44 | Deloitte | A Middle East Point of View | Winter 2013

Much has been made of the decision to allow overseasinvestors access to direct investment in the Tadawul – the flagship exchange of the Kingdom of Saudi Arabia.But as companies across the Kingdom continue to addtheir names to an ever-increasing IPO pipeline, advisors,and the Capital Markets Authority (CMA) alike, areadvocating a cautious approach to the listing process.

Deloitte | A Middle East Point of View | Winter 2013 | 45

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Saudi Capital Markets - Open?Ouverts? Offen?

46 | Deloitte | A Middle East Point of View | Winter 2013

There was little surprise at the announcement inDecember 2011 that foreign investors would eventuallybe permitted to invest directly in the Tadawul All ShareIndex (TASI), Saudi Arabia's top index of 1551 listedcompanies and widely considered to be the Gulf’s mostattractive capital market due to its size and maturity.Though investment through swaps and exchange-tradedfunds had become popular indirect routes for non-Saudinationals to track the continued growth in the petro-chemical dominated KSA economy, allowing directforeign ownership has long been seen as a keymilestone for Gulf Cooperation Council (GCC) capital markets.

A cautious and measured approach to regulatory changeAllowing foreign investment is obviously andunderstandably a decision that the Capital MarketsAuthority (CMA) in Riyadh will not have taken lightly,even with the hint of inclusion as a ‘Frontier’ or‘Emerging Market’ under MSCI2 classification.Subsequently, the application of a cautious andmeasured approach to the change appears to be theirongoing strategy, borne out by comments from CMAchairman Abdulrahman Al Tuwaijri that any opening“should be done in an orderly and gradual manner to

make sure it does not impact the market’s stability,”3

as well as the fact that, as of late 2012, a formal dateand confirmed details for any changes in ownershipregulations had yet to be announced by the Saudi CMA.It is expected that foreign ownership will be tested on atrial basis at some point during 2013 – although it is notyet clear what format such a trial would take – and thatthe foreign ownership in any single Saudi company willbe capped at a limit expected to be around 20 percent.It is fair to expect that a stepped process will providecomfort to investors and current Saudi-listed companiesthat the authorities are considering the full implicationsof such a large capital inflow, as well as avoiding thecreation of a dangerous market bubble. This confidencein the CMA’s handling of the process may havecontributed in part to the seven percent Last TwelveMonths (LTM) growth of the TASI,4 although obviouslythe contribution from pre-emptive moves to buysecurities ahead of foreign investment cannot beunderestimated.

Changes in ownership rules in recent years are not theonly sign that the Kingdom is serious about becoming aglobal capital market. As well as continuing to use sharesuspensions to crack down on companies not complyingwith ongoing listing or reporting requirements, inJanuary 2012 the Saudi CMA announced updated listingregulations following a public consultation period in itslatest step to improve governance and the listingprocess. Of particular significance was the expressprovision that independent financial and legal advisorswould be required for any Initial Public Offering (IPO)process, the former being required to confirm theissuer’s eligibility for listing through a due diligenceprocess. Such moves, when contrasted with the smallerGCC capital markets, appear to indicate that theKingdom wishes to improve the reputation of itsflagship bourse, as well as the quality of its participating listed companies.

Allowing foreign investment isobviously and understandably adecision that the Capital MarketsAuthority (CMA) in Riyadh willnot have taken lightly

Deloitte | A Middle East Point of View | Winter 2013 | 47

How will capital inflow from foreign investmentimprove the quality of KSA issuers?As the CMA drives for improved governance andfinancial reporting and opens the market to limitedforeign ownership, proponents of the Tadawul wouldhope that market confidence will lead to the long-awaited unblocking of a pipeline that has been bulgingwith potential IPO candidates since the early years ofthe financial crisis. However, as the CMA’s moves todate show, potential issuers can be expected to bevetted extensively for suitability to a listing and shouldbe aware that any shortfalls in financial reporting,availability and preparation of historical financialinformation and adequacy of corporate governancecould adversely impact their listing aspirations (both in time and shareholder value).

Ultimately, as Saudi companies join an ever-growingqueue to go public and enjoy the benefits fromadditional liquidity generated from direct foreigninvestment, they should bear in mind that the CMA now has both the luxury and the motive to be selectiveover the issuers it admits. Potential issuers should beready and aware of the updated listing requirements,the ongoing reporting requirements, as well as thewider necessity of a strong equity story to attractinvestors. Regardless of the fine print of the regulatorychanges to the Tadawul, it is clear that 2013 will be anintriguing period of transformation for the Kingdom’spublic market.

by Ross Pennington, manager, Transaction &Restructuring Services, Middle EastDeloitte Corporate Finance Limited

Endnotes1 As at 28 November 2012, http://www.tadawul.com.sa/2 Morgan Stanley Capital International emerging markets index3 Reuters, 3 April 2012, http://uk.reuters.com/article/2012/04/03/

saudi-bourse-opening-idUKL6E8F31TB201204034 Bloomberg, 28 November 2012, http://www.tadawul.com.sa/

Regardless of the fine print of theregulatory changes to the Tadawul, it isclear that 2013 will be an intriguingperiod of transformation for theKingdom’s public market

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