Saudi Arabia Drafts Foreign Limits for $580 Billion Bourse

Saudi Arabia set out draft proposals on foreign-shareholder limits as one of the world’s most restricted stock markets prepares to open its doors for the first time to investors outside the region.

The Capital Market Authority may cap foreign ownership of a single stock to 49 percent, it said in plans posted on the Riyadh-based regulator’s website today. It may also set a 5 percent limit for qualified foreign investors, or QFIs, in a single stock, and a 20 percent ceiling for QFIs and approved QFI clients combined, it said.

Saudi Arabia, the world’s biggest exporter of oil, is removing barriers to its stock market as the kingdom pursues a $130 billion spending plan to boost non-energy industries. The country’s bourse may be added to MSCI Inc.’s emerging-markets gauge by 2017 at the earliest, Sebastien Lieblich, executive director at MSCI Index Research, said in July, adding the nation may account for about 4 percent of the index. MSCI is reviewing the draft rules and may share its views and comments directly with the CMA, Lieblich said by e-mail today.

“The opportunity set for foreign investors is too significant to pass up given the quality of the corporations and market breadth relative to other frontier markets in the Middle East that come with a higher risk premium attached,” Neil Azous, founder of Stamford, Connecticut-based research firm Rareview Macro LLC, said in an e-mail. “Also, this will likely lead to a multi-percentage point weighting increase in the MSCI benchmark.”

Market Access

Saudi Basic Industries Corp. (SABIC), the world’s biggest petrochemicals producer; Kingdom Holding Co., the investment vehicle of billionaire Prince Alwaleed bin Talal Al Saud; and Al Rajhi Bank (RJHI), the largest Islamic lender globally, are all listed on the Tadawul.

Investors from outside the six-nation Gulf Cooperation Council, looking for access to Saudi Arabia’s $745 billion economy, aren’t currently allowed to buy Saudi-listed shares directly, and instead access the market through equity swaps and exchange-traded funds.

Foreign investors with a minimum of 18.75 billion riyals ($5 billion) of assets under management and at least five years experience in the business may be eligible to trade Saudi stocks (SASEIDX), according to the proposed rules. The regulator said it may reduce the minimum for those assets to 11.25 billion riyals.

“The maximum proportion of the issued share of any particular issuer whose shares are listed that may be owned by all foreign investors -- in all categories, whether residents or non-residents -- in aggregate is 49 percent, including interests under swaps,” it said.

Top 10

The QFIs’ holdings may not exceed 10 percent of the market value, including interests under swaps, it said. The Saudi bourse has a market capitalization of more than $580 billion.

“For Saudi to begin like this is a positive start,” Ahmed Badr, Dubai-based head of MENA equities at Renaissance Capital Ltd., said by phone. “It’s a big enough slice of the pie.”

The Tadawul All Share Index gained 26 percent so far this year to 10,734.76 at the close today, the strongest level since January 2008. That compares with a 7.8 percent increase in the MSCI Emerging Markets Index at 8:17 p.m. in Dubai, and a 24 percent jump in the MSCI GCC Countries Index. The Tadawul is one of the top 10 best performing gauges in dollar terms this year among more than 90 tracked by Bloomberg globally.

‘Game Changer’

“There are a lot of big players that are absolutely waiting for the Saudi market to open up,” Amer Khan, a senior executive at Shuaa Asset Management in Dubai, which oversees more than $300 million in assets, said in a phone interview today. “There are institutions that by mandate cannot invest through swaps and for them MENA markets are quite attractive, but the elephant in the room so to speak is Saudi Arabia, which they can’t touch thus far.”

The regulator in July said it will open the market to foreigners next year. If included in MSCI’s developing market gauge, Schroders Plc. estimates it would lure as much as $40 billion of foreign cash.

The opening will be a “game changer,” Mark Mobius, who oversees more than $40 billion as executive chairman of Templeton Emerging Markets Group in Singapore, said in a July Bloomberg Television interview in Hong Kong.

To contact the reporters on this story: Sarmad Khan in Dubai at skhan170@bloomberg.net; Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net; Arif Sharif in Dubai at asharif2@bloomberg.net

To contact the editors responsible for this story: Samuel Potter at spotter33@bloomberg.net Dana El Baltaji, Shaji Mathew

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