The recent publication of the Implementing Regulations (Official Gazette (Umm Al-Qura) edition 4021) to the Capital Market Regulations (Royal Decree M/30, 2/6/1424H), has given rise to some uncertainty for prospective issuers in an increasingly active IPO market in the Kingdom.
The questions arise as a result of a potential conflict between the Implementing Regulations and the Capital Markets Regulations of the Capital Market Authority (the CMA) on the one hand and the Companies Regulations (Royal Decree M/6, 22/3/1385H, as amended) and internal procedures of the Ministry of Commerce and Industry (the MoCI) on the other hand. At issue is a prospective offeror's ability to form or convert to a joint stock company within a reasonable time to take advantage of market opportunities.
The CMA has indicated its intent to fast track this conversion to, or creation of, joint stock companies for the purpose of conducting an IPO, but the MoCI has maintained that it retains its jurisdiction in this area, reserving the right to require companies to follow its far more time-consuming formation or conversion procedures. Accordingly, until the relevant authorities in the Kingdom resolve this apparent dispute, prospective issuers will not be able to establish with any certainty a functional timeline for completion of an IPO. Complicating matters, it remains unclear whether a Saudi joint stock company may offer shares to the public at inception or if it must wait the three years required by Article 8 of the Listing Rules of the Implementing Regulations before offering shares to the public. Specifically, clause (c) of Article 8 requires that a company seeking admission and listing of its shares must have published audited accounts for each of the previous three years. Curiously, while clause (b) of Article 8 similarly requires that a company seeking admission and listing must have been carrying out its main business, and under substantially the same management, for the previous three years, this clause specifically grants discretion to the CMA to waive this requirement; no such specific discretion is granted under clause (c) of Article 8.
These issues have not yet been tested, because the recent and much-publicized IPOs in the Kingdom have been able to bypass the problem by other means. For example, Etihad Etisalat, the winner of the hotly contested second GSM licence in the Kingdom, was formed pursuant to an exemption to the MoCI procedures granted by Royal Decree as an inducement to prospective investors promised as part of the Communications and Information Technology Commission's bid process with respect to the licence. Additionally, under the rules of the Saudi Arabian Monetary Authority (SAMA), newly formed insurance companies in the Kingdom are required to offer at least 25% of their shares to the public at inception (a requirement that will further heat up the already-torrid Saudi capital market when the shares of these prequalified insurance companies become available to the public). While the specific rules of SAMA probably take precedence over the more general rules and regulations of the CMA, it is at least arguable that this requirement indicates the intent of Saudi Arabian authorities to permit routine IPOs at inception, as well.
Despite the apparent confusion surrounding the IPO market in the Kingdom, there are promising signs that help is on the way for prospective issuers. While the mechanics of the formation of joint stock companies remain subject to debate, there is increasing evidence that the MoCI is disclaiming jurisdiction in the specific arena of IPOs. Moreover, certain ad hoc working groups of officials from MoCI and the CMA have been meeting to discuss and resolve the issues causing uncertainty for companies seeking to avail themselves of an eager pool of public investors in Saudi Arabia.
Patrick F Campos
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