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India and the Gulf: A Gateway into the GCC

The United Arab Emirates is one of the most stable political and economic regimes in the entire region. DK Singh outlines the legal environment for Indian and other foreign investors.

United Arab Emirates

United Arab Emirates United Arab Emirates (“UAE”) is a federation of seven Emirates, which were formed on 2 December 1971. The country has emerged as a global trading hub and as a gateway to the Gulf Co-operation Council countries (“GCC”) with which it enjoys legal and commercial agreements and treaties. It also leads the GCC countries in providing access to one of the leading financial markets in the region based out of the Dubai International Financial Center (“DIFC”).

The UAE has a population of approximately 9.5 million people and 80% of them being expatriates. As compared to anywhere in the world, this is a unique model of economic development whereby the economic contribution of expatriates is a significant factor in the growth of UAE.

Whilst UAE has traditionally been a oil and gas reliant economy but it has diversified significantly over the years and now has a thriving trading hub in commodities, a fast growing financial services market and tourism. The major corporate entities in the UAE are government owned and have expanded both domestically and globally, examples being Dubai Ports and Emirates Airlines.

Some of the key elements to be kept in mind are that UAE has been a tax-free economy, however it has recently embarked on introducing a value added tax to come into effect from January 2018 and there are proposals to bring corporate income tax in due course. There are no foreign exchange control rules in the UAE though the dirham is pegged to the dollar at a fixed rate. The country happens to be one of the most stable political and economic regimes in the entire region and therefore attracts a considerable interest and investment from within the GCC countries and the MENA region, being Middle East and North Africa.

Legal and Investment Regime

The UAE is a federation with a written constitution that regulates the relationship of the seven emirates. There are however significant differences between the Emirates in terms of how federal and local laws are applied, the nature and system of the Courts and additionally there are Free Zones within each Emirates and some of them have independent laws and regulations and even Courts. For instance the Dubai International Financial Center (“DIFC”) has its own common law led courts and similarly the Abu Dhabi Global Markets (“ADGM”) have also established a similar common law regime with its own Courts.

The UAE is generally a civil law jurisdiction and the laws are based on the French Civil law and only the Arabic version is considered the authoritative text of the law. This is of course distinct from legal regimes, which operate in Free Zones like the DIFC and ADGM.

Whilst there are no extensive regulations in relation to foreign investment in the country as compared to the more comprehensive regulations such as in countries like India and other developing countries, but there are certain restrictions on foreign investment, particularly in relation to ownership and participation in the profits of the business. The key purpose of the restrictions is to ensure that there is local participation in the business that over a period of time is intended to empower the local entrepreneurs in business methods and being independent.

Corporate Structures

The country has a dual investment regime that caters to the Free Zones set up across the country to invite investments with attractive tax holidays and the onshore market where much of the retail, manufacturing and trading activity happens. Depending on the nature and purpose of the business an entrant into the UAE can opt or elect to operate out of a Free Zone or on an Onshore basis.

In order to set up a company in the UAE (onshore limited liability company) the investor must have a sponsor. The sponsor must be a UAE national or a company wholly owned by UAE nationals. The UAE Company must be at least 51% owned by UAE nationals. However certain sole proprietorships and professional partnerships can be wholly foreign-owned.

It is critical that the investor obtains legal advice on how to structure the investment and to protect its investment. The Memorandum of Association (“MoA”) of an onshore limited liability company in UAE is very different from the Memorandum of Association of a company registered in India. The MoA here is very specific to the licensed business activity and does not include ancillary and supplemental business activities like most MOAs of Indian companies.

The Department of Economic Development which is the key body for registering companies in the UAE, with its counterparts in various Emirates maintains a list of trading activities which will be the basis of the license issued to the newly incorporated company. It is open to the company to have multiple trading activities, however outside of the trading activities the company is prohibited from doing business anywhere in the UAE.

Alternatively, an investor may incorporate a company in a Free Zone. A foreign investor may own 100% of the shares in the free zone company and no UAE national agent or UAE partner or shareholder is required. The UAE has about 45 free zones, including the Jebel Ali Free Zone, Dubai Multi Commodities Centre, Dubai Airport Free Zone, Dubai South and the Dubai International Financial Centre. There are similarly Free Zones established in other Emirates such ADGM, KIZAD, RAKICC and Fujairah among others. In general, the free zones focus on different business areas and therefore the investor has to carefully consider its proposed business activities and evaluate whether a particular free zone is suitable for its business requirements.

The majority stake in many UAE companies are controlled by the government or families that are often reluctant to sell their stakes or give voting rights or representation on their board to foreign shareholders. These family-owned businesses are privately held and the family members maintain their operational control. Therefore, the majority of foreign M&A activity into the United Arab Emirates mainland jurisdiction tends to take the form of minority stakes by way of joint venture.

The UAE has a relatively small stock market and the number of listed entities is modest. This means that there is no secondary market of any significance and there is no liquidity in shares as such. As a consequence the M&A laws and takeover regulations are yet to mature as compared to the United States, Europe and certain countries in Asia. The regulator, Securities and Commodities Authority, (“SCA”) has not been tested in any significant basis in relation to the merger control regime, unlike the more mature regimes in the United States or the United Kingdom, or even countries like India and Singapore. Therefore there is a lack of market precedents in this regard. Business and asset transfers often require specific approvals of local government and regulatory authorities.

The rules issued by the SCA shall be applicable in the case of mergers of public joint stock companies. In addition to the SCA, certain industry-based regulatory bodies such as UAE Central Bank may have a role to play in certain M&A transactions based on the industry in which the parties to the transaction operate.

The statutory pre-emption rights on local partner shareholding apply to an onshore LLC for transfer of shares. The notary public will not notarize a clause contrary to the statutory pre-emption rights in the Memorandum of Association of the company. The statutory pre-emption rights do not apply to a free zone company. However, the company has to notify the relevant free zone authority for any transfer of shares.

Dubai International Financial Center (“DIFC”)

A free zone company based in the DIFC and regulated by the Dubai Financial Services Authority (“DFSA”) will have to obtain approval from the DFSA for a change in its controller(s). The DFSA regulated company must notify the DFSA when a person (as defined in the DFSA regulations) becomes or ceases to be a controller (as defined in the DFSA regulations) or when a person’s holding in the relevant DFSA regulated company increases or decreases by a set percentage as set out in the DFSA regulations. Depending on the percentage of change in shareholding, prior approval is required from the DFSA for the change in control.

Acquisitions in the UAE usually take the form of a share transfer rather than an asset transfer. This reflects the legal challenges of transferring assets and, particularly, employees in the UAE.

The implementing regulations of most of these free zones contain very basic regulations on the merger or amalgamation of two companies, an exception being the Takeover Rules Module (TKO), which applies specifically in the DIFC. M&A transactions in the DIFC involving public companies are principally regulated by the TKO that is part of the DFSA Rulebook.

The Challenge of restricted ownership

The restrictions imposed on foreign ownership under UAE law presents an unacceptable loss of control for many potential foreign investors. It attracts criticism as it does not allow foreigners to have sufficient control and there have been discussions in the past to relax these restrictions in order to attract and encourage foreign investment.

While perhaps not unique to the UAE, many mid-market deals are often complex due to the family-owned business mentality that exists in the region. This mentality makes it more challenging to do deals and UAE companies have difficulty splitting management from ownership. Many owners are also emotionally attached to their business, which cuts across and can hinder M&A activity and the disposal of assets.

The UAE does not have robust M&A laws and takeover regulations compared to the United States, Europe and certain countries in Asia, a primary reason being the ownership of business in the UAE – approximately 80 per cent of non-oil GDP within the Middle Eastern region is owned by family-owned business groups. Additionally, the lack of mandatory tax filing requirements in the UAE often poses as a deterrent to robust M&A activity due to unavailability of information for assessment of risks of the target’s business as well as valuation of assets of the target.

However notwithstanding these challenges and need for certainty in relation to the rights qua the local partner, there have been very few instances where the ownership and economic benefits have been matters of a dispute. The Courts of UAE have been generally supportive of the arrangements both legal and informal in relation to economic and shareholder rights as between the expatriate investor and the local participant.

New Developments

As for significant new developments in the UAE legal regime, the UAE proposes to introduce Value Added Tax (“VAT”) at a rate of 5%, with some limited exceptions, with effect from 1 January 2018. The Government of Saudi Arabia recently issued the unified agreement for VAT. The agreement sets out the framework under which VAT may be implemented in the Gulf Cooperation Council (‘GCC”) member states.

Also the UAE government has recently issued a new bankruptcy law. Law 9 of 2016 came into force on 29 December 2016. Under the new bankruptcy law a financial restructuring committee is proposed to be appointed. The new law applies more widely and covers companies governed by the Commercial Companies Law, most free zone companies and sole establishments.

The UAE remains at the top of investors’ lists of target markets given its ability to provide strong infrastructure and investor friendly tax regime. India is considered as a large and fast-growing emerging market economy that offers a broad range of investment opportunities for UAE investors, including but not limited to infrastructure and energy, consumer goods and real estate. Private investors from the UAE are also looking at investing in India in a significant way.

The two countries recently signed 14 wide-ranging agreements including a strategic comprehensive partnership and deals on defense and maritime cooperation. The bilateral cooperation and collaborations between India and the UAE is likely to see an increase in investments in the infrastructure, logistics and defense industries sector.

In my view there is likely to be a surge in deals between the two countries as the UAE and India recently signed various agreements to increase strategic partnerships and to promote cooperation between the two countries in sectors such as; technology development in cyberspace, defense, oil storage and management, maritime transport, infrastructure, small and medium industries and innovation and agriculture. Therefore we are likely to see an increase in deal flow in these sectors especially in infrastructure and energy. n

About the author

</p><p>DK Singh is the Managing Partner of KBH Kaanuun. He has over 25 years of experience in top tier multi- national firms and leads KBH’s Dispute Resolution, Corporate and Commercial teams.

DK Singh is the Managing Partner of KBH Kaanuun. He has over 25 years of experience in top tier multi- national firms and leads KBH’s Dispute Resolution, Corporate and Commercial teams.

He has extensive experience of working in the United Kingdom, India and the Middle East and has a reputable client led practice focusing on cross border business ventures and international dispute resolution. He has assisted clients in

arbitration centres including London, USA, Singapore, Paris and Dubai. He is also actively engaged in advising companies in the financial services, hospitality, retail, upstream and downstream petrochemical sectors throughout the Middle East, North Africa and CIS countries.

DK Singh regularly contributes articles on arbitration law, mergers and acquisitions and dispute resolution in UAE and India. His articles have been published in reputable journals like Law Business Research and PLC Corporate Magazine.

DK is often relied upon by the clients as a legal and commercial advisor and regularly negotiates contracts and commercial deals on their behalf.

Practice areas

  • Banking and Finance
  • Corporate Commercial
  • Dispute Resolution and Arbitration
  • Regulatory Compliance

Qualification

  • LLM London School of Economics (1991)
  • MA University of Delhi India (Economics) (1982)
  • LLB University of Delhi (1979)

Membership

  • Registered as Lawyer with Legal Affairs Department Dubai, UAE
  • Solicitor, Law Society England and Wales
  • Advocate, Bar Council of India

Firm profile

Achievements

KBH is set apart from its competitors by offering both case management and advocacy services and many local and international law firms based in the region instruct KBH as an advisor in their own matters to carry out the advocacy, advise on strategy and finalise pleadings. KBH clients benefit from a cost-efficient litigation service, and in-house counsel who is able to provide input from the inception of the case, which contributes to higher success rates in all of KBH’s matters.

The firm relies on its reputation for winning business and all of its team members contribute to the success of the firm in winning new clients. The firm has carved a reputation for itself in financial services, employment, private client and property related matters.

In the financial services space, KBH wins business across the entire spectrum of services:

  • Entry strategy and incorporation in the DIFC for both regulated and nonregulated entities;
  • Advising new startup financial services business in conducting business in accordance with DFSA rules;
  • Assisting companies in relation to DFSA imposed liquidations and DFSA led investigations; and l Assisting clients in relation to disputes arising out of mis-selling of financial services.

The firm has won significant high profile mandates including:

  • Appointment on the Liquidation Committee of a high profile European financial institution representing several clients.
  • Advising Saudi Arabian and Singaporean wealth management firms in setting up in DIFC;
  • Advising a high profile financial services firm in relation to a DFSA investigation; and l Initiating multi-million dollar claims on behalf of a liquidator and separately for a High Net Worth individual.

Further, KBH has been instructed in a number of property disputes involving DIFC LCIA arbitration including the most high profile financial mis-selling case backed by litigation-funding in the entire GCC region.

KBH Kaanuun

Dubai International Financial Centre | Gate Village 7 | Level 2

PO Box 506546 | Dubai | United Arab Emirates T +971 4 709 6700 | F +971 4 709 6711

www.kbh.ae

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