SAUDI ARABIA: finalises rules to open up equities

2014-09-article-image-495.jpgSaudi Arabia has finalised rules for direct foreign investment as it prepares to open one of the world’s most restricted stock markets, worth $575 billion, on 15 June.

The Riyadh-based Capital Market Authority (CMA) will allow institutional investors with a minimum of 18.75 billion riyals ($5 billion) under management to invest directly in the $575 billion stock market, according to the regulations published on its website. The CMA has restricted foreign ownership of a single stock to 49%. The rules will be enacted 1 June,  the regulator said in a statement last month.

The world’s biggest oil exporter is giving foreigners access to its stock market as it pursues a $130 billion spending plan to boost non-energy industries. Income from oil accounted for almost 90% of revenue last year.  Investors from outside the Gulf Cooperation Council currently access Saudi-listed shares through equity swaps and exchange-traded funds.

The kingdom’s Tadawul All Share Index has risen 17% so far this year, the best performer among seven major gauges in the GCC. Saudi Arabia may be added to MSCI Inc’s emerging markets index by 2017 at the earliest, accounting for about four per cent of the index Sebastien Lieblich, executive director at MSCI Index Research, said in July.

The regulator published the draft rules in August. Tadawul, with 170 listed companies, is home to Saudi Basic Industries Corp, the world’s biggest petrochemicals producer by sales, Kingdom Holding Co, the investment vehicle of billionaire Prince Alwaleed bin Talal Al Saud. Al Rajhi Bank, the largest Islamic lender globally, also trades on the exchange.

A regulatory drive to reduce the volatility around initial public offers of shares is bolstering the Saudi funds sector and also creating an opportunity for international investors to sidestep the kingdom’s foreign ownership restrictions.

For the Saudi Capital Market Authority, a major motive for opening the market is the desire to create more stability in a bourse currently dominated by local retail investors who are prone to short-term thinking. The same desire for stability can be seen in the regulator’s stance towards IPOs; listing of stocks has traditionally been accompanied by massive volatility in their prices, so the CMA is encouraging investments in share flotations by IPO funds. The result is a huge jump in the number of IPO funds offered in the kingdom.

These open-ended funds, which specialise in subscribing to IPOs but often have broader remits, are run by CMA-regulated firms, from large commercial banks to investment houses. Of the 12 such funds tracked by Zawya Funds Monitor, a Thomson Reuters unit, nine have been established in the last 12 months. “It seems everyone is doing an IPO fund because the CMA is encouraging it and not allowing the (fund and asset) managers to take stakes in IPOs unless the companies do a fund,” said James Stull, senior associate at law firm King & Spalding.

The CMA didn’t respond to requests for comment.

The potential profits are considerable. Many Saudi listings are offered at a substantial discount to normal valuations as a way for the kingdom to spread its oil riches to the population. For example, when National Commercial Bank was sold to investors last year, it was priced at an 18.8% return on equity, compared with a 13.4% average for the sector. When NCB listed, its shares rose their 10% daily limit for the first three days. The average performance of Saudi IPO funds in the last three years has been 37% per annum, according to Muscat Capital, which set up its fund earlier this year. The wider stock market returned about 10% per cent per annum in that time.

This article originally appeared in The Khaleej Times.  

 

 

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