x Abu Dhabi, UAESunday 23 July 2017

DIFC lessons point the way for Abu Dhabi's new free zone

Abu Dhabi's recently announced Global Marketplace must learn from the mistakes of the DIFC, focus on its core business and know the limits of its powers.

The planned future site of the Abu Dhabi Securities Exchange on Al Maryah Island is at the heart of the new financial free zone. Delores Johnson / The National
The planned future site of the Abu Dhabi Securities Exchange on Al Maryah Island is at the heart of the new financial free zone. Delores Johnson / The National

Sheikh Khalifa, President of the UAE, recently issued Federal Decree No 15 of 2013 establishing a new financial free zone in Abu Dhabi. The name of the free zone will be Global Market Place Abu Dhabi or Global Marketplace (GMAD).

In accordance with the UAE Constitution and the Financial Free Zones Law No 8 of 2004, the UAE Cabinet issued resolution No 4 of 2013 stating that the free-zone area will be located on Al Maryah Island. The marketplace authorities will be composed of the Global Marketplace Courts, which comprises a lower court and courts of appeal, a companies registry and a financial services regulator, the Financial Services Regulations Bureau (the authority).

The assumption is that the legal system will be based on English common law and the dominant language of the marketplace will be English.

It is expected that various regulations will be passed, including those to cover employment, companies and insolvency. No details as to the content or structure of these regulations have been announced.

The announcement has led to broad-brush comparisons with the Dubai International Financial Centre (DIFC).

Commentators may have overlooked the fact that the concept of establishing a financial zone was actually first conceived by Abu Dhabi in the late 1990s. Saadiyat Island was the original location chosen for the financial free zone. For various reasons, this did not go ahead. Dubai then picked up on the idea, establishing what later became the DIFC, the first operational financial free zone in the UAE and the wider region.

GMAD is expected to be a full-service financial free zone, accommodating a complete range of financial activities, from investment banking and capital markets to asset management, commodities trading and finance, brokerage and trading in securities, commodities and derivatives.

In addition, GMAD will offer market trading through the buying and selling of currencies, commodities, metals, securities, bonds, instruments and financial derivativesas well as provide Islamic financing and other Islamic banking activities. Companies can be 100 per cent foreign-owned, earning and repatriating profits tax-free.

Among the incentives is 50 years "zero taxation" for investors, free-zone authorities, companies and their employees. This includes income tax relating to activities taking place within the marketplace, and any transfer of assets, profits or wages to any destination outside the marketplace in any currency. These incentives are virtually identical to those provided by the DIFC, and it is fair to assume that the regulations that have been drafted for Gmad have been based predominantly on the DIFC laws and regulations, indeed with some of the same shortfalls that we are seeing today within the DIFC framework.

The announcement of the establishment of an Abu Dhabi financial free zone begs the question as to whether the UAE needs two financial services hubs and whether the new financial free zone will have any impact on the DIFC.

Some officials have stated that the idea behind establishing GMAD was to cover the global trading gap for the few hours between the closing of the Asian markets and the opening of the European ones. This was also one of the main business cases for establishing the DIFC, and over time this has proven not to be a successful model.

Other officials claim that GMAD will be different from the DIFC, arguing that it will not be a free zone but an actual trading platform supported by Abu Dhabi's wealth and financial institutions, which might well make sense. Although GMAD will be competing with the DIFC in certain areas, it may not have a significant impact on the business of the DIFC. GMAD will be supported by Abu Dhabi's cash-rich banks and financial institutions, which are, in any event, not very active in the DIFC. It is also likely to provide these banks with a suitable platform to conduct international trading and transactions.

It is unfortunate that the legislation passed so far contains some of the same shortfalls from which the DIFC legislation suffers. For example, the legislation refers to memorandums of understanding to be entered into between the GMAD courts and the local courts to regulate the enforcement of judgements issued by GMAD courts in the local Abu Dhabi courts. This is the same approach that the DIFC courts took recently, possibly mistakenly.

Article 7(2) of Law No 12 of 2004 establishing the DIFC Judicial Authority provides that judgements rendered by the DIFC courts shall be automatically enforced by the Dubai courts. The DIFC, however, chose the path of concluding a memorandum of understanding with Dubai courts for the reciprocal enforcement of judgements between the DIFC Courts and the Dubai Courts.

The memorandum of understanding was not needed and actually defeats its own purpose, as enforcement of a judgement based on it can never be as solid as enforcement based on statutory provisions.

In order for GMAD to be successful it has to learn from the lessons of the DIFC. It is arguable that the DIFC went astray in two main areas, subsequently affecting its business. The first was that it did not focus on its core business - to attract the top 500 companies in the region; instead, it focused on property activities and retail.

This strategy, although it led to the speedy accumulation of revenue, ultimately proved detrimental to the growth of the exchange business. Another possible mistake was the expansion of the DIFC jurisdiction beyond its federal mandate, which could open the door for possible constitutional challenges in the future. Hopefully GMAD will tread more carefully in its approach.

 

Habib Al Mulla is executive chairman of the Dubai law firm that bears his name