EXCLUSIVE: The law that will open Saudi Arabia's stock exchange

Author: Gemma Varriale | Published: 19 Jul 2012
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With Saudi Arabia’s government seemingly set on reform, there has been much speculation as to when the country will open its official stock exchange (Tadawul) to foreign investment. Hogan Lovells’ Irfan Butt has seen parts of the draft law and revealed its contents to IFLR. Here’s what firms need to know.

The law by which Saudi will open its market to foreign participation will be the qualified foreign investors’ law (the QFIL). This means that Saudi’s regime is set to be very similar to the Chinese framework: investment will not be opened up directly to the public.

"Essentially, we know that large institutional investors who have been in business for at least five years and managed at least five billion dollars worth of capital - preferably more - will be able to invest,” Butt told IFLR.

The QIFL has been coming for some time. When foreign listed companies were allowed to cross-list on Tadawul in January of this year, experts and corporate lawyers took it as a signal that the opening of the country’s official stock exchange was imminent.

And, although it can be difficult to predict the moves of Saudi’s notoriously secretive government, Butt is confident the new law will come into force before the end of the year.

“Banks and investment firms did test trades to pilot the new rules at the end of 2011,” said the Hogan Lovells lawyer.

The fact that in April the Capital Market Authority’s chairman, Abdulrahman al-Tuwaijri, said Saudi Arabia would open its stock market to foreigners in a "gradual" manner indicates that foreign participation in the market is likely to happen.

And, based on the draft law Butt has seen, there is likely to be a cap of 49% of stock that institutional investors will be able to put into any one company. As well as the minimum amount, there will probably also be a maximum limit that institutional investors will be allowed to invest.

Another key aspect is that there is likely to be a limitation on the type of investment. The Saudi Arabia general investment authority (Sagia) regulates all foreign investments in the Kingdom, publishing a negative list of industries foreigners are not allowed to invest in. Butt believed this list will also apply to the QIFL, meaning foreigners will be unable to invest in areas including: real estate brokerage; real estate investment in Mecca and Medina; commission agents; media services; and land transportation.

The likelihood that the law will be limited ownership mirrors the process seen throughout the UAE. And, with 152 companies listed and a value of around $350 billion - the combined value of all the other five stock markets in the GCC – Tadawul is one of the major bourses in the Gulf.

Like many others, Butt said that the entrance of large institutional investors to the Saudi market will be a stabilising influence, reducing the peaks and troughs caused by the thousands of retail day traders.  

“It’s a good initiative from the government to liberalise Tadawul and to encourage foreign investment,” added Butt. “And once it happens we hope that they will relax some of those stringent qualified foreign investment rules and open up the market further to include other investors.”

A reformist government

The Saudi government has made sweeping structural changes to the economy over recent years, in a bid to move away from its dependency on oil and towards developing industry and a robust stock market.

“Strong public listed companies with foreign institutional investment is a formula that could perhaps work in Saudi Arabia,” said Butt. “The outlook is a lot stronger in Saudi compared to other GCC countries.”

And, although Saudi is known to be a particularly restrictive market, there are many factors in its favour.

The Kingdom has a young population, more oil reserves than any country in the world and a government that’s willing to liberalise its economy. “It’s just that many investors from the west, looking at the country from a western perspective, find it difficult to understand the heavily regulated nature of doing business in Saudi Arabia,” said Butt. “But this is because we’re judging it by western standards, failing to take into account the massive changes that have taken place in Saudi Arabia to liberalise the economy.”

“Tadawul is the big exchange and I think the eager institutional investor will definitely want to invest when it opens up,” added Butt.