* Gulf bourses becoming mainstream markets for foreigners
* But poor corporate disclosure often keeps risks high
* Secretive company cultures can trump regulations
* Some regulators may be reluctant to pursue illicit trading
* Exposure to foreign capital may prompt reforms
By Nadia Saleem
DUBAI, Feb 19 When Dubai's biggest property
developer decided to change its chief executive last year, it
did not inform the stock market for weeks. The incident
underlined the challenges which investors face as Gulf exchanges
Stock markets in the six-nation Gulf Cooperation Council are
set to attract billions of dollars of fresh foreign money in
coming years as the region develops into a mainstream investment
Index compilers MSCI and S&P Dow Jones are upgrading the
United Arab Emirates and Qatar to emerging market status. Saudi
Arabia is preparing to open its market to direct foreign
investment, though it has not fixed a date. Gulf markets have
stayed strong during the global turmoil of recent months, as the
region's trade and budget surpluses make them safe havens.
But in one key way, the Gulf markets lag: the amount of
information which listed firms reveal, fund managers say.
Secretive company managements, poor disclosure mechanisms and
patchy enforcement of disclosure rules mean information is often
more scarce than it is in markets elsewhere in the world.
That raises the risks for investors and can sometimes even
create opportunities for insider trading, in which small groups
of well-connected insiders trade on information well before it
becomes public knowledge.
"Regulations and their implementation in GCC markets,
especially those of UAE and Qatar, have improved but they have a
long way to go compared to those in the U.S. or London - which
reflects how new these markets are," said Slim Feriani, chief
investment officer at London-based Advance Emerging Capital.
"There will be scandals, because of the nature of the
governments and companies, which makes it difficult to have full
trust in them."
All major Middle East exchanges have rules requiring listed
companies to disclose important information in a timely way, but
the rules are not consistently obeyed.
Securities markets in the Gulf are younger than many of
their counterparts overseas - Saudi Arabia launched a regulated
market in the early 1980s - so an investor-friendly culture has
not yet developed. Family-controlled firms traditionally operate
secretively; many big firms are controlled by governments which
are reluctant to reveal too much information to the public.
"It's because of cultural roots - most of the companies in
this region are built by trading families who think everything
is a trade secret, and they don't like to disclose anything
unless they are forced to," said Abdullah Alawi, head of
research at Aljazira Capital in Jeddah.
Only 6.3 percent of GCC firms covered by the Standard and
Poor's credit rating agency have "strong" scores for management
and governance, compared to 9.5 percent for the Europe, Middle
East and Africa region, and 7.5 percent for the entire world.
Tommy Trask, director of corporate ratings at S&P, said the
reasons for the low GCC score were board independence and
transparency, ownership control and management culture.
"Companies we rate in the Gulf region tend to be owned by
governments or powerful local families, both of which can be
detrimental to corporate governance," Trask said.
Boards of directors of infrastructure companies are largely
dominated by government officials, making them susceptible to
decisions being made in the interest of government policy and
not of minority shareholders or creditors, he added.
State-linked Emaar Properties, Dubai's largest
listed company by market value, quietly replaced its Group Chief
Executive Low Ping late last year, appointing Abdulla Lahej as
her replacement, industry sources told Reuters.
But the company did not announce this to the stock exchange
until late January, three days after Reuters reported the news.
Emaar did not respond to emails seeking comment on the delay.
A lack of forward guidance for analysts during companies'
conference calls on their business is another frustration.
"As an analyst, you're always worried about not being told
the same thing as others," said Sanyalaksna Manibhandu, senior
analyst at NBAD Securities in Abu Dhabi.
"There is an inconsistency - the regulator encourages
transparency but the companies will say we can't give you
A Reuters survey of a dozen international fund managers
found Saudi Arabia ranked highest among the five main Middle
Eastern exchanges for disclosure of corporate information, with
43 points out of a possible 60. Qatar followed with 41 points
and Egypt with 39. Kuwait came bottom with just 18 points.
Erratic corporate disclosure in Gulf markets can lead to big
and unexplained share price moves, sometimes extending over
several days, that are eventually followed by major corporate
In these cases it is usually not clear that any improper
trading has occurred - but the suspicion can be hard to avoid.
"Unexplainable market moves destroy investor confidence. You
need to see prices react to news - whether positively or
negatively - and you need to see it happening legitimately in
the market, with a proper flow of information," said Ali Adou,
portfolio manager at Abu Dhabi's The National Investor.
All of the national regulators have rules against insider
trading or other improper market activity. The UAE's Securities
and Commodities Authority, for example, says a person who
exploits unpublicised information for personal benefit can be
liable to imprisonment of up to three years and a fine of as
much as 1 million dirhams ($270,000).
But around the region, authorities may lack the
investigative muscle to go after illicit investors, and there
have not been the high-profile legal cases against insider
traders seen in other countries such as the United States.
"There are classic cases of leaks in information which can't
be proved, and we don't have answers," said Alawi.
The picture is not entirely grim. Egypt, which has a stock
exchange history dating back over a century, has a relatively
strong reputation for acting against improper trading.
Last month its financial regulator cancelled a day of trades
in shares of Cairo-listed investment bank EFG-Hermes,
which had soared before the bank announced a 1 billion Egyptian
pound ($144 million) share buy-back.
Some fund managers believe more exposure to foreign capital,
and Gulf countries' desire to diversify their economies beyond
oil, will encourage them to tighten standards in coming years.
In Saudi Arabia, that already appears to be happening as the
Capital Market Authority prepares the stock market for its
eventual opening to direct foreign investment. The regulator
issued tens of millions of riyals (millions of dollars) in fines
to investors in 2013 for breaches of trading regulations, and
fined some companies small amounts for poor disclosure.
Adou at The National Investor said that while the Gulf's
regulatory framework was overall below par compared to developed
markets, a lot of effort had gone into improving transparency
and corporate governance in recent years.
But some analysts think the government's relationship to
regulators may need to change for any major improvement.
"GCC regulators need to be independent of and have a mandate
enabling them to work independently from the government for the
level of corporate governance to improve," said Nasser Saidi,
founder and president of Nasser Saidi & Associates, an economic
consulting company based in Dubai and Beirut.
The Reuters survey found Egypt ranked highest among the five
main Middle East markets for enforcement of rules against
illicit trade, with 43 points. Saudi Arabia, at 35 points, came
second; Kuwait was again at the bottom with only 14 points.
SURVEY RESULTS (12 fund managers, maximum 60 points)
Question 1: Rate company disclosures for timely and
Question 2: Rate effective implementation of regulations
against improper or illicit trade.
Saudi 43 Egypt 43
Qatar 41 Saudi 35
Egypt 39 Qatar 30
UAE 37 UAE 30
Kuwait 18 Kuwait 14
(Additional reporting by Raya Atallah; Editing by Andrew