The MSCI upgrade of Qatar and the United Arab Emirates to “emerging market’ status marked the beginning of increasingly liberalised GCC stock exchanges.

Saudi Arabia’s stock exchange, the Tadawul, is by far the largest securities exchange in the GCC by market capitalisation. It is also the most liquid in terms of daily trading volumes and the most diversified in terms of issuers.

Most recently, The National Commercial Bank (NCB), Saudi Arabia’s largest bank, issued 25 percent of its shares at an offer price of SAR45 per NCB share. This US$6 billion initial public offering (IPO) is the largest equity offering ever in Saudi Arabia and in the Arab world, and is also the second largest IPO globally so far this year.

Tadawul Set for Foreign Investment?

This landmark offering has not only encouraged increased liquidity in the Middle East’s equity capital markets, but has also attracted the attention of international investors. Direct investment in the shares of Tadawul-listed companies has historically been limited to Saudi and other GCC investors. Yet in August 2014, the Saudi Arabian Capital Market Authority (CMA) published its draft rules for qualified foreign financial institutions, a proposal which will permit non-Saudi’s to participate directly in the Kingdom’s stock exchange. Although subscription to the NCB IPO is limited to Saudi nationals, the awaited opening of the GCC’s largest stock exchange to foreign investment has heightened interest in the Tadawul among global investors.

It is expected that the final rules will not be announced before 2015. Once in force, eligible foreign investors will benefit from the opportunity to invest directly in Tadawul-listed companies. Yet in order to access the Kingdom’s stock exchange, applicants will be subject to a registration regime where aspiring Qualified Financial Institutions (QFI) must satisfy certain eligibility criteria, including license standards, asset value  and experience in securities related activities.

The draft rules propose that QFIs must have assets under management of no less than US$5 billion. This threshold will therefore limit all but the largest foreign institutions from investing directly in the Tadawul. Although the opening of the Tadawul is limited, it represents a significant change in Saudi Arabia’s capital markets policy.