New regulation by Saudi Arabia’s Capital Markets Authority (CMA) will likely narrow the valuation gap of initial public offerings (IPOs) and limit speculation on the Saudi Stock Exchange (Tadawul), says Majed Kabbara, director of Asset Management at EFG Hermes in Saudi Arabia.
“I think institutions will get bigger IPO allocations now that retail speculators will not be very interested to participate anymore,” he says.
On 12 May, the CMA issued regulation that limits share price fluctuation to ten per cent a day. Prior to that no limit was set, resulting in undervalued IPO offerings that shot up in the first days of trading, often taking the price far above fair value.
National Medical Care Company, which went public in March, listed at SR27, opened at SR81, shot up to SR200 a few minutes before market close and finally closed at SR122.
“The spike to SR200 a few minutes before closing was questionable and signalled manipulation of the stock price,” says Kabbara.
The CMA is also planning to introduce regulation that will limit the ability of investors to manipulate share prices of small cap companies, with low liquidity, that are already listed.
Rather than basing the closing price on the last trade, it is considering switching to a volume-weighted average price (VWAP) calculated over the last 15 minutes of trading, which will limit the effect a major last-minute trade could have on the share’s closing price.
Following a global study into the VWAP mechanism, Tadawul launched a survey that will run until the end of May, allowing stakeholders to provide feedback on its plans.
“The regulation seems to be a step towards the markets opening up more to institutional investors,” says Farouk Miah, Head of Equity Research at NCB Capital.
Currently, around 90 per cent of trading on the Tadawul is performed by retail investors.
The CMA is stepping up efforts to open up its stock market to foreigners in order to attract more institutional investors.
Last month, Mohammed al-Sheikh, the new head of the CMA announced it is “finalising the regulatory framework” for the opening up of the Tadawul to foreigners. Currently foreigners do not have direct access to Saudi’s stock market, but need to perform share swaps or invest in exchange-traded funds if they want to invest in Saudi-listed equity.