There was so much hype about the inclusion of the UAE and Qatar in the MSCI index for emerging markets that everyone started to feel fatigue much before the decision actually took effect. The extent of fund flows into these markets that their new categorisation would bring about was one of the key talking points.

In the din and excitement about the new prospects, some basic issues got pushed into the background. These are now coming home to roost.

The ignominy suffered by Arabtec in the post-MSCI period, in fact, brings out the pitfalls of a market getting the upgrade before it is ready for the elevation. Apart from the possible impact of a real estate market that is beginning to suffer from a variety of problems, including overheating, the company suffered its worst drubbing at the hands of investors, who also pounded down the overall market by a quarter of its value in the space of a few trading sessions.

In the pre-MSCI era companies simply got away with practices that could be called into question in a more regulated environment. For instance, nothing was considered amiss when the Arabtec share price rose three times within six months on the pretext of a few deals.

But with MSCI, matters have taken a different turn as the company and its affairs are now subject to close international scrutiny. In fact, several developments involving the company, including the accumulation of a 28 per cent stake by the former CEO, have caused consternation among global investors.


Positive development

International exposure is by all means a very positive development in any market, but such an elevation has to be accompanied by the realisation that global fund managers are also likely to apply stringent transparency and regulatory templates to each aspect of the market. This is where analysts feel the upgrade may have happened too soon.

The inclusion of these markets was planned earlier, but had been put off on the ground that the basic framework for bringing them into the international league was still missing. It was after at least a couple of deferments that the UAE’s upgrade was finally taken up this year.

The most curious part of the current turmoil is that the UAE regulator has confirmed compliance of disclosure rules with regard to price-sensitive announcements as well as the developments leading to sudden management changes. This means that the problem is systemic and not really a compliance failure on the part of an individual company. In other words, the Securities and Commodities Authority has still to cover some distance when it comes to transparency levels acceptable to international investors.

The UAE market regulator is aware of the challenges thrown up by the inclusion in the MSCI index. Towards this end, the regulator has even announced a plan to upgrade the local market to that of developed markets, for which new sets of regulatory guidelines are being studied. These are expected to include not only compliance tools and practices, but also standards to regulate issuing, listing and trading of more sophisticated financial products, such as bonds, sukuks, funds, etc.

The plan is to achieve parity with international markets by 2018, which gives regulators roughly five years to implement a superior set of standards. The regulator is committed to launching at least two major initiatives every year as part of this five-year plan. The reforms are expected to be accompanied by other systemic changes aimed at broad-basing the market by providing opportunities for more companies to tap the market.

Well–meaning targets for sure, but given the current state of affairs, the challenge looks formidable.

— The writer is a journalist based in Dubai