UAE and outside a financial free zone.
Other issues covered under the Sukuk Regulations include the procedures and documents required for approval by the SCA of primary and joint listings of sukuk, the establishment of an SCA sukuk register, as well as trading, clearance and settlement of sukuk, and suspension and cancellation of listings.
The Debt Securities Regulations replace SCA Board Resolution No. 94/R of 2005 Concerning the Listing of Debt Securities. Debt securities are defined as tradable financial instruments of equal value evidencing or creating indebtedness on the issuer, whether secured or unsecured. The Debt Securities Regulations state that with the exception of government corporate bonds, no corporate bond shall be issued and offered for public subscription in the UAE without first obtaining the SCA's approval. The corporate bonds must also be listed on the market. To be listed, debt securities must satisfy the following conditions:
- they must comply with the provisions of the Commercial Companies Law and with the issuer's constitutional documents;
- unless the SCA decides otherwise, the aggregate value of all debt securities to be listed must be at least 10 million dirhams, or the equivalent thereof in a foreign currency that is acceptable to the SCA and the market; and
- where the debt securities sought to be listed are secured debt securities, a trustee must be appointed to represent the interests of the holders of those debt securities, and that trustee must have the right of access to any information relating to the assets.
The Debt Securities Regulations provide that the general assembly must approve the issuance of corporate bonds if the issuer is a joint-stock company, and that a subscription announcement must be prepared and presented according to the format approved by the SCA.
The Debt Securities Regulations also require non-government issuers to obtain SCA approval before publishing any document or making any announcement inside the UAE relating to the listing of corporate bonds. The documents or announcement must clearly indicate that SCA approval was granted for publication. This requirement is also applicable to sukuk.
Both the Sukuk Regulations and the Debt Securities Regulations provide that neither the SCA nor the markets shall have any responsibility for any information (lists, financial statements, financial data, information, reports or any other documents) presented by the applicant or issuer.
The SCA issued Board of Directors' Decision No. 27 of 2014 on the Regulation of Securities Brokerage in July 2014. This regime classifies brokerage firms into those that engage in trading only while the clearance and settlement operations are conducted through clearance members, and those that engage in trading clearance and settlement operations for their clients.
Some of the features of the new regulatory regime include the new classification of brokerage firms, new capital requirements (3 million dirhams with respect to a brokerage company (trading member) and 10 million dirhams for a brokerage company (trading and clearing member)), and increases in the value of bank guarantee requirements. Under the new regime, no company shall engage in a brokerage activity without a licence from the SCA and registration in the SCA Register for brokers.
In July 2014, the SCA also introduced controls for brokerage firms trading for their clients in foreign markets whereby a brokerage firm may trade for its clients in the foreign markets in the normal way of trading, or using accounts, only after obtaining the approval of the SCA.6
SCA Board of Directors' Decision No. 10 of 2014 Concerning the Regulation of Listing and Trading of Shares of Private Joint Stock provides the conditions under which private joint-stock companies would be able to list their shares on the market, including the requirement that the capital be paid in full, that the audited budget be issued for the previous two fiscal years and that the company facilitates the trading of its shares through brokerage companies licensed by the SCA. Private joint-stock companies that are listed on the market shall be exempt from the Corporate Governance Regulations, Ministerial Resolution No. 370 of 2009 Concerning Private Joint Stock Companies Register and SCA Board of Directors' Decision No. 3/R of 2000 Concerning the Regulations as to Disclosure and Transparency.
The much-anticipated new UAE Commercial Companies Law (Federal Law No. 2 of 2015) was issued on 1 April 2015 and came into force on 1 July 2015. The provisions relating to corporate governance were significantly enhanced. Some of the most significant amendments relate to public companies and capital markets. The minimum free float permitted in an initial public offering (IPO) was reduced from 55 to 30 per cent, with the maximum proportion that can be floated decreased from 80 to 70 per cent. The share price can now be determined by way of a book-building process, and shares can be issued at a premium. Pursuant to the Commercial Companies Law, the concerned authorities have introduced subordinated legislation in a number of areas, including the Corporate Governance Regulations as noted below, and regulations on IPOs and book-building.7 The concerned authorities have also been authorised to introduce legislation regarding the rules on the formation and qualification of shariah boards, the creation of different classes of shares and their rights. For public joint-stock companies, the minimum share capital requirement of 10 million dirhams has been increased to 30 million dirhams. The concept of authorised (but not issued) share capital has been introduced. Public offers of subscription to shares are expressly prohibited without SCA consent.
The Commercial Companies Law prohibits any company, other than a public joint-stock company, from offering any securities in an IPO. In all cases, no company or natural or corporate person, incorporated or registered anywhere in the world, may publish any advertisements in the UAE that include a call for an IPO in securities prior to obtaining the approval of the SCA. This prohibition has also been introduced by the SCA.8
A company may now issue shares to a strategic partner (i.e., an investor from an industry sector related to the company's own) through a capital increase on terms approved by a special resolution of the shareholders without needing to comply with preemption rights.
In September 2018, the SCA issued SCA Chairman Decision No. 28/Chairman of 2018 Approving the Fintech Regulatory Framework (the Fintech Regulatory Sandbox Guidelines). A fintech regulatory sandbox is a process-based framework that allows entities to test innovative products, services, solutions and business models under a relaxed regulatory environment, but within a defined space and duration. In December 2019, the UAE Central Bank announced that it will establish a new fintech office to support fintech activities in the banking sector. The fintech office will facilitate the establishment of a regulatory framework in cooperation with the DIFC and ADGM, and with the relevant authorities in the wider Middle East region.
The Commercial Companies Law has introduced the concept of investment funds incorporated as a separate legal personality in the form of common investment companies, and the concept that a public shareholding company may buy back a portion of its own shares to resell them. SCA Board of Directors' Decision No. 40 of 2015 set outs the conditions and procedures for companies to do so, which include the following:
- at least two financial years must have elapsed since the establishment of the listed public shareholding company on the financial market;
- the company must have issued two audited balance sheets approved by its general assembly;
- at least one year must have elapsed since the most recent selling transaction of shares previously bought back (if any);
- approval of the general assembly of the company under a special resolution on the buy-back for resale transactions;
- the buy-back may not exceed 10 per cent of the shares representing the company's paid-up capital; and
- the company may not execute the buy-back transaction until after six months have elapsed since the most recent issuance of any securities in a public offer.
Pursuant to the Commercial Companies Law, the SCA issued Chairman of the SCA Board of Directors' Decision No. 3/Chairman of 2020 Concerning Approval of Joint Stock Companies Governance Guide in April 2016, which sets out new corporate governance rules and corporate discipline standards for public joint-stock companies (the Guide), which replaced the existing resolutions and regulations.9 The Guide applies to all listed UAE companies, their board members, managers, chairs and auditors to whom the provisions of the Commercial Companies Law apply. The provisions stipulated in the Guide shall not apply to foreign companies listed on the market. Key features of the Guide include:
- the obligation to appoint a secretary on the board of directors, and the majority of board members should be independent and non-executive;
- bringing more clarity to the mechanism for disclosure of interests of new board members, by means of the submission of a declaration of interest form upon assuming position, and more clarity to the process for handling conflicts of interest;
- the introduction of proper and fit criteria for board members;
- the development of a new approach to management through the (optional) adoption of the dual governance structure;
- bringing more clarity and detail to risk management procedures through the (optional) formation of a permanent committee in charge of handling risks;
- the introduction of provisions giving the board the authority to create a technical committee for the purpose of assisting it in discharging its supervisory responsibilities regarding the role of technology in executing the company's business strategy;
- bringing more clarity to governance-related disclosures; and
- the introduction of provisions regulating the governance of subsidiary companies and corporate social responsibility.
The SCA recently issued new rules under Chairman of the SCA Board Decision No. 13/RM of 2020 Concerning Procedures of Dealing with Listed Troubled Joint Stock Companies (the New Rules). One of the main objectives of the New Rules is to provide additional classification criteria for local or foreign public joint-stock companies listed on either the Dubai Financial Market or the Abu Dhabi Securities Exchange to highlight to investors public joint-stock companies that are in financial distress.
On 11 March 2019, the SCA, the Dubai Financial Services Authority (DFSA) of the DIFC and the Financial Services Regulatory Authority (FSRA) of the ADGM issued a joint press release announcing the enactment of legislation enabling the implementation of a passporting scheme to facilitate the UAE-wide promotion of domestic funds. Historically, the existence of three different regulatory regimes in the UAE has been an impediment to the growth of the market for funds since a fund approved by a particular regulator was only eligible for promotion within the relevant jurisdiction and not throughout the UAE. The passporting regime aims to change this. The DFSA and ADGM have published amendments to the relevant rules and regulations implementing the passporting regime. The SCA's regulations have not yet been published. The passporting regime applies to both private and public domestic funds. It does not apply to foreign funds promoted in the UAE. Foreign funds and other types of securities promoted in the UAE remain subject to the applicable rules of the jurisdiction in which they are promoted.
ii Developments affecting derivatives, securitisations and other structured products
Derivative products have been marketed and sold in the UAE for many years. There have been some changes to the rules and regulations affecting these products to expand the investment options available to customers in the markets with the issuance of SCA Board of Directors' Decision No. 22/RM of 2018 Concerning the Regulation of Derivatives Contracts (the Derivatives Contracts Regulations).
Pursuant to the Derivatives Contracts Regulations, derivative contracts are financial contracts of a specific value determined by the contracting parties. These types of contracts derive their value from that of the underlying securities (defined to be local securities and foreign securities, or local or foreign index subject matter of a derivatives contract) and are dependent on the change of value of the securities. The Derivatives Contracts Regulations also classify structured derivatives contracts as 'derivatives contracts structured on the local securities or indicators issued in accordance with the market's conditions and rules, derivatives contracts structured on foreign securities, issued in accordance with the market's conditions and rules upon obtaining the SCA's consent, and derivatives contracts structured on local securities or indicators, issued in accordance with the conditions and rules of the foreign market upon obtaining the SCA's consent'. Customers who deal in over-the-counter derivatives contracts on local securities or indicators are required to settle and clear the trading of these contracts through a central clearing party.
The Derivatives Contracts Regulations address the obligations of the markets in the UAE. In addition to other obligations set out in the law that established the SCA and its regulations, these include the following:
- to continuously disclose and update the securities involved in the structured derivatives contracts in the market;
- to continuously disclose the types and specifications of the structured derivatives contracts in the market in accordance with its rules, as well as any updates or amendments thereto, provided that they may not enter into force in the event there are pending unsettled structured derivatives contracts;
- not deregister any security involved, in cases where pending or unsettled structured derivatives contracts, which include these involving securities, exist in the market;
- announce the working days, the hours dedicated to trading in the structured derivatives contracts therein, and the opening and closing times;
- settle all transactions through a central clearing party;
- specify the number of structured financial derivatives contracts in the series of contracts. The market should also specify the securities involved, the month of contract settlement, the month of contracting and the expiry date of the contract that may be registered with the market. The market may enforce limits for each structured derivatives contract or for all contracts;
- specify the initial margin of the transactions of structured derivatives contracts therewith. The market should also set the conditions and rules governing the structured derivatives contracts therewith, rules of trading and listing thereof on the market, and the rules and conditions of licensing practice of the tasks of the derivatives member, and the rules of licence renewal as well as the obligations of the derivatives member, provided that the rules, as well any update or change thereto, are approved by the SCA before they enter into force; and
- abide by the provisions related to structured derivatives contracts that are compatible with the principles of Islamic shariah.
Securitisation transactions are extremely rare in the UAE as the existing legal and regulatory environment is not well suited to structuring such transactions. There have been no significant recent developments.
iii Cases and dispute settlement
As has already been noted, the capital markets in the UAE are young and developing. The UAE has only had emerging market status since 2012/2013. It is not a common law jurisdiction, and the doctrine of binding judicial precedent is not followed. To date, there is an absence of significant court cases regarding securities law matters, and there have been no significant recent developments.
iv Relevant tax and insolvency law
With limited exceptions, the UAE is (as a matter of practice) a tax-free jurisdiction. There is no federal income tax law, nor are there any federal taxes on income. There is no personal income tax.
Corporate income tax statutes have been enacted in most of the emirates (all of which predate the formation of the UAE in 1971) but they are not implemented.10 Instead, corporate taxes are collected with respect to branches of foreign banks (at the emirate level) and courier companies (at the federal level). Further, taxes are imposed at the emirate level on the holders of petroleum concessions at rates specifically negotiated in the relevant concession agreements. Taxes are imposed by certain emirates on some goods and services (including, for example, sales of alcoholic beverages, hotels, restaurant bills and residential leases).
The UAE Ministry of Finance issued Federal Decree-Law No. 8 of 2017 (the VAT Law) and launched a dedicated website for the Federal Tax Authority. The VAT Law introduced a new 5 per cent VAT starting in January 2018. The Law is based on the common principles agreed by all GCC countries in the GCC VAT framework agreement. It sets the general rules for implementation of the new tax and includes some details on the goods and services that are subject to VAT and those that will receive special treatment. Full details of the scope of VAT implementation were revealed in the VAT Law's executive regulations, UAE Cabinet Decision No. 52 of 2017, which outlines supply of goods and services in all cases, including supply in special cases, supply of more than one component and exemptions related to legal supply. The regulations also define mandatory tax registration, optional tax registration, registrations that are liable to exceptions, tax grouping and deregistration.
Separately, the Ministry of Finance has announced that it is still studying reforms to the corporate tax regime, that the tax rate is under study and that businesses will be given at least one year to prepare for any changes. As there are still many stages to go through before the laws are enacted, there is still no firm timeline for implementation of the corporate tax legislation.
The economic slowdown that affected the UAE following the global financial crisis highlighted the inadequacy of the bankruptcy and insolvency law. The new Bankruptcy Law of the UAE was enacted on 20 September 2016 as Decree-Law No. 9 of 2016 and came into effect on 31 December 2016. The new Bankruptcy Law replaces and repeals the previous legislation on the subject: Book 5 of the UAE Federal Law No. 18 of 1993 promulgating the Code of Commercial Practice. Perhaps the most important new feature of the new Bankruptcy Law is the introduction of a regime that allows for protection and reorganisation of distressed businesses. It will be interesting to see how the new Law is implemented in practice and whether debtors make use of its provisions. Nevertheless, the introduction of an insolvency regime that offers protection and encourages restructuring to enable troubled businesses to survive what would otherwise have been a bankruptcy situation is welcome and is a milestone development in the UAE's business law landscape.
In addition to the new Bankruptcy Law, the Commercial Companies Law contains provisions for the dissolution of a company. The Penal Code of the UAE (contained in Federal Law No. 3 of 1987) also contains criminal sanctions for bankrupts.
The Commercial Companies Law provides for the dissolution of a company in certain prescribed circumstances, including where the losses to a company amount to half of its capital. All debts of the company become due and owing upon the company's dissolution. If the company's assets are not sufficient to meet all the debts, then the liquidator is required to make proportional payment of those debts, without prejudice to the rights of preferred creditors. Every debt arising from acts of liquidation must be paid out of the company's assets in priority over other debts.
Originally, a personal insolvency framework was suggested and drafted at the same time as the new Bankruptcy Law was formulated, but the draft personal insolvency law was not promulgated in 2016. However, a personal insolvency law was subsequently adopted as Insolvency Law No. 9 of 2019 (the Personal Insolvency Law) and came into effect on 29 November 2019.
Like the new Bankruptcy Law, the Personal Insolvency Law is seen as introducing a debtor-friendly regime. The Personal Insolvency Law remains largely untested and it remains to be seen if, and to what extent, this law will be applied in the coming years.
v Role of exchanges, central counterparties and rating agencies
The SCA is responsible for the regulatory oversight of the ADX and the DFM.11 In addition to the rules and regulations of the SCA, each exchange has its own rules and regulations.
The ADX and the DFM each have a clearing, settlement, depository and registry departments that operate a clearing, settlement and depositary system (CSD) and are responsible for the clearing and settlement of transactions executed on the exchange. Each exchange follows a multilateral netting system under which transactions are cleared and settled on a net basis by brokers. After the clearing of transactions by the exchange, the transfer of securities ownership is made through the electronic book-entry system operated by that exchange.
To buy or sell securities listed on the ADX or the DFM, an investor must apply for and be granted an identification number, called an investor number (IN), by the relevant exchange. The issuance of an IN triggers the creation of an investor account for the custody of shares traded on the exchange (the custody account). The IN identifies the investor's account in the CSD. In addition to the custody account, every investor must have at least one trading account with a licensed broker.
All shares traded on the ADX and the DFM are in dematerialised (electronic) form. Ownership of shares is reflected in a computerised credit entry in the investor account.
All trading is done through licensed brokers. An investor must have at least one trading account with a licensed broker but can have accounts with multiple brokers. To open an account with a broker, an investor has to enter into a customer agreement with the broker. The investor must also give the broker a power of attorney authorising the broker to execute any written share transfer form on behalf of the investor in relation to any trades executed on the applicable exchange by the broker. The broker will process buy or sell orders from the investor upon receipt of instructions in the manner specified in the customer agreement.
To sell listed securities, investors must transfer the securities from their custody account to their trading account with a broker. Upon receiving a sell order, the broker will record the order on the electronic trading system. The system matches buy and sell orders of a particular stock based on the price and quantity requirements. The cash settlement is done among brokers through the designated settlement bank. Once the trade is executed, the investor will be notified of confirmation of the deal, and the transfer of share ownership occurs electronically by debits and credits to the custody accounts of the seller and buyer.
As a legal matter, the transfer of securities occurs by way of contractual assignment. At the time sellers of securities transfer the securities from their custody account to their trading account with a broker, the obligation to settle transfers to the broker. However, the seller is still at risk until payment is actually received. Every broker is required to submit a bank guarantee of at least 10 million dirhams, and the seller may draw upon this guarantee if payment is not received.
Although the ADX and the DFM each operates a CSD, neither acts as a central counterparty in the sense that neither legally guarantees the completion of transactions on the exchange. The economic risk of clearing and settlement is intended to be addressed by the bank guarantees required by each accredited broker and the trading limits imposed on the brokers.
There are no UAE-based rating agencies. Some UAE issuers have securities rated by international rating agencies such as Moody's and Standard & Poor's.
In May 2018, the SCA issued Chairman of the SCA Board of Directors' Decision No. 18/RM of 2018 Concerning the Licensing of Credit Rating Agencies. Pursuant to these regulations, the SCA is now regulating credit rating agencies in the UAE. A credit rating agency may only be carried out in the UAE subject to obtaining a licence from the SCA.
vi Other strategic considerations
Under the current law, all companies incorporated in the UAE must have majority UAE ownership. In addition, the authorities impose additional restrictions on the ownership of some publicly traded companies. As a result of these restrictions, the demand from foreign investors for shares in certain publicly traded companies may, at times, exceed the number of shares permitted to be sold to foreign nationals. Many UAE banks will hold shares in publicly traded companies on behalf of clients through custodial arrangements. A riskier strategy for an investor is to use an unregulated individual holding UAE nationality as a proxy to hold shares on the investor's behalf.
It is possible to register a security interest over listed securities with the relevant exchange. In practice, however, the registration fees charged by the ADX and the DFM are often deemed to be prohibitively expensive by investors and secured parties, who sometimes opt for the cheaper but far riskier alternative (from the perspective of the secured party) of an unregistered contractual pledge.
Outlook and conclusions
The pace of legislative and regulatory change in the UAE has generally been slow. Predictions about future developments are difficult to make. The Foreign Direct Investment Law12 was published in the UAE Official Gazette on 23 September 2018 and is now in force. Subsequently, Cabinet Resolution No. 16 of 2020 on the Positive List of Economic Sectors (the Resolution) was enacted and came into effect on 1 April 2020. Pursuant to the Resolution, a positive list of activities eligible for up to 100 per cent foreign ownership has been approved. The positive list contains 122 activities in the agricultural, manufacturing and services sectors. Although activities on the positive list are eligible for up to 100 per cent foreign ownership, this does not come without conditions. These conditions vary depending on the activity, and can include minimum capital requirements, obligations to employ advanced technology and requirements to contribute to the Emiratisation of the workforce by employing UAE nationals. VAT was introduced in 2018 at a rate of 5 per cent, and some commentators believe this rate may be increased in the coming years. More generally, taxation is an area that could see changes in the future. While the UAE has historically been a tax-free haven, the implementation of corporate income tax in the future is a possibility.
Although still at a nascent stage, the cryptocurrency market is gaining ground in the UAE. According to the website CoinSchedule, the UAE ranked seventh (tied with Germany) in the world for crypto token sales in 2019 for the period from 1 January 2019 to 8 September 2019. It is anticipated that the cryptocurrency market in the UAE will continue to grow.
1 Gregory J Mayew is a partner and Silvia A Pretorius is a senior associate at Afridi & Angell.
2 The most notable exception is the Dubai International Financial Centre (DIFC) – see footnote 3.
3 The DIFC is often a source of confusion to international investors who are not familiar with the UAE. It is a financial free zone established in the emirate of Dubai. It should not be confused with the emirate of Dubai itself. As noted above, the DIFC has its own laws and regulations, which differ considerably from the laws and regulations applicable to capital markets and securities transactions outside the DIFC. The DIFC regulatory scheme applies only within the DIFC. The UAE federal regulatory scheme applies everywhere in the UAE (i.e., in all seven emirates) except the DIFC. The DIFC has its own regulator, the Dubai Financial Services Authority (DFSA).
4 See SCA Board of Directors' Decision No. 46 of 2012 Concerning the Regulations as to Market Makers, as amended by Chairman of the SCA Board of Directors' Decision No. 26 of 2014, SCA Board of Directors' Decision No. 47 of 2012 Concerning the Regulations as to Lending and Borrowing Securities, SCA Board of Directors' Decision No. 48 of 2012 Concerning the Regulations as to Short Selling of Securities and SCA Board Decision No. 49 of 2012 Concerning Regulations as to Liquidity Provision.
5 See SCA Board Decision No. 11 of 2015, Concerning the Regulations of Clearing Operations in Commodities Markets, Chairman of the SCA Board of Directors' Decision No. 22/RM of 2016 Concerning the Regulation of the Central Clearing Party Business, Administrative Decision No. 34/RT of 2016 Concerning the Regulatory Controls for Financial Activities and Services, Administrative Decision No. 49/RT of 2016 Concerning the Concerning the Exchange-Traded Fund and Administrative Decision No. 52/RT of 2016 Concerning the Controls of Cash Investment Fund.
6 See SCA Administrative Decision No. 86/RT of 2014 Concerning the Controls of Trading by Brokerage Firms for their Clients in Foreign Markets.
7 See SCA Chairman Resolution No. 6/TM of 2019, amending SCA Board Resolution No. 11/RM of 2016 On the Regulations for Issuing and Offering Shares of Public Joint Stock Companies.
8 See SCA Board of Directors' Decision No. 18 of 2015 Amending Certain Articles of the Regulations as to Disclosure and Transparency.
9 See Resolution No. 7/Chairman of 2016 Concerning the Standards of Institutional Discipline and Governance of Public Shareholding Companies.
10 Each emirate, except for Umm Al Quwain, has an income tax decree. The income tax decrees of the emirates of Fujairah (1966), Sharjah (1968), Ajman (1968), Dubai (1969) and Ras Al Khaimah (1969) are based on, and broadly similar to, the Emirate of Abu Dhabi Income Tax Decree of 1965.
11 NASDAQ Dubai is not regulated by the SCA but by the DFSA and is part of the separate regulatory regime applicable in the DIFC. As already noted, the regulatory scheme applicable in the DIFC is beyond the scope of this chapter.
12 Federal Decree-Law No. 19 of 2018 Regarding Foreign Direct Investment.