By Damian Reilly
Cass Business School professor says action needed to improve transparency.
Majority ownership of listed Gulf companies by powerful families or state entities is deterring international investors who fear the economic playing field in the region is not level, a leading economist has told Arabian Business.
Roy Batchelor, Professor of Banking and Finance at London’s Cass Business school, said in an interview: “There’s a difficulty generally with the financial markets in the area that with many of the listed companies the shares that are listed and actively traded really don’t represent much of the share capital of the company, so a lot is retained by the original owners or state entities and so on.
“Of course in that case if you are investor, it is not like investing in the US equities where you can be pretty sure that everyone has the same information about the shares. Here, large blocks of shares are owned by the family, by the original owners, so they could be doing anything, and you are not party to that.”
Earlier this year, members of the Abdullah family who founded Nasdaq Dubai listed jewellery company Damas were reprimanded by financial authorities for making $165m of “non-specified, unauthorised payments” using company money.
Professor Batchelor said that the practice of allowing families or state entities to hold controlling stakes in companies that are listed could be tantamount to insider dealing.
“They are insiders, they are the equivalent to insider investors. So if I come and I buy a share, with quite a lot of the companies traded here I know there are blocks of investors who have a lot more information about the company’s activities than I can ever have...
“So any company in that situation, where you’ve got the general public shareholders and family related shareholders, there is going to be an asymmetry of information between the two. And that is going to lead to, apart from the possibility of malfeasance, people on the outside are going to be very reluctant to invest in companies like this.”
Prof Batchelor said on Western bourses similar conflicts of interest were prevented from occurring by strict regulation.
“This doesn’t happen in Europe, not on anything like the same scale. There are large shareholders, sure, but they are often large institutional shareholders. They are not inside the company. There are family-owned companies, but there are typically listing requirements in the UK and the US that oblige the owner to not retain such a large percentage of shares for themselves, and to be very, very transparent.”
He added that until Gulf markets became more transparent, they would miss out on investment by funds looking to put money into emerging economies.
“I understand the problem here because historically the companies have been family owned and family run, and of course society here revolves around the economic power of successful family businesses. Over time, if there is a genuine interest in getting international capital into the markets, that is going to have to change.
“The reason for the fragility of [local] stock markets isn’t necessarily that the businesses are bad, but investors in emerging markets have a lot more attractive and more liquid and more transparent markets that they can go to outside the Gulf region,” he said.
As long as family members are allowed to get away with plundering company resources as in the well documented case of Damas, then what do they expect. The region will be damaged by this affair until justice is seen to be done.