The Saudi securities market is finally opening to foreign investors. After many years in gestation, the Saudi regulator, the Capital Market Authority, has published its rules (Rules for Qualified Foreign Financial Institutions Investment in Listed Shares ("the Rules")) permitting foreign investors to make direct investments in the Saudi Capital Markets.
Investment in Saudi listed securities has been limited to Saudi and other Gulf Co-Operation Council ("GCC") nationals. Other investors have not been able to invest directly in the Saudi market, although investment has been available through swaps or, indirectly, through funds.
This position is, however, set to change. The Saudis are liberalising regulatory rules so that foreign investors can access the Saudi market directly. The new regime is set out in the Rules which were adopted by the Saudi Capital Market Authority (the "CMA") on 4 May 2015. The Rules set out the procedures, requirements and conditions for the registration of Qualified Foreign Investors ("QFIs") with the CMA and also specifically the obligations applicable to Saudi Authorised Persons, who will sponsor QFIs in to the new Saudi regime. The key features of the new regime are:
- QFIs and their clients will be able to invest directly in the Saudi securities market;
- Direct investment with enable investors to exercise rights as shareholders, including voting and other rights;
- Eligibility criteria will apply imposing some limits on access;
- QFIs will need to be sponsored by a local authorised firm with a licence to deal in securities;
- Investment restrictions will apply to QFIs; and
- The Saudi regulator will acquire some supervisory powers over the QFI.
Introduction to the Saudi regulatory system
The CMA is the regulator of securities and investments related activities in Saudi Arabia. It was established in 2004, when regulatory functions were transferred from the Saudi Arabian Monetary Agency ("SAMA") to the then newly established CMA. At the time of the transfer of functions, banks in Saudi Arabia were required to spin-off their securities business operations into vehicles which were authorised by the CMA to carry on securities business. SAMA continues its functions as the Saudi Central Bank and the supervisor of Saudi credit institutions.
The Saudi Capital Market Law and its Implementing Regulations set out the legal framework for the regulation of securities business in Saudi Arabia.
As indicated, direct investment in securities listed on the Saudi Stock Exchange (the Tadawul) has been limited to Saudi and GCC nationals. Cross border business into Saudi Arabia is also restricted given that the Securities Business Regulations deem securities business to be carried on in Saudi Arabia (therefore requiring a CMA licence) where activities are engaged in with a person in Saudi Arabia.
Under the new Rules foreign applicants will need to apply to the CMA to become a QFI. The application will need to be sponsored by a local CMA authorised entity, the Assessing Authorised Person ("AAP"). Certain eligibility criteria must be satisfied.
An applicant for QFI status must be a non-GCC bank, brokerage or securities firm, fund manager or insurance company. The applicant must be licensed in a jurisdiction (presumably the institution's "home state") that is equivalent to Saudi Arabia or otherwise acceptable to the CMA. A list of such jurisdictions will be prepared by the CMA.
The Rules also impose certain quantitative requirements, namely:
- The institution must have AUM of or equivalent to SAR 18.75bn AUM (around £3.35bn).
- This can be lowered by the CMA to SAR 11.25bn in the CMA's discretion.
- AUM includes both assets held by the QFI applicant or its group as well as assets managed by the applicant/its group for the account of another person or persons.
The QFI applicant or an affiliate must also have carried on securities and investment related business for at least 5 years.
Approval of the QFI's clients
The new regime will permit investment in Saudi securities by both QFIs and their clients. A QFI can invest in listed shares on behalf of clients where the client has itself been approved in accordance with the Rules. Broadly, in order to be approved clients must be investment funds subject to equivalent supervision or other financial institutions which meet the same eligibility criteria as apply to the QFI itself.
Application for approval by the AAP
An applicant for QFI status is required to submit an application to an AAP who is responsible for carrying out an assessment of the application to ensure that the relevant eligibility criteria are met. The QFI applicant will need to complete a prescribed form on which various background information must be provided. Financial institutions will be familiar with the sort of background information sought from experience with other processes to obtain regulatory permissions and approvals. Interestingly, however, applicants are also required to consent to the disclosure of "any information or documents required by the [CMA] or other government agencies" of Saudi Arabia.
This is, of course, a very broad obligation which could put applicants in breach of obligations under client agreements or local client confidentiality laws.
Where an applicant for QFI status intends to deal in listed securities for clients, information must also be provided in relation to the underlying client.
Certain limits are imposed on investment by QFIs and their clients. In particular:
- Foreign investors in aggregate cannot own more than 49% of the issued shares of a listed company. This includes both directly held shares and shares held under a swap arrangement.
- A QFI and its affiliates and a QFI client and its affiliates can own a maximum of 5% of an issuer's shares;
- QFIs and QFI clients together can own a maximum of 20% of the shares of any particular listed issuer;
- A cap of 10% by market value is imposed on the holding by QFIs and QFI clients of all Tadawul listed issuers. This threshold also includes interests under swaps.
Certain ongoing reporting obligations will apply and the QFI and/or its clients must open accounts in the Saudi Depositary Centre.
The CMA will also acquire supervisory powers over QFIs and clients.
The Rules will be effective from 1 June 2015.
QFI's will be allowed to invest in listed shares starting from 15 June 2015.