Saudi Arabia, the home to regions biggest stock market, will allow foreign institutional investors to directly buy shares in initial public offerings by the companies in the kingdom from the beginning of next year.
The new regulations published on the website of Capital Market Authority (CMA) have included Qualified Foreign Investors (QFIs) among the type of institutions which could buy into share sales on Saudi Stock Exchange (Tadawul). CMA had earlier indicated that foreigners could be allowed access to IPOs on case-to-case basis. The new regulations define conditions of bidding in the book-building, a process in which IPO under-writers price and allocate shares to investors.
The move to allow foreign institutions to bid in IPOs will assist the government privatise state-owned companies on the Tadawul.
The slump in oil prices from the mid-2014 peak of $115 a barrel to current $50 a barrel has dented Saudi Arabias financial muscle, which relies heavily on the sale of hydrocarbons for revenues. The kingdom is implementing broad-ranging reforms to diversify its economy away from oil. The share sale of Saudi Aramco, the worlds biggest oil exporter is at the heart of the privatisation drive.
The government is preparing to list about 5 per cent of the $2 trillion oil giant on local and international markets, however, the sheer size of the offering means it will be hard the local market to absorb it. By allowing QFIs participation in future issuances, the government is adding extra depth into the market, which will help in subscription of larger IPOs.
In a separate statement on 21 August, the regulator also asked all listed firms to adopt International Financial Reporting Standards (IFRS), a move which will bring Tadawul enforce more transparency and bring it in line with standards implemented by most developed markets in the world.
The new reporting standards, which will also be implemented at the start of 2017, are part of several recent structural changes introduced by CMA.
Earlier this month the regulator said it will reduce restrictions on foreign investment in listed companies from next month, paving the way for increased flows into Tadawul.
It is enacting the amended limits on foreign ownership sooner than was previously announced. In May, the authority said the new rules and their effective date would be published by the end of the first half of 2017. However, an 11 August statement on the bourse says that the updated regulations will now go into effect from 4 September.
The reforms being introduced by the CMA include doubling the limit for QFIs to own up to 10 per cent in a listed company. QFIs institutional investors who can directly buy and sell Saudi stocks together with their affiliates were previously restricted to a 5 per cent holding in a single company. Foreign investors, resident or non-resident, will also now be allowed to own up to 49 per cent of a single company.
The minimum value of assets under management for investors to be licensed as QFIs by the CMA has also been lowered to $1bn from $5bn previously.
The CMA has been keen to lower the restrictions as the Tadawul has attracted little attention from foreign investors since it opened to direct foreign investment last year.
At the end of 2015, only nine foreign institutions had obtained licences to invest directly in the Saudi market.
In May, the CMA also approved the extension of T+0 (same-day settlement of transactions on the bourse between buyers and sellers) to T+2, which should lure more foreign investment in the market.
The introduction of securities lending and covered short-selling was another step approved by the authority, with regulations for those to be issued before the end of the first half of 2017.
The announcement didnt say when the rest of the structural reforms will be implemented and whether it is following the same deadline to finalise the rules.