The G20 country has launched a new equities market with lighter listing requirements aimed at boosting and diversifying SME funding in the region
Seven companies began trading on a new stock market on February 26 2017. Each of these companies' offerings were heavily oversubscribed by multiples such as 219% and all of them impressively traded upwards 20% on the first day of trading. This market is the Nomu – Parallel Market in Saudi Arabia.
On February 26, the Saudi stock exchange (Tadawul), which is by far the largest stock market in the Middle East, launched Nomu – Parallel Market, a junior market for equities, the aspirations for which are to provide a platform for smaller local companies to access capital markets funding as well as deepen and further develop the Saudi capital markets in general (nomu, in Arabic, means growth).
Its main appeal to potential local issuers is that the listing requirements are considerably lighter than those for a listing on the Main Market in Saudi Arabia. In return, only qualified investors (as further described below) may trade shares in this market. The real question is, will private companies take up this opportunity to access additional funding, or instead determine that the admission to listing, and continuous obligations, are still too onerous? Part of the target group of prospective issuers for the new market is family-owned companies where there are succession issues, and a listing is seen as a way to instil corporate governance in them and ensure their future sustainability.
In April 2016, as the price of oil plummeted, the Deputy Crown Prince of Saudi Arabia (HRH Mohammad bin Salman Al Saud) spearheaded the launch of Vision 2030, a blueprint to wean the country off its dependency on oil. The Vision 2030 document promises to 'smooth the process of listing private Saudi companies'. The launch of the Nomu – Parallel Market appears to be aligned with the implementation of the Vision and is essentially Saudi Arabia's version of the UK's Alternative Investment Market (AIM) for example.
New parallel market listing rules to govern all aspects of the Parallel Market were announced in December 2016, following their approval by the board of the Capital Market Authority (CMA) and in time for the launch of the Parallel Market at the end of February 2017.
Features of the Parallel Market
In addition to lighter listing requirements, the parallel market listing rules provide flexibility for companies that have maintained a Parallel Market listing for at least two years to be able to transition to the Main Market. This is subject to an application to transfer to a premium listing on the Main Market being accepted by the CMA and to ongoing compliance with the listing rules, which govern companies listed on the Main Market and those wishing to become listed thereupon.
Saudi joint stock companies are eligible to list on the Parallel Market, as well as joint stock companies incorporated in the Gulf Cooperation Council (GCC) countries (Saudi Arabia, Bahrain, Kuwait, Oman, Qatar and the United Arab Emirates), provided that the majority of the capital of such GCC companies is owned by GCC citizens.
The main features of a listing on the Parallel Market compared with the Main Market can be summarised in the table.
Following a listing on the Parallel Market, the continuing obligations set out in the listing rules which apply to companies on the Main Market also apply to companies listed on the Parallel Market, with the following key differences:
- Interim financial statements must be announced and provided to the CMA within 45 days of the end of the relevant period (rather than within 15 days).
- The contents (which are extensive) of the board report that accompanies the annual financial statements are only indicative (rather than mandatory).
- There is a 12 month lock-up period on shareholders following listing (compared to six months) – however, CMA approval is not required for disposals following the lock-up period.
- Qualified investors are not required to notify the company in cases where (i) they own five percent or more of the company's shares (or this holding increases or decreases by one percent or more), or (ii) a director or senior executive owns or has rights in any shares of the company, or (iii) the ownership of company shares by any director or senior executive increases or decreases by 50% or more, or by one percent of the company's shares, whichever is less. Notification to the CMA is still required in these circumstances.
- Shareholders owning 10% or more of a company's shares do not need CMA approval in respect of any disposal of shares.
|Main Market||Parallel Market|
|1. Minimum market capitalisation||SAR 100 million |
|SAR 10 million |
|2. Minimum percentage of shares to be offered to the public||30%||20% (no single investor may own more than five percent)|
|3. Minimum number of public shareholders||200||50, if the expected market value of the listed shares exceeds SAR 40 million; |
35, if the expected market value of the listed shares is less than SAR 40 million
|4. Is listing permitted if the issuer has undergone a major restructuring within the last 12 months?||No||Yes|
|5. Required financial statements and operational performance of the issuer||Minimum three years||Minimum one year|
|6. Other documentary requirements||Comprehensive prospectus and extensive documentary requirements||Fewer content requirements for prospectus and less extensive documentary requirements in general (for instance, no market study is required) A shareholders’ circular (rather than prospectus) is required if a company is already listed and is conducting a rights issue|
|7. CMA review period for prospectus||45 days||30 days|
|8. Compliance with Bookbuilding Instructions||Required||Not required|
|9. Compliance with Corporate Governance Regulations||Required||Compliance not mandatory but indicative (unless required by other laws)|
|10. Appointment of financial and legal advisors||Appointments are mandatory Advisors must be independent||Appointment of financial advisor is mandatory. No explicit independence requirement. No mandatory appointment of legal advisor|
Investing in the Parallel Market
Given the higher risk profile of issuers listed on the Parallel Market, the CMA has restricted investment in the Parallel Market to so-called qualified investors, which are defined as follows:
- companies licensed by the CMA to conduct securities business (authorised persons) acting for their own account;
- clients of an authorised person who has a discretionary portfolio management mandate from the client to invest in the Parallel Market;
- the Saudi government, any governmental body, supranational authority recognised by the CMA or Tadawul, and any stock exchange recognised by the CMA or the Securities Depositary Centre (SDC);
- government-owned companies, whether directly or via a portfolio managed by an appropriately licensed authorised person;
- GCC companies and funds;
- investment funds;
- qualified foreign investors;
- legal entities that are permitted to open investment accounts in Saudi Arabia and accounts with the SDC;
- individuals who are permitted to open investment accounts in Saudi Arabia and accounts with the SDC (such as Saudi nationals or non-Saudis who are resident in Saudi Arabia) and who (i) have conducted at least SAR 40 million worth of securities transactions in total, with at least 10 transactions per quarter for the last 12 months, or (ii) have a securities portfolio averaging at least SAR 10 million over the last 12 months, or (iii) hold the General Securities Qualification Certificate (CME-1) recognised by the CMA; and
- any other persons permitted by the CMA.
The launch of the Parallel Market appears to have been enthusiastically received by market participants, with seven companies having listed to date across the following sectors: capital goods; commercial and professional services; consumer services; retail; and software. It is still, however, too early to determine the long-term appetite for, and success of, the Parallel Market. The lighter listing requirements set out in the listing rules may well give owners of small- and medium-sized enterprises, across Saudi Arabia and the rest of the GCC, another funding option especially if they are contemplating alternative sources of funding to bank financing.
Given that the market has been somewhat preoccupied with the prospect of a mammoth initial public offering of the Kingdom's most valuable asset, and possibly the world's most valuable company, the Saudi Arabian Oil Company (Saudi Aramco), a number of other prospective issuers on the Main Market have been hesitant about proceeding with their IPOs given the uncertainty as to whether or not Saudi Aramco might saturate the otherwise relatively deep pools of liquidity in the Saudi market. Therefore, the introduction of the Parallel Market is timely as it provides an alternative path and welcome boost for smaller issuers considering equity capital markets issuances in the Kingdom.
The CMA's initiative to introduce lighter listing requirements for prospective issuers is to be welcomed. The ultimate challenge will be persuading companies who are eligible to list on the Parallel Market that (i) the listing process itself and (ii) the continuing obligations to which companies listed on the Parallel Market will be subject, are not too onerous and that listing is an endeavour worth undertaking, even given the current market conditions.
By Omar Rashid (partner) and Sahel Mughal (senior associate), secondees from Clifford Chance to AS&H Law Firm in Riyadh
Clifford Chance (in cooperation with AS&H Law Firm)
Clifford Chance (in cooperation with AS&H Law Firm)
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