Saudi Arabia has introduced new regulations allowing for broader foreign ownership of publicly traded firms. As part of the Kingdom of Saudi Arabia's efforts to regulate and develop the capital markets and to facilitate foreign investment, the Capital Market Authority (CMA) has approved the Instructions for Foreign Strategic Investors' Ownership in Listed Companies (the FSI Instructions), which came into effect on 26 June 2019. The FSI Instructions have removed the existing limit on the foreign ownership of a Saudi-listed company for foreign strategic investors (FSIs) that meet the FSI Instructions' criteria, allowing them to take controlling stakes in Saudi-listed companies.
Historically, foreign ownership of shares in publicly listed companies in the Kingdom has traditionally been a heavily regulated regime. Until the introduction of the QFI Rules in 2015, foreign investors could not invest directly in Tadawul-listed securities and instead were only able to invest indirectly through swap agreements with CMA-authorised persons.
Under the new regulations, foreign ownership of stocks will no longer be limited to qualified foreign investors (QFIs) (i.e. financial firms with at least US$500 million in assets under management); FSIs can take stakes in listed companies by either buying the shares directly on the market or through private transactions and initial public offerings. The new regulations have also done away with any minimum or maximum ownership limits for strategic investors, the only restriction being that investors must hold their shares for two years before they can sell. For FSIs that already hold stakes in listed companies, the two-year lock-up period is not pertinent, unless they decide to add shares to their current stake. In that case, they also have to respect the new lock-up period. According to the CMA, an FSI is a foreign legal entity that aims to own a strategic shareholding in listed companies in Saudi Arabia. The aim of a strategic shareholding is to contribute in promoting the financial or operational performance of the listed company. "We hope the new decision will allow more incentives to boost investor diversification in the local capital market, including strategic, financial, foreign and Saudi investors," said Mohammed bin Abdullah El-Kuwaiz, chairman of the board of the CMA of Saudi Arabia.
In order to qualify as an FSI, a foreign investor must:
- Be established or licensed in a country that applies regulatory and supervisory measures similar to those applied by the CMA or are accepted by it
- Have a client account with a CMA-authorised person and a portfolio account with the Securities Depositary Centre (Edaa)
- Satisfy any other requirements or conditions as the CMA requires
As explained above, the FSI Instructions do not set either a minimum or maximum ownership limit for a strategic shareholding, and FSIs are exempt from the 49% foreign ownership limit set by the QFI Rules. However, the following restrictions apply to investments by FSIs:
- Limitations set out in the bylaws of the listed companies or any instructions issued by the regulatory and supervisory authorities to which such companies are subject.
- Other legislative limitations on foreign ownership of joint stock companies.
- An FSI may not dispose of any of the shares it owns in accordance with the FSI Instructions within a period of two years after the date of becoming the owner of such shares.
- A foreign investor cannot be an FSI and a QFI owning shares in the same issuer at the same time. If a foreign investor wishes to convert from an FSI to a QFI to hold shares in the same issuer, or vice versa, it must meet the relevant requirements set out in the FSI Instructions or the QFI Rules (as applicable) and transfer all shares from the FSI account to the QFI account, or vice versa (as applicable). A foreign investor can be an FSI and a QFI on Tadawul at the same time.
The Kingdom has introduced a raft of reforms in recent years, winning endorsements from international index compilers MSCI and FTSE Russell, as it seeks to position its bourse as an international capital markets hub. Saudi Arabia's stock market is the largest in the Middle East and Africa, with a capitalisation of US$540 billion, and has seen an upsurge in foreign fund flows since the start of the year due to the inclusion in the emerging markets indexes. The number of foreign investors, including strategic partners, rose to 7% in June 2019 from almost 4% in January, driven by the entry of financial investors and inclusion of Tadawul in global emerging markets indexes.
The Kingdom's bourse and its Debt Management Office (DMO) announced a reduction in fees and commissions to encourage secondary market trading of debt. The DMO also reduced the par value for government-issued sukuk from 1 million Saudi riyals to one thousand, signalling further government efforts to facilitate access to the bond market for retail investors.
According to Mohammed El-Kuwaiz, "Strategic investment conditions apply to all stocks listed in the Saudi capital market except for three categories only":
- Real estate firms with core investments in Makkah and Madinah
- Companies that ban foreign investor ownership
- Companies under certain sectors, such as banks, insurance and communications
Most of these businesses are subject to rules that limit ownership for Saudi and foreign investors. In relation to these sectors, ownership is limited to 70%.
Additionally, cross-border offerings are becoming increasingly common. The successful completion of the sale of shares in shopping mall operator Arabian Centers Company, owned by Fawaz Alhokair Group, is the first offering in the Kingdom under SEC Rule 144A, which allows the sale of securities primarily to qualified institutional buyers (QIBs) in the US. In addition, reports say that at least six gulf firms have expressed interest in a listing on the Saudi exchange.
The broadening of stock ownership is part of the Kingdom's ongoing efforts to open up its capital markets to international investors and to help lessen its dependence on oil-based revenues. The introduction of the FSI Instructions is a significant step towards solidifying Tadawul as the major exchange in the MENA region, ensuring that foreign direct investors who intend to invest in the region are not faced with excessive regulatory obstacles. As Mohammed El-Kuwaiz put it, "Companies were looking to acquire strategic stakes but they didn't have a legal framework, so we created one."