Saudi CMA may relax investor rules to join world indices

Saudi Arabia would be open to relaxing its rules on foreigners investing directly in its stock market to help it get included in global indices, the chairman of the Saudi financial-markets regulatory agency, the Capital Market Authority, told Reuters.

In his first interview with international media since his appointment in January, Mohammed al-Jadaan also defended the limited trading so far by qualified foreign investors (QFIs) and noted the kingdom was already seeing wider benefits from having direct foreign access to its $470bn stock market.

On June 15, the Saudi stock exchange, the Tadawul, became one of the last major emerging markets to let foreigners buy shares directly. But licences are granted only to vetted professional investors, who must have $5bn of assets under management and a five-year investment track record.

Limitations on market access are frowned upon by index compliers such as MSCI and FTSE, whose indices are tracked by trillions of dollars of institutional wealth globally. The Saudis will have to make changes to be included.

“One of our objectives is to ensure we are included in international indices, and we will obviously, in a prudent way, look to ways to ensure we convince them that the market is ready to be placed in their indices,” Jadaan told Reuters in an interview at the market regulator’s offices in Riyadh.

“We will do whatever is needed from a regulatory point of view to be ready.”

Joining an index could increase dramatically the foreign money going into the kingdom, to more than $50bn, by some estimates. The 11 QFIs now approved for investing owned shares worth SAR 845.9m ($225.7m) as of Oct. 15, according to bourse data, or 0.05 per cent of the market.

The limited trading so far isn’t a concern for Jadaan: “Liquidity was not a key objective. We had made it very clear before June 15, so it wasn’t something that we came up with as an excuse.”

Instead, it’s about the benefits to the wider Saudi economy, which are already manifesting themselves, with more in-depth research from both international and local institutions among the biggest changes, Jadaan said.

The names of the QFIs now approved have not been disclosed, although the regulator is considering whether to publish the list, Jadaan said. Those who have confirmed they have licences include Ashmore Group, BlackRock, Citigroup and HSBC.

Those without a QFI licence can get access to the market through exchange-traded funds and swap agreements, where a locally approved party owns shares on behalf of a foreign investor. Swaps will remain in place as long as the CMA board felt they were benefiting the market, Jadaan said.

MARKET DEVELOPMENTS

Other developments the CMA is working on include increasing the depth of the market and improving the range of products available to Saudi companies, especially relating to the local debt market.

The Tadawul now has 171 companies listed, a figure that hasn’t grown much recently. Only four flotations have been held since National Commercial Bank’s $6 billion initial public offering in November 2014.

Lack of new share sales isn’t a concern, Jadaan said. There is a “very healthy IPO pipeline”, with both private companies and some government entities considering going public.

“The decision to list or not to list is the company’s, and we are making every effort to make sure our procedures are improved and that we have all the tools to facilitate the process,” he said.

The CMA was also studying with the Tadawul starting a second exchange, promoting the listing of small and medium-sized enterprises and family-owned businesses. The latter make up a significant segment of the Saudi economy, but few are listed on the exchange.

“There are various options, whether it is SMEs alone, whether it’s SMEs and new companies, or whether it’s SMEs, new companies and distressed companies. There are a lot of options and a lot of scenarios,” he said, noting any plan drawn up would be put out to a public consultation before being implemented.

Facilitating the growth of a local debt market is also one of the CMA objectives, Jadaan said.

“This is a focus area and we are very pleased that the sovereign started issuing, so that will also help more companies come to the market,” he said, pointing to the government issuing up to 20 billion riyals monthly since July.

Other areas being looked at by the CMA include ways to help ease the merging of listed firms – only one merger has been completed in the history of the exchange – as well as rules covering investment funds, listings and corporate governance.