Saudi Stock Exchange open for foreign investment

Robert Hamilton
For Al-Shorfa.com
2008-09-10

Saudi traders work at a bank in Riyadh on March 19. (Photo by HASSAN AMMAR/AFP/Getty Images)

Saudi Arabia opened its stock exchange, the Tadawul — the largest in the Middle East and the eleventh-largest in the world — to foreign investors for the first time on 20 August.

While foreign investors are still not allowed to own shareholdings in Saudi companies, they are now entitled to buy shares through certain intermediaries authorized by the kingdom’s Capital Markets Authority (CMA).

The bourse is home to over 42 percent of the market value of listed stocks in the Gulf Cooperation Council (GCC) and has been the least-open among Gulf Arab bourses to foreign investors, until now giving foreigners access to stocks through mutual funds.

As part of a wide range of plans to bring liquidity to the Tadawul — which has suffered in the first half of 2008 and was down over 19 percent year-to-date as reported on August 26 — foreign investors are now entitled to returns related to their share purchases.

Foreign investors will not be able to take seats on the boards of companies, however, nor will they have a say in the running of Saudi firms.

On the first day of trading in which foreign investors were allowed to buy shares through licensed intermediaries, the Tadawul rallied 5.2 percent, its biggest one-day gain since April 2007.

According to reports, the CMA has sent a memo to Saudi brokerage and asset management firms outlining 11 guidelines for the swap agreements. Among these were that the agreements will last a maximum four years; that licensed intermediaries must avoid credit risks that may arise from swap agreements; that they must be paid for in full; and that intermediaries must ensure regulations for swap agreements are met.

International institutions now able — or seeking regulatory approval — to practice share swaps include Deutsche Bank, Morgan Stanley, Goldman Sachs and BNP Paribas.

“The authority ... has approved that licensed individuals sign swap agreements with non-resident foreigners — institutional or individual — for the purpose of transferring the economic benefits of shares in Saudi listed companies to those persons,” the CMA said in a statement last week, as reported by newswire Reuters on August 20.

The move was part of the “continued efforts of the authority to develop the financial market,” the CMA added.

“This is one step away from opening up the market completely to foreign investors,” John Sfakianakis, chief economist at SABB bank, HSBC’s Saudi affiliate, told Reuters. “This is a very sizeable step. A client in London, Paris or New York has a way to get invested in the local market through licensed stockbrokers.”

The announcement came less than a week after the exchange began naming investors with stakes of 5 percent or more. Each week, the Tadawul posts a list of such holdings on its website in a bid to boost transparency on the bourse.

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