Saudi Arabia steps up capital market reforms

A new wave of reforms including higher shareholding ceilings and lower asset requirements has opened the door wider to foreign investors looking to buy into Saudi Arabia’s capital markets.

In early January the Capital Market Authority (CMA) issued new rules making it easier for international institutions to invest in the Kingdom.

The measures – part of a series of phased regulatory reforms launched in 2015 – concern criteria for qualified foreign investors (QFI) seeking to purchase listed securities, and came into effect on January 23.

Incentives for foreign investors the primary focus

Other changes include an increase in the percentage of shares that QFIs and their affiliates are permitted to own in any listed issuer, from 5% to 10%.

The ceiling for foreign ownership in listed Saudi companies remains at 49%, the level set during the first round of reforms that permitted QFIs to buy shares or debt stock on the Saudi Stock Exchange (Tadawul). However, the decision to increase the individual ownership share to 10% will enable investors to acquire a stronger presence within a holding.

A measure reducing the amount of required assets under management from SR3.8bn ($1bn) to SR1.9bn ($507,000) should also encourage QFIs to enter the Saudi market. The CMA has indicated that the asset rate could be lowered again at a later date, a move expected to encourage smaller institutional investors to buy into the stock exchange.

Significantly, the changes mean that QFIs’ qualifying subsidiary and individually managed funds will be able to trade on Tadawul’s parallel equity market, called the Nomu platform. Launched in February last year, the platform was set up with less stringent requirements for businesses looking to go public in a bid to encourage small and medium-sized enterprises to list.

QFIs will be able to trade shares on the platform and buy them without having to submit a separate application, one of several areas in which oversight and reporting obligations have been relaxed.

Ease in restrictions aimed at unlocking growth

The reforms are the latest in a series of regulatory changes to the Kingdom’s capital markets aimed at increasing foreign investor access, streamlining processes and enhancing transparency. The measures are thought to be key to boosting investment inflows and drawing financial services specialists into the Saudi market – the world’s 23rd largest by capitalisation – whose growth has long been restricted by limited access.

The deregulation of access requirements for investors, local and foreign issuers, and market participants, is also expected to encourage more intermediaries and financial advisors into the market.

Market status upgrade on the cards as privatisation plans move forward

The ongoing reform process could also see Saudi Arabia upgraded to emerging market status. Last June index provider MSCI put the country on a watch list for an upgrade.

Following the January 9 reforms, MSCI issued a statement welcoming the amendments to the QFI regulatory regime, describing them as a significant step forward in increasing the efficiency of the equity market.

The reforms come as officials develop plans to privatise national assets and launch initial public offerings (IPOs) of state-linked companies in the coming years.

Under Vision 2030 – the government blueprint for economic diversification – Saudi Arabia is aiming to boost private sector and foreign investor involvement in the economy, notably through privatisation of a number of state-owned assets.

The highest profile and by far the largest of these is the partial privatisation of petroleum giant Saudi Aramco. The firm was preparing to list 5% of its shares through an IPO this year, although a date for the listing has not been confirmed.

With valuations of the company reaching as high as $2trn, the float could raise $100bn, a significant increase given the Saudi exchange’s current capitalisation of around $450bn.

International alignment taking shape

While the impact of the reforms has already been significant, the market has taken some time to process the latest changes, leading to questions from industry players about their immediate impact.

Despite this, the overall sentiment for long-term investor activity remains positive, with liberalisation efforts and amendments to the QFI model aligning the market more closely with international standards.

The reforms should support recent trends that have seen stronger interest in the Saudi markets from institutional investors, with foreign institutions, private and mutual funds and strategic investors all raising their profile in the country.

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