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Saudi stock market to open up to foreign investment [CPI Financial](CPI Financial Via Acquire Media NewsEdge) The Saudi Capital Market Authority (CMA) has revealed plans to revise rules governing the investment of foreign financial institutions in stocks listed on the Tadawul (Saudi stock market). The proposals would open up the biggest Arab capital market and the last major market in the world to restrict foreign participation. The official Saudi Press Agency reported that at a meeting last night the Saudi cabinet, in a session at Al-Salam Palace in Jeddah and chaired by Crown Prince Salman bin Abdulaziz Al Saud, Deputy Premier and Minister of Defense approved that the stock market authority work to offer foreign financial institutions the opportunity to purchase and sell stocks enlisted in the Saudi stock market. The Tadawul) index broke through 10,000 today, showing gains of more than three per cent, taking it to its highest level in almost seven years in reaction to the decision taken last night. The move will open the way for foreign financial institutions to buy and sell stocks listed on the stock market. Draft regulations will be published during the next month for a 90-day consultation period in order to solicit opinions and suggestions from investors and interested parties. The CMA aims to publish regulations by the end of the year and expects the Tadawul to be open to foreign financial institutions to invest directly during the first half of 2015. At present the Saudi market, capitalized at around $531 billion is excluded from international indexes such as those calculated by MSCI. Bassel Khatoun, Head of MENA Equities for Franklin Templeton Investments, said, "The opening of the Saudi Arabian equity market to foreign direct investment is a massive step forward for the region. As the largest equity market in MENA, this will certainly put the region back on international investors' radar and is likely to be transformative for regional equities. From a regional perspective, Saudi Arabia's economic output, the size of its equity market and its demographics all vastly outstrip those in the remainder of the GCC countries. Saudi Arabia's macro-economic fundamentals bring scale to the attractive dynamics that make the GCC region an interesting and differentiated addition to global portfolios. The market gives investors exposure to emerging market-type growth coupled with low-risk sovereign credit quality. "Liberalisation of the Saudi market may pave the way for future inclusion of the Saudi market in the MSCI Emerging Market index. Entry into the MSCI EM index would likely boost trading volumes, enhance market liquidity and potentially bring down transaction costs through improved scale effects." Salah Shamma, Head of Investments – MENA Equities, Franklin Templeton Investments said, "Opening up to foreign institutional investors holds considerable advantages for the Saudi market. The Tadawul is dominated by local retail investors, who account for over 90 per cent of volumes traded, while foreigners represent just over one per cent of the total. The opening up of the market will likely bring with it a higher degree of institutionalisation that will add sophistication and maturity to the market in time. A more sophisticated investor base would promote the efficient allocation of investment capital within the Saudi Arabian economy. In the medium term, such measures are likely to lead to an increase in initial public offerings (IPOs), thus leading to a much-needed deepening of the equity market in the region and improved sentiment from global investors." Muhammad Anum Saleem, Senior Associate, D&P Dhabaan and Partners in association with Eversheds, Saudi Arabia, said, "The opening of the Saudi Arabian stock market has been gradual initially allowing the GCC nationals to participate, followed by the resident foreigners, the international community through mutual funds and swap arrangements and now the decision to allow foreign direct investments in Saudi Arabia. "So far the foreign investors were entering the Saudi market through mutual funds, corporate portfolios and Swap arrangements. Swap arrangements, which were allowed in 2008, allowed an authorized local firm to trade on the Tadawul on behalf of a foreign client, allowing the foreign client to stock pick. On the other hand, the swap agreements gave the CMA the ability to oversee foreign transactions, monitoring the funds as the Authorized Entities were required to report swap transactions to the CMA on a daily basis. "Investors in the swap contracts received the economic benefits of owning the stock, such as dividends and stock splits, but did not hold voting rights. Those rights resided with the authorized entity, which was not permitted to exercise them either. The CMA also reserved the right to change the terms of the contracts and to stop issuing swaps. "The introduction of swap agreements came at a time in September, 2008 when the Tadawul All Share Index had dropped 23 percent since the beginning of the year and was described by many as a way to buoy the falling market in the short term with the injection of foreign cash. However, this time around the Saudi Arabian authorities are under no financial pressure. The Tadawul All Share Index has risen 46% over the past two years and the stock market has seen greater liquidity and broader diversity of sectors. Although the CMA has not given an indication of the time frame for implementation but it is rumoured that it has been working on the draft rules for this activity for some time proving that there is a genuine intention to open the Saudi market to institutional and international investors in the near future. "The decision to allow investors to own the shares directly and exercise voting rights will spur the concept of activist shareholders in the kingdom, as opposed to a purely monetary participation in the listed companies before. Companies will benefit by receiving management, accounting or legal guidance in keeping with the best practices practiced by their foreign shareholders. The companies can also take advantage of the latest technology, innovations in operational practices, and new financing tools that they might not otherwise be aware of. By adopting these practices, the companies can enhance their efficiency and adopt beneficial corporate governance practices." Global Investment House said, "This opening has been long awaited by the markets and will further open the market to foreigners who are now able to invest in the market only indirectly through swap transactions, mutual funds and a few ETFs. The Saudi stock market… is the largest equity market in the GCC, with about 50 per cent of the total market capitalization and 70 per cent of trading volumes." Global expects there will still be some restrictions on foreign investors in the market with foreign ownership limits likely to be placed on companies. "Also, we believe foreign investors will need to be approved by the CMA, possibly in schemes similar to those run in China (more restrictive) or India (more open). "In China, Qualified Foreign Institutional Investors (QFII) are approved by the Chinese authorities and given specific quotas for the amount they can invest in the Chinese markets. As of June there were 229 QFII, mainly large institutional investors such as UBS, Morgan Stanley, HSBC, Goldman Sachs, etc. The tight restrictions on approving QFII allows China to exclude hedge funds and other types of investors they deem may cause excessive volatility in the markets. The overall QFII program will increase to USD150 billion, although only USD43 billion has been allocated to specific investment companies so far. "In India, Foreign Institutional Investors (FII) are allowed to invest in the Indian equity and debt markets if they meet requirements to be deemed Qualified Foreign Investors (QFI). As of 2013, there were approximately 1,750 FII with about USD175 billion in investments in the Indian markets. The FII/QFI scheme in India is less restrictive than the Chinese scheme as investors just have to meet KYC requirements and no individual quotas are set on each company." Global believes the Saudi market may be considered for induction into the MSCI Emerging Markets index in the future. However, the Kuwaiti investment group added, "If the approval of foreign investors is restrictive as in the Chinese QFII example, this is less likely, however a more open scheme such as in India would mean a greater chance of eventually moving directly into the MSCI EM index, we believe." (c) 2014 CPI Financial. All rights reserved. Provided by SyndiGate Media Inc. (Syndigate.info). |