The giant wakes up: Saudi Capital Market embraces new reforms

The Gulf’s biggest stock exchange, the Saudi Tadawul, has belied the perception of being too slow to act, and has woken up with a roar, with some new reforms that could force the other Gulf bourses to follow suit.

The most dramatic new changes are in allowing the listing of small capitalized Saudi firms, the so called SME’s-or Small and Medium sized Enterprises-to list in a parallel Saudi stock exchange to give a boost to this SME sector and expand the number of listed companies, compared to the current primary market which is dominated by larger capitalized and well establishes firms.

On Sunday 26 February, the NOMU-Parallel stock market was launched with a debut of seven firms in the retail, food and industrial sectors and reached an initial market capitalization of SR 1.9 B, with all companies gaining 20 per cent on the first trading day, their maximum daily limit, but which admittedly is still a tiny fraction of the formal market with a capitalization of SR 1.512 T ($403 B), and 178 listed companies.

The minimum capitalization in this new parallel market is SR 10 M ($2.7 Mil) or 10 per cent of requirement of main market listing and trading is limited to “qualified investors” such as institutions and government related entities with a fluctuation limit of 20 per cent to avoid undue speculation and erratic share price movements by retail investors which has plagued the formal stock market, given the so called “herd mentality” of small retail investors who seek short term profit as opposed to long term value added investment returns like institutional investors.

However retail investors can access these parallel market listings through investment funds, with specified investment strategies to reduce risk of direct investments. The seven new debut companies are a mixture of sizes, with IPO share prices ranging from SR 11 ($2.9) to SR 78 ($20.8), and the new number of shares listed ranging from 230,000 to 6,750,000 shares.

“This is a positive move to add breadth and depth to the Saudi market which has been dominated by the larger IPO and capitalized companies and is part of the strategy to diversify the economy and provide new capital access to SME companies away from traditional bank lending”. The Gulf’s biggest stock exchange is seeking to attract more capital from abroad as Saudi Arabia goes through unprecedented economic and social change.

Vision 2030

Foreign investment is a cornerstone of Deputy Crown Prince Mohammed bin Salman’s “Saudi Vision 2030,” a blueprint for the post-oil period that includes plans to sell shares in state oil giant Saudi Aramco and expand its sovereign wealth fund into becoming the world’s largest. The private sector, and especially the SME sector, are slated to be the driving force for this new diversified Saudi economy and listing SME’s especially in the tourism, medical, food and IT sectors will assist in raising capital, expanding their base and creating local jobs.

This new move has certainly put practical teeth to the longer term transformation plan, and the ordinary Saudi citizen can see the immediate benefit and participate in it. The list of possible new listing from the Saudi Joint Stock Companies (JSC’s) who are potentially eligible is truly staggering, with around 4,500 registered JSC’s, out of 68,000 Saudi private sector companies .

Given regional interest in the large Saudi stock exchange with its large consumer and industrial base, companies from the GCC will be allowed to list in the parallel market as a primary or secondary listing

Dr. Mohamed Ramady

According to the Saudi Stock Market head, 38 new companies will be listed in 2017, and the Saudi Capital Market Authority’s Vice Chairman Mohammed Al Kuwaiz said that the parallel market will be open to foreign qualified investors by 2Q 2017, and added that a lot of financial advisers are looking at the opening up of the market, as well as the privatization program and feel that the change in the overall market infrastructure is an opportunity, as the regulator has seen “a tremendously increasing amount of interest” from foreign firms seeking licensing to operate in Saudi Arabia.

Given regional interest in the large Saudi stock exchange with its large consumer and industrial base, companies from the Gulf Cooperation Council will be allowed to list in the parallel market as a primary or secondary listing.

Separately, there are more reforms in the pipeline concerning the formal market and Saudi Arabia is counting on rules that will extend the settlement cycle on stock trades to attract more foreign investors as currently the Tadawul stock exchange has about fifty qualified foreign investors and expects to draw more after shifting to a T+2 cycle (transaction date plus two days for settlement) by the end of June 2017, a system used across most major exchanges, while the current system requires same-day settlement.

Foreign direct investment

The Saudi stock market started allowing limited foreign direct investment in 2015 and eased restrictions further last year and foreigners currently own about 4 per cent of shares, with regulators arguing for more qualified foreign investors be allowed to participate, as they will ostensibly add a longer term investment, value added approach by assessing economic fundamentals of Saudi listed companies and sectors as opposed to emotion driven intra -day retail sector trading.

Another goal for Saudi Arabia is to be included in the prestigious emerging market MSCI or Morgan Stanley Capital International index, and the planned draft regulations for the settlement shift has already received encouraging feedback from most global index providers, including the MSCI. The kingdom is keen in seeking to join MSCI’s emerging market index, which is tracked by some of the world’s biggest fund managers.

The “T+2”is an important piece of change for MSCI to move forward to include Saudi Arabia on its emerging-market watch list, as the new settlement cycle would bring the Tadawul in line with international best practices. No longer will foreign qualified investors have to hold large funds in the Kingdom with their local brokers to execute transactions on same day settlement basis, but can do so two days after the transaction allowing them to manage their international liquidity more efficiently. The lion has awakened.

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Dr. Mohamed Ramady is an energy economist and geo-political expert on the GCC and former Professor at King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia.

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Last Update: 11:00 KSA 14:00 - GMT 11:00
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