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.