May 19 (Bloomberg) -- Saudi Arabia’s stock market, the Arab world’s largest bourse, is one step away from gaining approval to allow direct foreign investment into equities, according to two people with knowledge of the matter.
The Capital Market Authority completed a draft set of rules for international investors more than a year ago, and at least three banks, including HSBC Holdings Plc and Deutsche Bank AG, have executed test trades, three people said, asking not to be identified as the plans are private. The regulator submitted the draft to the kingdom’s Supreme Economic Council, and an approval would be the final step in opening up the market, one of the people said.
Investors are seeking access to the world’s largest oil producer as the government pursues a $130 billion spending plan to boost the non-oil economy. The benchmark Tadawul All Share Index, which has a market value of $532 billion, bigger that that of South Africa’s bourse, has gained 14 percent this year.
Investors from outside the six-nation Gulf Cooperation Council aren’t allowed to buy Saudi listed shares directly, and instead access the market through equity swaps and exchange-traded funds.
HSBC, Deutsche Bank and Saudi Fransi Capital, the investment banking unit of Banque Saudi Fransi, completed trades by prospective overseas money managers as part of the CMA’s preparations, according to all of the people. The trades were executed more than 12 months ago, they said. Saudi Fransi Capital confirmed its involvement in the tests by e-mail May 14.
The proposed CMA rules require investors to have a minimum $5 billion of assets under management and to have operated for at least five years to limit speculative inflows, or hot money, according to one of the people. Investment in local companies will also be capped, the person said.
The Supreme Economic Council advises the cabinet on economic policy. Gross domestic product in Saudi Arabia will probably grow by 4.2 percent in 2014, economist estimates compiled by Bloomberg show.
MSCI Inc., whose indexes are tracked by investors managing about $8 trillion, resumed coverage of the Saudi Market in 2012. The index provider said it would consider including the nation’s bourse in frontier or emerging-market gauges if foreigners are granted direct access. Franklin Templeton could double or triple its investment in Saudi Arabia if the market opens up, Mark Mobius, who oversees $50 billion in assets as chairman of Templeton Emerging Markets Group, said Nov. 18.
Saudi Basic Industries Corp., the world’s biggest petrochemical producer, Kingdom Holding Co., the investment vehicle of billionaire Prince Alwaleed bin Talal Al Saud, and Al Rajhi Bank, the world’s biggest Islamic lender, are all listed on the Tadawul. The Saudi stock exchange fell 0.9 percent to 9,724.75 today.
Saudi Fransi Capital said it was involved at an early stage in market testing, which began in 2011. This included doing a “full test cycle” with a foreign institutional client, opening an account for direct investment in Saudi equities, transferring cash in and out of the kingdom, and executing buy and sell orders, according to a spokesman for the bank.
Paul Harris, a spokesman for HSBC, declined to comment when contacted by phone May 12. The CMA declined to comment by phone May 14, and a spokesman for the Tadawul said in an e-mail May 12 that any decision to open up the market rests with policy makers. The Supreme Economic Council didn’t respond to a phone call and an e-mail May 13. A spokesman for Deutsche Bank declined to comment.
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