Saudi regulator to raise IPO allocations to institutional investors

Saudi Arabia’s stock market regulator said it would raise the proportion of shares allocated to institutional investors in initial public offers as it aimed to reduce volatility in the market.

The Kingdom’s stock market, set to open to qualified financial institutions on June 15, is dominated by retail investors in terms of daily trading volumes.

“Markets with a big tranche of institutional investors are characterised by low volatility and high efficiency,” the Capital Market Authority said in a statement late on Monday.

“Increasing institutional investors’ strategic ownership in listed companies supports governance practices and increases transparency, a target that is hard to achieve amid the dominance of retail investors in the market.”

In recent IPOs, the latest of which was Saudi Company for Tools and Hardware, the CMA allocated 60 per cent of shares to institutional investors and 40 per cent to retail investors.

Its statement did not say what the new allocation levels would be, but said 90 percent of institutional shares would go to institutions that catered to retail investors, so that retail investors could indirectly own the equity.

The CMA said it aimed to encourage retail investors to participate in IPOs through specialised channels that were run by professionals with greater understanding of risks.

Some traders have criticised funds which profit by selling retail investors shares that they obtain at lower prices in the primary market. But the CMA said it would not restrict funds from selling their allocated IPO shares if they wished.

“Restricting fund managers’ ability to sell is not in line with international practices in this regard,” it said.