Riyadh Inches towards Increased Foreign Investment: New Financial Regulation Mooted in Saudi Arabia Could See Significant Changes in the Kingdom's Foreign Investment Climate-Eventually

By Ford, Neil | The Middle East, May 2012 | Go to article overview

Riyadh Inches towards Increased Foreign Investment: New Financial Regulation Mooted in Saudi Arabia Could See Significant Changes in the Kingdom's Foreign Investment Climate-Eventually


Ford, Neil, The Middle East


Financial regulatory authorities in Saudi Arabia look set to permit direct foreign investment in shares listed on the Tadawul for the first time. At present, foreigners can only buy shares in Saudi companies through swap deals or exchange traded funds, which are tradable index-linked financial products, and even these arrangements have only been in place since 2008 and 2010 respectively. Yet with share prices in the kingdom currently performing strongly, there seems no rush to change the investment regime.

The Capital Market Authority (CMA) and the Saudi Arabian Monetary Agency (SAMA) have finally signed an agreement to allow foreign purchase and ownership of foreign shares. However, direct foreign investment would be capped at a minority level, probably at about 20%. The first draft of the Qualified Foreign Investors legislation states that "the maximum proportion of the issued share capital of any particular issuer whose shares are listed that may be owned by all categories of foreign investors in aggregate is 49%, including interests under swaps".

Such reforms would have a major impact on the composition of Saudi investors. According to official figures, 93% of all Saudi shares are currently held by individual rather than institutional investors but most foreign investment is likely to come from fund managers. Such institutional investors are the bedrock of the European and North American stock markets but play a relatively limited role in the Gulf states.

It has been reported in Saudi Arabia that potential investors must manage assets worth a minimum of $5bn and will only be permitted to participate by invitation. The CMA hopes to attract only those investors prepared to commit themselves to the country for the long haul. Michael Cole-Fontayn, the chairman of BNY Mellon in Europe, the Middle East and Africa, said: "We believe that there is willing institutional participation. Whenever the Capital Market Authority or the Tadawul come to London or the United States, they draw a very big audience of interested institutional investors."

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Sami Al Nwaisir, chairman of the board of Alsami Holding Group, said: "We are not surprised by this move by the Ministry of Finance because the stock market was acting as a lagging factor, rather than leading the economic prosperity the kingdom is witnessing these days. The private sector is also channelling the money from real estate to the stock market." No timetable for the introduction of the new regulations has yet been given--a fact that some analysts have taken to suggest that there may be tensions within Riyadh over the move.

However, there could be more to the lack of a timetable than a conservative economic approach. A sudden influx of investment could trigger another round of boom and bust at a time when the government is keen to stabilise the national economy. Even without new foreign investment, Saudi share prices are rising strongly. The Tadawul All Share Index (TASI) increased by 22% in value during the first quarter of this year to 7,835.15, its highest level for 42 months, giving total market capitalisation of SR1.54 trillion ($410. …

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