Saudis to Ease Stock Market Rules in New Foreign Lure

  • Biggest Arab bourse to lower AUM requirement, alter settlement
  • Changes will come into effect in first half of next year: CMA

Saudi Arabia took further steps to open up its stock market to foreigners in a move that may help it get included in a key index of developing-nation equities.

The kingdom will cut the amount of assets foreigners must have under management to invest directly in the nation’s stocks to 3.75 billion riyals ($1 billion) from 18.75 billion riyals, according to a statement on the market regulator’s website on Tuesday. The exchange will also amend its settlement cycle for share trading, bringing it in line with European markets. The changes will be effective before the end of the first half of 2017, the Capital Market Authority said in a statement on Wednesday.

Saudi Arabia is seeking to open up one of the world’s most closed stock markets to more international participation. The $411 billion Tadawul Stock Exchange started allowing limited foreign direct investment in June last year under rules that govern which foreign entities can invest and how much of each company and the market they can own. The changes may help the country in its bid to be included in MSCI Inc. indexes, which are tracked by most of the world’s largest fund managers.

The bourse will also activate covered short-selling with the ability to lend and borrow securities, it said.

“This brings the Saudi market’s development to par up to international standards,” said Ahmed Shehada, the executive director of advisory and institutions at NBAD Securities LLC, the brokerage arm of Abu Dhabi’s biggest bank. The new settlement “is going to solve a lot of issues for big institutions. Stock lending and borrowing will also increase the liquidity and will enhance market efficiencies, where highly-speculated stocks will see a two-way flow when investors are not convinced of an unwarranted rally,” he said.

Foreign Ownership

The CMA approved plans to adopt a so-called T+2 settlement, allowing a two-day settlement period for equity trades. The bourse currently uses a T+0 system, meaning same-day settlement. Adjusting the cycle may help it get added to MSCI’s emerging-markets gauge.

The Riyadh-based regulator will also allow individual foreign investors to own not more than 10 percent of shares outstanding in a single company, up from 5 percent. Furthermore sovereign wealth funds and university endowments are also allowed to invest.

The rules concerning the changes will be published before the end of the first half next year, the CMA said on Wednesday.

Even though qualified foreign investors can currently collectively own as much as 10 percent of the market’s total value, they hold 0.97 percent, bourse data show. The Tadawul All Share Index dropped 1.2 percent on Tuesday amid a selloff of equities in the six-nation Gulf Cooperation Council. The gauge is down 4 percent this year.

World Stage

The new rules will bring the market closer to the world stage, Capital Market Authority Chairman Mohammed Al-Jadaan said at a Euromoney conference in Riyadh. Investors complained that the current restrictions are too stringent, he said.

Meanwhile the Tadawul will appoint banks to manage its initial public offering and make an announcement within a few days, its chief executive officer said. The exchange has carried out an “IPO-readiness exercise,” Khalid Abdullah Al Hussan said in an interview.

(Corrects second paragraph of story first published Tuesday to clarify when changes will take effect.)
Before it's here, it's on the Bloomberg Terminal.