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Saudi Arabia announces expansion of capital market for qualified foreign institutional investors

The Saudi Arabian Capital Market Authority (CMA) Board has approved the final version of amended rules for Qualified Foreign Financial Institutions Investment in listed securities (the Rules). The approval follows publishing of the Rules on the CMA’s website for consultation for a 30 day period.

The CMA announced that the Rules as amended will be effective as of 4 September 2016 (03/12/1437H). The current rules for Qualified Foreign Investors (QFIs) in listed shares shall continue to be effective until the effective date of the new rules.

The CMA had announced the easing of ownership limits for foreign investors in May 2016. The minimum qualifications for overseas financial institutions are expected to be announced by mid-2017.

The amendment of the Rules is in line with the CMA’s strategic objectives to: (i) develop the capital market; and (ii) expand the base of institutional investment. The easing of foreign investment is an effort to increase the flow of foreign institutional money into the country.

The CMA has stated that it has reviewed all opinions, observations and recommendations received from investors, specialists and related parties. Accordingly, key amendments to the Rules include:

  • A reduction in the value of assets required for qualification as a QFI. Each asset manager is required to have a minimum value of SAR3.75b (US$1b) of assets under management globally, reduced from the current minimum of SAR18.75b (US$5b).
  • An expansion of QFIs to include governments and government-related entities.
  • QFIs will be allowed to directly own up to 10% of a single listed company, up from the current ceiling of 5%.
  • The Rules eliminate the QFI client’s concept and have also removed some of the ownership thresholds while relaxing others. This includes a ceiling of 10% on combined ownership by foreign institutions of the market’s entire capitalization. All foreign investors combined will still be limited to owning 49% of any single firm.
  • A QFI may engage with a Saudi or non-Saudi portfolio manager to manage its investment in the Saudi Capital Market, including the Gulf Cooperation Council portfolio managers.
  • The CMA will, in the near future, update the Rules’ frequently asked questions addressing questions that the CMA has received.

The CMA highlighted several objectives in both the short and long term in allowing QFIs to enter the capital market. They are:

  • Increase in the expertise of specialist international investors in the local market, thus enhancing market efficiency
  • Motivate the listed companies to improve the level of transparency of financial information disclosure and governance practices
  • Increase the level of research, studies and evaluations of the capital market generally, and the listed companies in particular, to enable better access to accurate information and fair evaluations
  • To contribute to the business growth of authorized persons (financial institutions licensed by the CMA), by increasing awareness of activities and Saudi investment conferences and promoting awareness about the capital market in general
  • The Rules allow QFIs to exercise all rights associated with the listed securities, including voting rights and trading rights issues in the market

Only nine foreign institutions had obtained licenses to directly invest in the Saudi market by the end of 2015. Fund managers do not anticipate a sharp rise in the number of foreign investors; even if the restrictions are eased, given the present economic environment in Saudi Arabia.

The CMA also approved the introduction of securities lending and covered short-selling to the stock market, giving investors more options to hedge their purchases against downturns. Meanwhile, the exchange would introduce the settlement of trades within two working days of execution during 1H17. The regulator has not confirmed whether the timetable for these reforms would also be accelerated.

The Rules for Qualified Foreign Financial Institutions Investment in Listed Securities are available for download at: http://cma.org.sa/en/Documents/QFI-en-amended.pdf .

EYG no. 02492-161Gbl

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