Spies in the coffee shop?


Source: Non GCC countries: MSCI standard country indices year-to-date, USS,July 25th | GCC countries: sourced from local exchange, July 25th

Every once in a while there is a newspaper article that, if true, means we have to change everything we believe about something important. Last week's 'Sunday Beat' (July 21) was just such an article.

Under a gentle headline claiming corporate transparency in Oman is still elusive, the article itself suggested something much deeper and more sinister was going on — the executives of companies listed at Oman's stock market are systematically defrauding Omani investors in multiple ways, and could be using a coffee shop near you to drop off inside information.

This is dramatic, serious, and worrying — if true. It would mean that not only are investors losing money because the Muscat Securities Market (MSM) is appallingly regulated and managed, but a portion of the country's future economic growth and job creation are under threat.

The Capital Market Authority (CMA) is the regulator of the Oman stock market, and part of our job is to set the rules for the market, and oversee behaviour to make sure that everybody plays fair and by the rules.

The theme of the article was rather a shock to us, as most of what we see and investigate on a detailed and daily basis tells us the opposite to what was claimed. And we like coffee shops.

Nevertheless, given such strong and public accusations we immediately asked ourselves some questions: what exactly are these allegations in detail — and are they true? What does the author of the article know that we do not, so that we can act upon it?

Firstly, let us look at the allegations. These include that: serious international investors are not coming to the Oman market because they "cannot be fooled" by the lack of transparency and corporate governance and disclosure; that remaining local Oman investors are being "hoodwinked" by "holes deliberately crafted by business leaders who control the listed companies"; and these business leaders are also "striking dodgy deals under their executive tables" and "receive thousands of free shares".

And it gets even worse. These business leaders are apparently "carelessly" (for which, read 'deliberately') and "rampantly" leaking information such as by "leaving confidential files at a popular coffee shop for somebody else to pick up". To cap it all, these business leaders are "carefully orchestrating" events to routinely mislead investors at company Annual General Meetings (AGMs).

As a result of all this, the article claims, "blue chip shares being traded at MSM are still languishing at the bottom, even as most global markets are recovering….wiping out thousands of rials from original investments".

These are strong allegations indeed and, if accurate, then there is clearly a major conspiracy among business leaders at the heart of the market.

Unfortunately, the author has given us no facts we can check to back up his allegation, though he does make general claims to support his theories — claims such as an alleged lack of foreign investors at MSM, and alleged continued low price of shares at MSM. These, however, are very strange claims to make, as they are so clearly opposite to the data.

Firstly, the level of foreign ownership at MSM is high, not low. At the end of 2012 international investors owned 28 per cent of the companies listed on the MSM, up from 26 per cent the year before. This is some way ahead of any other GCC market. By comparison, in Abu Dhabi 7 per cent of the listed market capitalisation was owned by foreigners by the end of 2012, up from 5.3 per cent the year before.

It is a similar story in Qatar, Dubai and Kuwait (Saudi does not allow non-GCC foreign investors). Looking further afield, the level of foreign ownership of stocks at MSM is higher than in many markets, for example Malaysia, India, China and the USA.

Yes, on a relative-size basis more foreign investment sits in the Oman stock market than in the New York and Nasdaq Stock exchanges!  Only in Europe is the level of foreign ownership of stocks consistently higher than Oman (due to the high level of cross-border trade within the EU).

So if, as suggested, foreign participation is a benchmark of the level of corporate standards, then the Oman market is doing a great job. Well done the MSM listed companies, the brokers, the CMA and MSM and MCD, and thank you to the international investors.

Secondly, Oman share prices this year have risen higher (16.4 per cent) than nearly all markets in the world, as the chart illustrates. They are not "languishing at the bottom even as most global markets are recovering" because of the lack of international investors. Indeed, MSM share price rise this year is higher than every European market except Bulgaria.

Happily, therefore, when we examine the facts of the two main allegations we can see that the Oman market is very attractive to foreign investors, who have clearly put and kept their money in the market, and price-wise the market is performing very well — better than most markets world-wide.

So, what else in the article should the CMA should be worried about and follow up on?
Most of the author's allegations and comments were generalised and not specific, but they did portray a view that regulations and rules are being deliberately and shamelessly ignored by company executives, and not checked upon or enforced by the regulator. As the article said "unless corporate governors start to severely reprimand offenders, capital market investors would continue to lose confidence." This raises clear questions — what checks are carried out on companies and executives to keep them playing fair, how effective are these checks, and are punishments levied?

The answer is most positive in all respects, and can be seen in the CMA annual report, which shows the number of companies which have been audited, investigated, warned, fined, and had disciplinary action taken against them, itemised by the type of disclosure and other offence. In 2012, 49 companies were found to have been non-compliant with some form or other of regulatory requirement.

Thirteen were fined, and five have had other enforcement and disciplinary action taken against them. These companies have been named. Two weeks ago week the CMA published in newspapers the enforcement actions for the first six months of this year.

Clearly, the CMA is policing the market vigorously, because the figures show that over 25 per cent of MSM listed companies have been found to have committed some form of breach of regulation. Most of these breaches were relatively minor, but a handful were more serious, and treated as such. This demonstrates that the CMA is keeping a close eye on the behaviour of the listed companies, and catching even small transgressions.  And how does this level of Oman regulatory activity and discipline compare to other markets? In the UK in 2012 the regulator (the FSA — now called FCA) opened 76 enforcement cases, and fined 20 firms and 39 individuals. Given the far larger size of market and participant numbers in the UK, you can see that the Oman CMA is very active indeed.

That is why the international Monetary Fund (IMF) in its most recent risk assessment of the Oman Capital Market (2011) gave the CMA such high marks for its regulatory framework, its operational performance, and its on-going improvements.

And continual improvement is the watchword of the CMA. Despite our excellent track record, we know we still have much to improve and develop to maintain and grow investor confidence.

Investor confidence is a topic close to our hearts. Investors do not need to trust everybody in the market, but they must at least trust the system to keep the market clean and fair and constrain "bad apples" sufficiently so that the benefits of investing outweigh the risks, and so they don't have to spend all their time checking up on the trustworthiness of every company and every manager. Good regulation and a good regulator are there to do this for the investor.

We know we have good regulation and a good regulator in Oman, and international investors and the IMF know it. We want you to know it too. We can assure you that there is no conspiracy going on in the coffee shops, even if an occasional bad apple does make it there for a while.  So, pass the coffee please, it won't disappear down a hole, and we all definitely need another cup!

Article courtesy: Capital Market Authority

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