Billions of dirhams were yesterday wiped off the market value of the telecoms operators Etisalat and du amid widespread investor concern over changes to government fees paid by the operators.
A government official tried to allay investor fears, however, saying changes to royalty fees were designed to reflect a new era of greater competition between Etisalat and du.
But investors interpreted the move negatively, with shares in the two telecoms operators declining by almost 10 per cent each.
Etisalat shares closed 8.94 per cent down to Dh9.07 yesterday, wiping more than Dh6 billion (US$1.63bn) off the company's market value while du's declined 9.79 per cent to close at Dh3.50, wiping about Dh1.5 bn from the company's market value.
"We expect share price to remain volatile over the next few days," said Taher Safieddine, an equity research associate at Shuaa Capital.
The sell-off was prompted by new government royalty rates announced on Monday, which investors fear will prompt a drop in earnings.
That sentiment is likely to be compounded by a government official's forecast that fees for telecoms services in the UAE are set to decline in the future.
"[The operators] need to provide more competitive prices," said Younis Al Khouri, the undersecretary of the federal ministry of finance.
Mr Al Khouri said the driving force behind the change in royalty fees levied on Etisalat and du was an expected new era of competition between the two operators.
"We now have a different structure to prepare the ground for the future … due to the changes and dynamics of the local companies," he said. "The competition, the liberalisation of the market, the need to make them more competitive, all of these were considered and taken into account."
Etisalat is 60 per cent owned by the UAE Government, while du is almost 80 per cent owned by state-linked entities.
The revisions to the royalty fee structure mean that Etisalat, the incumbent operator, will be taxed on its revenues for the first time in at least 20 years.
Historically, Etisalat has paid a 50 per cent royalty fee on its profit from its local and international operations. Under the new structure, the company will be paying a 15 per cent royalty fee on its local revenues and 30 per cent on profit by 2016. Du's fees on revenues will increase by 2.5 percentage points every year until 2016, when it will reach 30 per cent in line with Etisalat.
The shift in emphasis towards a tax on revenues rather than profits comes ahead of two long-delayed initiatives that are set to increase the level of competition between Etisalat and du.
These are mobile number portability - which allows customers to switch operators without changing their number - and fixed-line sharing, which will allow Etisalat and du to compete freely on landline services.