The financial sector has always been volatile. Yet, the increasing interest it has drawn from public sector initiatives across the globe remain noteworthy. In 2013, the Chinese government introduced the China Pilot Free Trade Zone which was speculated to provide a blueprint for reforming the financial sector. This free zone was a testing ground for the convertibility of Yuan and China plans to accelerate the process of making the Yuan convertible on the capital account allowing foreign investors to use it to invest in Chinese financial institutions. In the same year the Government of Abu Dhabi also passed the Federal Law Number 4 of 2013 establishing a financial free zone in Abu Dhabi (the Decree). Many of the efforts within the GCC region in establishing financial centers are inspired from the success story of the Dubai International Financial Centre. The introduction of the Dubai International Financial Centre (DIFC) in 2004 marked the beginning of a well-structured business environment for the financial services domain and sizable investment firms chose DIFC to set up their base in Middle East. Later, the Qatar Financial Centre was set up in the GCC region however its ten percent corporate tax policy barred it to qualify to the definition of a ‘free zone’ and restrained its success in terms of captivating interests of international investors. As such, the DIFC enjoyed unparalleled investor support owing to its world-class infrastructure, tax free regime and an independent legal framework.
With the announcement for introduction of Abu Dhabi Global Market (ADGM) - a financial free zone in the Emirate of Abu Dhabi pursuant to the Decree - comparisons between DIFC and ADGM are bound to take interesting leaps and bounds. Abu Dhabi is one of the most stable economies with rich oil reserves to boast of. However, it faces challenges in terms of attracting foreign direct investment in other sectors particularly banking and finance; and also those pertaining to increasing exports and making Abu Dhabi lucrative to the larger international market players. The laying down of the foundation of ADGM is a conscious decision by the law makers and is no doubt a milestone in meeting these challenges.
ADGM is expected to be operational in the year 2015. In terms of Article 2 of the Decree, the objective for the formation of ADGM is the promotion of Emirate as a financial center, the development of the economy of the Emirate and the presentation of the same as both an attractive environment for financial investments and an effective contributor to the international service industry.’ The Decree further lays down the core constitutive ingredients for the setting up of the ADGM. It states that ADGM will be operated by and between three autonomous bodies, namely (i) the Global Market’s Registration Bureau (ii) The Financial Services Regulations Bureau and (iii) the Global Market’s Courts; each of which shall have different regulatory, compliance and legal functions.
Article 14 of the Decree provides that licensed ADGM establishments can carry out the following activities:
(a) Banking and financial services activities including funding services;
(b) Investment business, commercial and private banking, wholesale trading and electronic banking, managing, dealing and arranging investments;
(c) Accepting deposits (excluding deposits taken from the state’s market or dealing in UAE Dirham), opening and maintain bank accounts of all types for third parties;
(d) Trading in and dealing with all types of financial instruments, currencies, commodities, metals and derivatives of all types (including trading and dealing on margin with spot and forward contracts or through the offering, buying and selling of financial futures and options of all types) and short selling as permitted by Financial Services Regulation Bureau;
(e) Storage, processing and delivery of all types of commodities and metals whether through actual delivery or the delivery of instruments representing such commodities and metals and related complimentary services;
(f) Financial and monetary brokerage including prime brokerage activities;
(g) Providing Islamic financing and Islamic banking;
(h) Establishment and management of assets and funds, trust and fiduciary services;
(i) Custody, settlement, clearing and deposit activities;
(j) Transportation and shipping including sea, air and rail shipping;
(k) Selling, buying and issuing of shares, bonds, sukuk and other financial instruments;
(l) Providing insurance, re-insurance and brokerage services in line with Federal law Number 8 of 2004;
(m) Auditing, accounting, legal and other ancillary services; and
(n) Support and assisting works for financial and banking activities.
The Global Market will not just provide tax free and internationally recognized legal jurisdiction but will also help in training and educating young Emirati.
The Legal Framework
Article 14 of the Decree provides for the establishment of two tier hierarchical system of courts within the ADGM- the Court of First Instance and the Appeal Court. A chief justice would preside in the ADGM courts whose remuneration shall be fixed by the government.
While the Decree goes on to provide clear indications on appointment, duties and tenure of the judges it leaves much to apprehension in terms of the law governing operations within ADGM. Specialists debate that with DIFC providing a Common Law inspired legal framework, ADGM shall follow similar footprints. It is however clear that being a free zone, ADGM will be subject to the federal law governing the free zones in UAE.
Government and administrative efforts are being streamlined to make ADGM operative by 2015 as planned. Whether this proposed new financial free zone which is in close proximity to DIFC will have an adverse effect on the growth of DIFC cannot be commented upon. What remains to be seen is whether this free zone, to be located on Al Maryah Island, will add any feathers to the cap of the financially stable Abu Dhabi economy or not. Without doubt, if ADGM is able to achieve the objectives enshrined in its preamble, the Emirate of Abu Dhabi will be a major commercial hub to look out for. In sharp contrast to the competitive side which is speculated, ADGM may in fact serve as an extended platform for DIFC in the long run should there be cooperation between the two bodies.