Saudi Arabia this week took a series of steps towards launching the world's biggest initial public offering (IPO), by easing foreign investors' access to its stock market, the Tadawul.
On Wednesday, Jan. 10, the stock exchange said in a statement that it would make trading limits for the exchange's independent custody system more flexible, which would enhance foreign investors' access to the market, and would allow foreign asset managers to aggregate the orders of their portfolios and funds, which will help them to get better execution and prices. These changes will come into force on Jan. 21.
On Tuesday, Jan. 9, the Tadawul supervisor, Saudi Arabia's Capital Market Authority (CMA), announced that it changed the rules of the country's Qualified Foreign Investor (QFI) program. The new rules make it easier for overseas institutional investors to qualify, and widen the range of institutional investors eligible to invest on Saudi Arabia's stock market.
The country plans to sell part of its national oil company Saudi Aramco on the domestic stock market, and may sell a stake on an international stock exchange. Crown Prince Mohammed bin Salman has said the company could be worth $2.0 trillion, and therefore the 5% stake Saudi Arabia plans to sell could be worth $100 billion.
The key changes to the existing Tadawul rules are the halving of the requirement for minimum assets under management for QFIs to $500 million, and the automatic qualification of subsidiaries and managed funds of QFI applicants without the need to submit separate applications.
The rules also set out general principles for QFI eligibility, but they still retain some elements of discretion for the CMA to approve the foreign investors.
Foreign banks, brokerage and securities firms, insurance companies, investment funds, government and government-related entities and other financial institutions considered eligible can be QFIs as long as they are "licensed or otherwise subject to regulatory oversight by a regulatory authority and incorporated in a jurisdiction that applies regulatory and monitoring standards equivalent to those of the Authority or acceptable to it," according to the rules published on the CMA's website.
This does not mean the market is completely open; foreign investors still face restrictions. A QFI cannot own more than 10% of the shares or the convertible debt of any issuer that is listed on the Tadawul. On aggregate, foreign investors cannot own more than 49% of the listed shares or convertible debt instruments of any single issuer.
Still, these reforms add upon those already implemented. At the beginning of the year, the government announced it changed the status of Aramco to that of a joint stock company -- a condition necessary for the IPO.
Last year, to encourage more foreign investment in domestic companies, the CMA enabled foreign participation in domestic IPOs and adopted International Financial Reporting Standards (IFRS) for companies listed on the Tadawul.
It also introduced T+2 settlement -- trades must be settled two business days after the execution -- instead of the same-day requirement it previously had. This aligns the stock exchange to international practices. The world's largest market, the NYSE, made the change the other way around in March last year -- from T+3 to T+2.
"These measures and reforms are creating a more attractive investment climate for domestic and international investors alike, and have attracted more than 100 major financial institutions to open accounts in the Kingdom," Khalid Abdullah Al Hussan, Chief Executive Officer of Tadawul, said in the statement released on Wednesday.
It looks like things are entering a straight line, at least when it comes to the listing of Aramco on the domestic stock market, which is now opening its doors wider to receive foreign investors.
A decision on the foreign exchange to use for the international IPO -- if and when it happens -- should have been taken by the government by the end of last year, but nothing has yet been announced.
I argued in a previous article that the Tokyo Stock Exchange could be the best venue for it. But until Aramco is listed on a foreign exchange, at least foreign investors can be increasingly sure they can access the IPO on the Tadawul.