Stock Market
The government of Saudi Arabia has for some time explored methods of improving stability in Tadawul, the Gulf’s largest listed share market by market capitalization. The vast majority of significant investors in Tadawul are local retail investors or high net worth individuals. Volatility in listed share values regularly highlights perceived weaknesses in the Saudi capital market.
A recent upgrade of the Kingdom of Saudi Arabia to an ‘Emerging Market’ by MSCI, a leading provider of global equity indexes, is expected to enhance the diversity of the investor base as well as the liquidity of the Saudi capital market. The Kingdom, which was added in March 2018 to the FTSE Russell as a ‘Secondary Emerging Market’, will be included in MSCI’s Emerging Market Index in two phases concurring with the May 2019 Semi Annual Index Review and the August 2019 Quarterly Index Review.
To facilitate participation by international investors in the Saudi capital market, the Capital Market Authority (CMA) issued in 2014 draft rules enabling certain qualified foreign institutions to directly access share trading on Tadawul for themselves and on behalf of their clients. The rationale behind opening up the Tadawul for direct foreign investment included:
improvement in market stability and a reduction in pricing volatility;
an increase in local expertise of financial markets;
enhancement of market efficiency and encouragement of listed entities to raise their overall performance;
improved corporate governance and transparency for listed entities;
to lift the international rating of Tadawul; and
to increase the level of research and evaluation done on the market and the listed entities.
In 2015, the CMA formally released the Rules for Qualified Foreign Financial Institutions Investment in Listed Shares, which came into effect in September 2016. The Rules do not apply to GCC nationals and companies, as these persons may invest directly in Tadawul-listed shares.
The Rules, which have most recently been amended in January 2018, set out the procedures, requirements and conditions for the registration, and approval, of qualified foreign investors (QFIs) to invest in listed shares; and the obligations of Saudi Arabian registered securities businesses in their dealings with QFIs. Under the Rules, QFIs are able to exercise shareholder rights that include voting, participation in appointing board members and trading in rights issues. QFIs may invest in many securities listed on the Tadawul, including many IPOs. QFIs may also access the Nomu – Parallel Market of Tadawul, which is a parallel equity market with lighter listing requirements that serves as an alternative platform for companies looking to go public.
The assessment of the applicant institutions seeking to obtain a QFI status is made by an assessing authorized person (i.e. an entity authorized by the CMA to conduct securities business in KSA) rather than by the CMA. The assessing authorized person examines the application on the basis of criteria and procedures set out in the Rules.
Broadly speaking, in order to qualify as a QFI, an applicant must satisfy each of the following criteria:
be a bank, brokerage/securities firm, investment fund, insurance company, or government and government related entity and must be duly licensed or otherwise subject to regulatory oversight, and incorporated in a jurisdiction that applies regulatory and monitoring standards equivalent to those of the CMA; and
with the exception of government and government related entities have assets under management or custody of at least USD 500 million.
The affiliates of a QFI or a foreign portfolio manager who meets certain specified criteria, and the funds managed by them, shall also be considered as QFIs, without the need for a separate application.
The Rules impose the following restrictions and limits on investment:
no QFI may own more than 10% of the shares or convertible debt instruments of any Tadawul-listed issuer; and
no more than 49% of the shares or convertible debt instruments of any Tadawul-listed issuer may be owned by foreign investors.
Investments by QFI’s will also be subject to any other regulatory limitations on foreign ownership in JSCs, the rules of any other relevant regulatory body, and the provisions of the issuer’s constitutional documents.
