UAE watchdog finally bares its teeth

After months of barking, came the bite. Markets throughout the Middle East had long promised to toughen up their regulatory practices, and last week the UAE’s Securities & Commodities Authority (Esca) slapped a Dh100,000 fine on Abu Dhabi’s biggest real estate firm, Sorouh Real Estate Company, for failing to disclose its first-half results on time.

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By  Andrew White Published  August 20, 2006

After months of barking, came the bite. Markets throughout the Middle East had long promised to toughen up their regulatory practices, and last week the UAE’s Securities & Commodities Authority (Esca) slapped a Dh100,000 fine on Abu Dhabi’s biggest real estate firm, Sorouh Real Estate Company, for failing to disclose its first-half results on time. Although companies have been warned and named in the past, this is the first time the market regulator has fined a listed company. Several analysts and industry figures from inside and outside the region have been quick to praise the decision “It’s definitely a step in the right direction,” Framroze Pochara, CEO of Dubai Gold & Commodities Exchange, told Arabian Business last week. “After giving and extending deadlines, if people are not complying then the regulators have to show that they mean business, and Esca have done that. It’s sending out the right message to all of the companies.” Firas Kaysi, managing director, Middle East, for Fortune Management, and a former compliance officer in Canada, insisted that complying with regulators was essential for any listed company in the world. “We need disciplinary action here. People around the world take for granted that there is no regulation in these emerging markets, but this disciplinary action will prove that we are on the right path,” “Our markets are evolved enough that the next step can be to become sophisticated. Part of sophistication is complying by regulation and by discipline,” he continued. “This will absolutely encourage firms to list in the region, as we are proving to the local markets and to the international markets that we are regulated.” Indeed, Esca is eager to send out a clear message that regulations are there for everyone to adhere to: “The rules state that companies have one month to declare their financial results, and we then give them a grace period of 10 days after that month,’ a source within the Authority told Arabian Business last week. “Sorouh was the only one after that period who failed to produce their results. They were warned.” In fact, seven companies - two local and five foreign - had defaulted on disclosing their first-half results within the one-month period that ended on 31 July, 2006. The period was extended until August 10 when all the companies submitted their results, except Sorouh. The real estate firm’s troubles may not be over, either. At press time, Sorouh still had not filed their first-half figures, despite a strongly-worded Esca statement urging the firm to declare their results “as soon as possible”. “After the fine, we told them that they have to provide their results as soon as possible, but we have not received them yet. They still have not provided their results, and as a result there may be more financial punishment,” said the source. Sorouh is not expected to file its results before a meeting with shareholders next week, and while Esca appears to have accepted this, the Authority is clearly prepared to hit Sorouh with another sizeable penalty.“The measures are designed to stop the leaking of privileged information to limited numbers of people – in other words, insider trading,” he continued. “We won’t allow that to happen.” The new board of directors at Esca is clearly determined to remove any possibility of insider trading on their watch. Regulations state that any chairman, member of the board of directors, or indeed any employee of any company who exploits his inside information “as to the company in the purchase of shares or the sale thereof in the Market shall be liable to imprisonment for a period of not less than three months and not more than three years and a fine of not less than one hundred thousand Dirhams and not more than one million Dirhams.” Esca believe that only through the strict application of regulatory legislation, will the region’s bourses make the leap from emergent markets, to sophisticated financial centres. “It is very important for us to have transparency, as it will attract business to the region,” says our man at Esca. “We have been working hard at trying to educate our investors and giving them more information. This way, we will raise the standard of our market, and the confidence and strength of the market.” Nevertheless some are less convinced that Esca’s actions regarding Sorouh are fair, or even represent a constructive contribution to the health of the region’s markets. Others have expressed concerns that Esca is merely making a high-profile example of the real estate company at the expense of responsible regulatory management. “Esca have acted improperly by fining the company,” says Mohamed Al Sharif, executive vice-president, Finance, at Dubai Islamic Bank. “This has nothing to do with general public awareness or security – this was a particular case and it should have been handled more professionally”. “Esca fining Sorouh cannot be seen as a precedent, because there is an issue between the company and the external auditors,” he continues. “By handing out the fine, Esca are just showing their muscles, and it should not have been taken in this direction.” Al Sharif argues that Esca should be playing a diplomatic role, as opposed to inflicting fines “just to show the public that they are imposing discipline in the marketplace.” He is concerned that, far from improving confidence in the market, such decisions could have a negative impact. “Professionally speaking, they should not have mentioned the company’s name,” he insists. “They could have said that they had fined ‘a company’, without naming Sorouh.” Whilst Kaysi disagrees – “[Naming the offender] is key to any disciplinary action, and part of transparency. It’s very good for the industry, whether Sorouh like it or not” – Al Sharif is concerned that Esca are adopting the wrong approach to their responsibilities. “If Esca are behaving on a reactive basis, then this will not bring confidence to the market. It’s been very unhelpful – with Sorouh the timing was wrong, and the action was wrong,” he adds. Indeed highly-placed sources close to Sorouh suggest that the firm remains mystified by Esca’s stance. Sorouh’s difficulties with external auditor PWC allegedly began in the first quarter, and the Authority had been aware for a long time that problems were brewing. It has even been suggested that Esca’s eagerness to set a precedent overrode any attempts to actually find a solution to the problem. “Sorouh have accepted the punishment, but are disappointed as Esca were well aware of problems with the external auditors,” the source told Arabian Business last week. “Sorouh took the fall, but no-one knows why Esca went ahead with the announcement.” Nevertheless, Esca’s powers are expected to increase dramatically over the coming months. The Authority was praised earlier this year by the International Monetary Foundation (IMF), which called for more responsibility to be handed to Esca. “Under the law, Esca has supervisory responsibility for brokerage houses, listed companies and the two stock exchanges. What needs be under the authority’s supervision are investment companies, mutual funds, IPOs [initial public offerings], and the envisioned non-governmental pension fund,” said the IMF report. Last week, an Esca spokesman confirmed that the Authority was looking to assume a larger remit. “IPOs are now handled by the Ministry of Economy, but that situation shall be rectified with the issuance of the new companies law,” said the official. “We are gradually increasing our cadres to accommodate new responsibilities, and this goes hand in hand with the markets’ development.” However, as Esca’s responsibilities broaden, so too will concerns that the regulator is taking on too much, too fast. “You don’t need to name companies that are late with their results, just as you don’t need to reward companies who announce their results in the first week,” warns Al Sharif. “We are not playing games here.”

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