On 10 August 2016 the Saudi Arabian Capital Market Authority (CMA) announced the publication of the much anticipated revisions to the Rules for Qualified Foreign Financial Institutions Investment in Listed Shares (the QFI Rules).
The revised QFI Rules, which will become effective on 4 September this year, further relax the criteria for registration of foreign institutions and the various investment restrictions they were subject to under the first iteration of the rules.
Key features of the revised QFI rules
The changes reflected in the revised rules signal a clear willingness on the part of the CMA to respond to the various concerns voiced by foreign institutions, as well as a commitment to positioning Saudi Arabia’s market for inclusion in key global indices, which is expected to result in an increase in higher foreign investment flows.
The key revisions are as follows:
1) Securities vs Shares
QFIs are now permitted to invest in “securities”, providing much broader market access beyond just listed shares.
2) Profile of QFIs and removal of the ‘QFI Client’
The concept of “approved QFI Client” has been removed from the new QFI Rules and the profile of institutions eligible for QFI status has been expanded. Approved QFI clients will now need to register directly as QFIs by signing the undertaking form approved by the CMA by 1 November 2016.
Significantly, the criteria regarding minimum size of the financial institution has been reduced from assets under management of or equivalent to SAR18.75 billion (approx. US$5 billion) to SAR3.75 billion (approx. US$1 billion).
3) Relaxation of Investment Limits
The CMA has significantly liberalized the investment limits for QFIs, which were previously set such that, apart from other existing legislative and regulatory restrictions on foreign ownership of listed entities (such as those that may apply to banks or telecoms), the only applicable limits are as follows:
i. Each QFI may not own 10% or more of the shares of any issuer whose shares are listed (an increase from the previous limit of 5%, which was calculated on the aggregate holding of the QFI and its affiliates); and
ii. The maximum proportion of the shares of any issuer whose shares are listed that may be owned by all foreign investors (in all categories, whether residents or non-residents) in aggregate is 49%.
QFIs permitted to participate in IPOs
In a separate development, on 18 August the CMA confirmed, in its announcement of the publication for the new Instructions of Book Building Process and Allocation, that QFIs will be permitted to participate in IPOs via the book building process from 1 January 2017.
This represents a further significant step in the liberalization of the market and it will be interesting to see the impact this has on the process for those issuers seeking to attract the participation of QFIs.
Potential implications are likely to include recasting the approach on the prospectus to ensure compliance with Reg S requirements and international market practice, as well as an increased focus on the importance of the English version of the prospectus.