|15 October, 2019

Dubai Financial Market implements new rules for loss-making firms

Companies with losses exceeding 20 percent of their capital will be color-labelled on DFM page

A broker looks at the electronic display boards in the Dubai Financial Market.

A broker looks at the electronic display boards in the Dubai Financial Market.

REUTERS/Ahmed Jadallah

Dubai-listed companies with accumulated losses exceeding 20 percent of their capital would be required to submit reform plans to the regulator and the market.

Dubai Financial Market (DFM) said in a statement that the new measures, mandated by the Securities and Commodities Authority (SCA), are aimed at boosting “operational efficiency and make investors aware of the financial conditions of listed firms.’

Listed firms making losses of 20 percent and above of their capital are obliged to submit an explanation about the causes of the losses and the planned remedial measures. These companies will be also be yellow-flagged on DFM’s Market Watch webpage.

Where accumulated losses exceed 50 percent of the capital, the firms are required to submit an explanation of the main causes of the losses along with a detailed plans to handle the situation within a definite timeframe. These firms will be red-flagged on the market watch page.

“Anything that increases transparency for shareholders is welcome,” said Ali Al-Salim, co-founder of Arkan Partners, an independent Gulf-based investment consulting firm in emailed comments to Zawya.

“Some companies continue to think that by disclosing information to investors, they are doing them a favour, particularly when those companies are closely held by a small number of significant shareholders,” he said.

The new measures implemented by the DFM for loss-making firms will force list corporates to correct themselves to regain the trust of the investors, according to an analyst.

“DFM’s initiative to color code companies in Market Watch will help in improving transparency and make investors more aware of the securities they are dealing with on a daily basis,” said Vijay Valecha, Chief Investment Officer, Century Financial. “A large number investing public are not financially aware and color coding is an easy way to educate them,” he said.

“On the other hand, it is common sense that every corporate entity or for that matter individual would look for social approval and appreciation from the society. And if pointed out in the public, corporates will be forced to correct themselves to regain the trust of the investors. So on an another level, the color coding will act as a method of moral persuasion on the company management,” Valecha added.

Apart from color coding, the listed companies are also required to submit a plan to Securities and Commodities Authority (SCA) and DFM for reforming their companies.

“This is certainly a good move as the DFM and the SCA are now taking the role similar to that of an activist investor which is common in the Western Financial markets. In those markets, activist investors buy a large stake and they try to implement changes that enhance shareholder value,” he said.

“It is good that SCA takes on a more aggressive role as there is limited scope for western style activist investors in Middle Eastern markets. Ultimately, these moves will help in improving the image of DFM listed companies, he added.

(Reporting by Nada Al Rifai; Editing by Anoop Menon)

(nada.rifai@refinitiv.com)

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© ZAWYA 2019

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