On June 17 2003 Saudi Arabia's Council of Ministers passed a resolution approving the long awaited Capital Markets Law (CML), which - once it has been signed by King Fahd or the Crown Prince - will be effective 180 days from its announcement in the Official Gazette (Umm Al Qura). Saudi Arabia does not have a physical stock exchange, although shares in Saudi public companies are traded electronically through local banks under regulation by the Saudi Arabian Monetary Agency (SAMA), the Kingdom's Central Bank. The electronic exchange (Tadawul) and the Saudi Shareholding Registry will be transferred to the new Saudi Arabian Exchange Commission (SEC). The new market will be renamed the Securities and Exchange Market, which will be established as a joint stock company.
The CML will regulate the securities market in the Kingdom. Under article 5 of the CML, the SEC must issue regulations and enforce provisions of the CML to do the following:
- regulate and develop the securities and exchange market, develop and improve methods of those trading in securities, and develop measures that would ensure reducing systematic risks related to transactions in securities;
- regulate and monitor the issue of and trading in securities;
- regulate and monitor the activities of entities subject to the control and supervision of the SEC;
- protect the public and others investing in securities from unfair and unsound practices involving fraud, deceit, cheating or manipulation;
- achieve fairness, efficiency and transparency in securities transactions;
- regulate and monitor the disclosure of information regarding securities and their issuers; and
- regulate proxy and purchase requests and the public offering of shares.
The Exchange is the sole entity authorized to organize the trading of securities in Saudi Arabia. However, under article 20 of the CML, securities listed or traded in a regulated securities market outside Saudi Arabia are not subject to the CML even if the trading originates from orders in Saudi Arabia, unless otherwise agreed by the SEC with the relevant foreign stock exchange.
The objectives of the Exchange include the following:
- ensuring the fairness, transparency and efficiency of listing requirements and regulations of the Exchange;
- providing a prompt and reliable process for settlement and clearance procedures;
- establishing and enforcing rules of conduct for brokers and their agents; and
- ensuring that brokers have the requisite financial abilities to carry out their profession.
The SEC will form a body to be known as the Committee for the Resolution of Securities Disputes to apply the provisions of the CML and the bylaws, rules and directives adopted by the SEC.
The board of directors of the Exchange has the task of forming a department called the Securities Deposit Center, which will serve as the sole body to engage in deposit, transfer, settlement, clearance and registration of ownership activities in respect of securities traded on the Exchange.
Article 31 of the CML provides that the brokerage business is restricted to joint stock companies holding a valid brokerage licence, and to agents employed by a licensed brokerage. In addition to any rules adopted by the Exchange, a brokerage must satisfy the following requirements to obtain or renew a brokerage licence: meet minimum standards of competence; provide evidence of integrity; and be capitalized locally with at least SR50 million ($13.3 million).
Article 40 of the CML states that an issuer, an affiliate of an issuer, or an underwriter for either, may not issue securities unless a prospectus is filed with the SEC, the prospectus is published as required by the CML, and the requisite fees are paid. The prospectus must include the following:
- information required by the CML regulations to provide an adequate description of the issuer, its business activities, the individuals in charge of managing its affairs such as the board of directors, executive officers, senior staff and significant shareholders;
- information required by the regulations promulgated by the CML to provide a sufficient description of the securities to be issued (for instance, quantity, price, relative rights, privileges and preferences of the issuer's other securities, if any). The description must include how the issue proceeds will be disbursed and fees of subscription agents;
- audited financial statements; and
- any other information that the SEC may require to assist investors in making a decision about investing in the securities.
The CML makes unlawful any action or course of conduct that creates a false or misleading impression in relation to securities offered on the Exchange. Articles 55-65 set out the various penalties and sanctions for violations of the CML.
Stephen P Matthews and Nabil A Issa