The Kingdom of Saudi Arabia separately regulates securities and banking business. Prior to 2004, securities business was the sole domain of Saudi commercial banks and was monitored by the central bank and banking regulator, the Saudi Arabian Monetary Agency (SAMA), and regulated by a number of disparate regulatory instruments. In 2004, the Capital Market Law came into effect ushering in a new securities regime and establishing the Capital Market Authority (CMA) as regulator. The CMA has subsequently issued a range of regulations covering licensing, offering and the conduct of securities business. More recently the CMA has proposed changes to the Listing Rules in Saudi Arabia and has invited comment from interested parties.
SAMA remains responsible for regulating Saudi banks pursuant to the Banking Control Law (BCL) and manages the regulatory approval process for establishing foreign bank branches under licence. Under Article 2 of the BCL, no person or entity is allowed to carry on “banking business” in Saudi Arabia without being licensed in accordance with the BCL. “Banking business” is defined in the BCL to mean the business of “receiving money on current or fixed deposit accounts, opening current accounts, opening of letters of credit, issuance of letters of guarantee, payment and collection of cheques, payment orders, promissory notes and other similar papers of value, discounting of bills, bills of exchange and other commercial papers, foreign exchange transactions and other banking business”.
In addition to the BCL, SAMA periodically issues circulars to Saudi commercial banks to regulate a wide range of operational matters, which cover everything from capital adequacy requirements and pay scales for chairmen, to ATM locations and minimum requirements for branch amenities. Under the BCL, Saudi banks must take the corporate form of a Saudi joint stock company. SAMA keeps a tight rein on the activities of Saudi banks, which are required to seek SAMA approval for new products and to notify SAMA of certain lending activities that involve non-residents. The BCL also provides, broadly, for the licensing of branches of foreign banks in Saudi Arabia by authorising the Minister of Finance and National Economy, with the approval of the Council of Ministers, to issue such licences. To date, only five such licences have been issued. In addition, banks of the other Gulf Cooperation Council states (Sultanate of Oman, United Arab Emirates, Kuwait, Qatar and the Kingdom of Bahrain) are able to establish branches in Saudi Arabia, subject to meeting certain qualifying conditions.
The introduction of the Capital Market Law marked the separation of the regulation of banking from the regulation of securities business. This division was also mandatory for Saudi commercial banks: they were given two years in which to transfer their securities activities to securities subsidiaries, which are now regulated by the CMA. In common with other jurisdictions, the securities regulatory regime in Saudi Arabia has a dual approach to regulation by having:
- rules that regulate the offering of securities: the Offers of Securities Regulations, Investment Fund Regulations, Real Estate Investment Fund Regulations and the Listing Rules; and
- rules that regulate the licensing and conduct of participants in the securities market: the Market Conduct Rules, the Authorised Persons Regulations and the Securities Business Regulations.
The Capital Market Law and the regulations issued under it centre around “securities”, which are defined as any of the following: shares; debt instruments; warrants; certificates; units; options; futures; contracts for difference; long-term insurance contracts; and any right to or interest in any of the foregoing.
The Securities Business Regulations prohibit a person from carrying on securities business in Saudi Arabia unless they are either authorised (licensed to engage in securities activities by the CMA as an authorised person) or exempt (certain government entities) or excluded (there are a range of transaction- and counterparty-specific exceptions). It is important to note that, under the Securities Business Regulations, a person carries on securities business in Saudi Arabia if they engage in a securities activity from a permanent place of business in the Kingdom. A person is presumed to carry on a securities activity from a permanent place of business in Saudi Arabia if, among others, they engage in the relevant activity with or for a person in Saudi Arabia. This considerably extends the reach of the Capital Market Law beyond the borders of Saudi Arabia and makes the Saudi securities regime a relevant consideration for persons who do not have any intention of setting foot in the Kingdom.
The process of licensing an applicant as an authorised person is a very thorough and well established process. It requires an actual "bricks and mortar" presence in Saudi Arabia. The form of corporate entity and minimum capitalisation required will depend upon the securities activities for which the applicant seeks a licence. Licences are issued for the following securities activities: dealing, advising, managing, arranging and custody services. More than 100 firms have been licensed as authorised persons, including the securities companies of each of the Saudi commercial banks. The Authorised Persons Regulations and the Securities Business Regulations also set out strict rules with respect to securities advertising, which effectively is limited to persons authorised to conduct securities business.
All offers of securities in Saudi Arabia must be made by an authorised person. Offers must comply with the Offers of Securities Regulations, unless more specific regulations apply, as for Saudi-managed investment funds. Securities may be offered by public offer or private placement. Public offers of securities (other than investment fund units) must comply with the Listing Rules. One of the requirements of the Listing Rules is that such offers are limited to the securities of Saudi joint stock companies.
A private placement must fall into one of the following categories:
- The securities are issued by the Saudi government or a supranational authority that the CMA recognises.
- The offer is restricted to sophisticated investors.
- The offer is a limited offer.
Sophisticated investors are defined as:
- Authorised persons that act for their own account.
- Discretionary investment management clients of an authorised person provided the offer is made through the authorised person.
- The Saudi Government, any supranational authority that the CMA recognises, the Saudi (or other recognised) Stock Exchange or the Securities Depository Centre.
- Institutions that act for their own account.
- Professional investors.
- Any other person that the CMA prescribes.
There are a number of categories of limited offers, but the most common is where the securities are offered to 60 offerees or fewer and the minimum subscription amount is 1 million Saudi Arabian Riyals (or the total offering is less than 5 million Saudi Arabian Riyals). All private placements must be notified to the CMA at least 10 business days prior to the proposed offering and the CMA has the power to prohibit an offering if it is deemed to be not in the interests of Saudi investors or contrary to the Capital Market Law.
The Investment Fund Regulations and Real Estate Investment Fund Regulations provide for both the establishment of such funds by authorised persons and the manner in which they are offered.
Recent Developments on the Saudi Arabian Listing Rules
In May 2011, the CMA released a consultation draft of the revised Listing Rules. The proposed changes include:
- broadening the application of the Listing Rules to allow for cross-listing and listing of convertible debt instruments and contractually-based securities;
- more stringent and detailed application for listing requirements, including the need for financial and legal due diligence reports, market studies and subsidiary information;
- employee share scheme provisions;
- providing for capital increases and decreases;
- restriction on share trading following a listing widened from those listed in the prospectus with a controlling interest to all those listed in the prospectus, and imposing restrictions on share trading by directors and senior executives during certain periods; and
- more detailed prescribed contents of prospectuses.
The CMA has invited comments on the consultation draft by 7 July 2011