While all eyes were firmly glued on speakers and the bold new mega project initiatives rolled out at the recent Future Investment Initiative organized by the Public Investment Fund (PIF) in Riyadh last year, Saudi Stock Exchange Tadawul’s CEO Khalid al-Hassan asserted that Tadawul aspired to be the main exchange in the region and to be the exclusive venue for the planned Aramco IPO listing.
The Kingdom has not yet decided on a final venue for its dual Saudi-international listing, with London, New York, Singapore, Tokyo and Hong Kong all vying for this prestigious listing, and even President Trump wading in and making a rather unusual twitter pitch for the listing to be in New York. The delay in announcing an international listing venue has raised an intriguing possibility of a Saudi listing.
Is listing the Aramco IPO exclusively on the Saudi Tadawul a viable option? The arguments against this are a long one. Critics, including international investment banks standing to lose millions of dollars in advisory fees if an international venue is not selected, point to the small size of the Saudi stock exchange, with a market capitalization of around $440 billion, the largest in the Arab world, but still small in comparison with other international bourses.
They list other factors such as the volatility that this would generate in the local Saudi bourse, with mostly individual investors selling their current holdings and buying into the new Aramco IPO offering, and that in essence there would be little inwards capital flows for a domestic listing.
They point out that there is still some way to go for the Saudi Tadawul to ensure that the necessary legal, regulatory and operational infrastructure is in place to handle the mega Aramco IPO and that an international listing in a prized foreign bourse would bring the Kingdom prestige and ensures that Aramco applies best –in- class governance models.
The above highlights many valid points, and raises the question on whether a sole listing of the Aramco IPO on the Saudi Tadawul is a valid option and whether there are any advantages in going this route. While al-Hassan acknowledged that the Tadawul has not been approached to be the sole exchange, he felt that the Saudi bourse now aspires to be the sole exchange.
The Saudi regulator has adopted amended guidelines and new mechanism for foreign investment in NOMU as part of its ongoing effort to develop and deepen the local equity marketDr. Mohamed Ramady
Factors behind optimism
This optimism is based on several factors. First, the exchange is working hard to ensure further reforms in its legal, regulatory and operational infrastructure. Second, the Saudi bourse is opening up to allow more foreign investors to participate whether by buying into listed Saudi stocks as so-called Qualified Foreign Investors (QFI’s) in their own right without having to go through Saudi intermediaries.
The threshold bar for QFI’s has been gradually reduced to allow for more international investors to participate, and the Saudi Capital Market Authority (CMA) has recently announced that non-resident foreign investors will be able to participate in the NOMU Parallel Market starting from January 1st, 2018.
The Saudi regulator has adopted amended guidelines and new mechanism for foreign investment in NOMU as part of its ongoing effort to develop and deepen the local equity market and attract more foreign investment in line with the Saudi vision 2030 program.
Under the new regulations, non-resident foreign investors are not allowed to own 10 percent or more of an issuers listed shares and this rises to 49 percent for both resident and non-resident foreigners. The hoped-for inclusion of the Saudi Tadawul in several prestigious international indexes is the main factor for this newfound optimism for a Saudi-only listing of the Aramco IPO.
While it was deferred for inclusion in 2017, the Saudi bourse is now very confident that it would be added to the Russel FT Emerging Market Index by March 2018, as well as the MSCI Emerging Market Index at a later date.
Passive capital flow
If these happen, then it will ensure that a local Tadawul Aramco IPO listing would attract significant passive capital inflow investments, as the Saudi Tadawul would be allocated a certain percentage weighting in these indexes and investors would, in effect, be “buying into” the Tadawul index and the Aramco listing.
The ongoing CMA reforms to allow more direct FQI investments and the indirect foreign index participation is to be welcomed according to those advocating a Saudi-only Aramco listing. Recent evidence has shown that foreign investors in the Saudi market are long-term investors that assess corporate profitability and macro-economic trends, as opposed to the more volatile investment profile of individual investors, and thus bring counter-cyclical stability to the market.
Another argument for a Saudi-only listing is that this would provide more time for Aramco to carry out its internal structural and governance reforms and produce the necessary audited accounts on a regular basis, which can then ensure that any future incremental IPO listings to the initial 5 percent is well received by international investors.
As such, a Saudi-only initial Aramco IPO can be viewed as one option for future additional international listings once the current issues and obstacles concerning possible listing on exchanges like London or New York become clearer. A Saudi-only listing then does not preclude an international one later on, but whatever is finally decided, the Aramco IPO is still on track, despite market rumors to the contrary.
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 and co-author of ‘OPEC in a Post shale world – where to next?’. His latest book is on ‘Saudi Aramco 2030: Post IPO challenges’.
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