Category Archives: Finance

Employee share option plan (the “ESOP”) have seen an impressive rise in popularity across the globe, with more companies offering them as a form of compensation. In KSA, employee share options have recently become a prime option for employers specially tech companies due to the increased flexibility and potential for financial gain that they provide.

Why ESOP are Growing in Global Popularity

ESOP shares offer number of advantages that make them an attractive tool for companies to reward their employees and motivate them to stay with the company: They also provide certain benefits such as:

1. Equity – ESOP provides employees with a form of equity, allowing them to benefit from the financial success of the company without having to purchase the actual shares.
2. Potential Gains – ESOP shares offer employees the potential for long-term financial gain as well as short-term performance. This makes them an attractive option for employees looking to benefit from the future success of their company.
3. Increased Engagement – ESOP shares can also help to increase employee engagement and loyalty by being a shareholder in the company. By providing employees with a sense of ownership in the company, employers can help to boost morale and create a more motivated workforce.

HOW DOES IT WORKS

Usually, the company’s board of director approves the ESOP and set the rules in the form of a plan on how it will work for employees and in most cases grant the chief executive officer of the company the authority to grant the ESOP shares (within the authorised number of shares) based on performance and for talent acquisition purposes since the chief executive office manage the day-to-day business of the company.

We often see in early-stage companies, the board is the administrator of the plan; however, with the growth of the company usually the administration is outsourced to a service provider mainly to assign the fiduciary risk away from management, as well as freeing up of time which the board can instead redirect towards growing the company.

Why Is KSA Prime for ESOP?

Until recently, it was not common for companies in KSA to offer ESOP as a form of compensation. However, the tide is changing, and more employers are now offering them as an attractive option for their employees. Companies have freedom to tailor their ESOP to fit the needs of both the company and the employees, and to modify it as their needs may change. However, stipulations exist on the rights of both the employee and the company when it comes time to “cash-out”.

ESOP is now positioned as the prime option for employers and employees in KSA due to a number of key factors such as (i) being attractive to institutional investors; (ii) cost effective; (iii)result a high retention and attracts talents.

ESOP in KSA: The Future of Compensation

It is clear that ESOP shares set to be a solid option for employers and employees in KSA, with a stable economy, growing stock market, and low cost, they offer a unique combination of flexibility and potential for financial gains that make them an attractive option for both employers and employees.

As more businesses begin to offer ESOP shares, they may soon become the norm in KSA. By harnessing their potential; however, resident companies in KSA must be mindful of the tax implications of offering ESOP shares to foreign employees operating in the Kingdom as the company may be subject to a 20% tax on income generated by shares owned by non-Saudi shareholders. If you are an employer looking to offer ESOP in KSA, be sure to speak with legal advisors who can help ensuring your compliance with the relevant regulations and maximize the potential of this form of compensation.

As technology continues to develop, countries worldwide have begun to recognise and address the importance of data privacy. Saudi Arabia is no exception. As part of its Vision 2030 economic reform plan, the government has prioritised data privacy and security, creating new regulations to ensure that financial information is collected, used, and stored securely.

In the past, financial institutions have had the freedom to collect, store, and process customers’ personal information with few restrictions. With the introduction of the new regulations, however, financial institutions in Saudi Arabia must now comply with strict data privacy requirements to ensure customer data is protected. This will bring Saudi Arabia in line with international standards, while also providing greater protection for its citizens. In this article, we will explore these changes and the implications for financial institutions in Saudi Arabia.

How are Data Privacy Laws & Regulations Changing?

The government of Saudi Arabia announced the new Personal Data Protection law in 2021, which aims to protect and regulate the collection, storage, and use of personal data by institutions and businesses in the Kingdom. Since the initial announcement, there was a delay in the implementation of the law to give more time for consultation with stakeholders. After these considerations are taken into account, the law is expected to come into force in March 2023.

The new data privacy regulations aim to safeguard customer information and protect it from misuse or abuse. Financial institutions are required to meet the requirements of these laws, which include implementing specific measures to ensure the security and confidentiality of customers’ personal data.

To comply with these laws, financial institutions must take the following steps:

• Create and implement a data protection policy
• Appoint a Data Protection Officer (DPO) to oversee compliance
• Implement technical and organisational measures to protect customer data
• Conduct regular risk assessments and audits
• Ensure that all customer data is securely stored and processed
• Use robust encryption technologies to protect customer data
• Provide customers with clear and adequate information on how their data is being used
• Put in place procedures for dealing with data breaches
• Put in place mechanisms for customers to exercise their rights under the regulations

It is important to note that these regulations are still in the process of being developed and, while they may be subject to change, all financial institutions must ensure that they are aware of the latest developments and regulations by March 2023 to remain compliant.

The Collaboration of Finance & Tech Teams is Key

The process of compliance with data privacy regulations can be a daunting task for any financial institution in Saudi Arabia. But the responsibility for compliance does not lie solely with the finance teams. It requires a collaborative effort between the finance and technology teams to ensure that all regulations are being met and that customer data is adequately protected.

Technology teams must be involved in the implementation of any regulatory requirements, as they are the ones with the technical expertise to implement the necessary measures. Inter-departmental communication and collaboration are essential to ensure that all requirements are being met. This includes sharing information and knowledge between the finance and technology teams to ensure that everyone is on the same page. Everything from the training of staff to developing and implementing an internal data protection policy must be done in collaboration with the technology team.

By working together to understand and comply with the new data privacy regulations, financial institutions in Saudi Arabia can ensure that customer data is adequately protected and remain compliant with the law.

Funding your business is a critical part of  your growth journey, and in Saudi Arabia, banks are often the first port of call for borrowing funds. Banks, however, have been restricting lending to private businesses globally, and Saudi Arabia is not an exception. To the contrary, bank credit availability to private business in Saudi Arabia can be rather limited. That’s why a business may wish to explore alternative funding sources. In this article, we will explore the different funding sources available and discuss some of the legal implications of each.

What Type of Alternative Funding Sources are Available in KSA for early stage growth?

Saudi Arabia’s venture stage ecosystem is rapidly maturing, and as such, the choice of alternative funding sources available to businesses continues to expand. It’s essential to keep in mind that for in-KSA enforceability, Shari’a compliance may be a legal requirement for recovery of profit charges or “interest”.

Angel Investors

Angel investors are customarily high-net worth individuals who provide capital to entreprenerus during the life of their ventures in exchange for an ownership stake in the business. This type of funding is often more readily available than traditional bank loans and can be used to fund the launch and very early stages of growth of a business.

Legal Consideration: Documentation in angel investment transactions is key, and while some angel investors can be qualifying or accredited investors, they may not be sophisticated. Therefore it is very important that the transaction documentation is prepared by specialists to protect both parties, and to take into consideration the private placement nature of the offering securities given applicable laws. It is also essential to perform due diligence on the investor and ensure that they qualifying or accredited investors.

Venture Capital (VC)

Venture capital is a form of capital provided by specialist investment funds (referred to as venture capital funds)  to businesses in exchange for equity. VC is typically available from after the proof-of-concept stages of a business, through advanced scaling stages.

Certain venture capital funds provide debt financing, which can help businesses looking to finance working capital or other aspects of their capital requirements, but without parting way with equity. Customarily venture debt is available to companies that received institutional venture capital equity investments.

Legal Consideration: Both forms of venture capital financing are considered to be private placements or financing, and as such special legal attention should be given to documentation to ensure that they are drafted in line with applicable laws. Additionally, businesses looking to receive venture capital should carryout internal legal and compliance review in preparation for investor legal due diligence.

Additionally, debt funding is likely to be subject to the borrower providing security to the lender, and the perfection of such security. The borrower should consider carefully the scope of security and its ability to perfect the security in favour of the lender, especially if the lender is a foreign party, which is customary.

Equity Crowdfunding

Equity crowdfunding is a form of funding provided by a large group of investors, including retain investors, through a platform in exchange for a share of the business’ equity.

Legal Consideration: Under Saudi law, equity crowdfunding is permitted, subject to certain restrictions. Fundraising must occur via a platform licensed by the Capital Market Authority (CMA).

Debt Crowdfunding

Debt crowdfunding is where investors provide funds in exchange for a fixed return. This type of funding is often used by businesses to meet their short-term cash flow needs or finance a specific project. In Saudi Arabia, two debt crowdfunding platforms recently received licensed from the Saudi Central Bank (SAMA) – Forus and Tameed.

Legal Consideration: In 2021, SAMA issued a new set of regulations that clarify the legal requirements for debt crowdfunding platforms. The platform must be registered with and regulated by SAMA, submit periodic financial statements, and establish a risk management system. If you choose debt crowdfunding, you must ensure that the platform you use is fully compliant.

Key Takeaways

Alternative funding sources are worth considering if you’re looking to finance the launch or growth of your business. However, it is crucial to consider the legal implications of each type of funding before selecting an option. It is also possible for you to utilize a number of funding options in tandem. In Saudi Arabia, angel investment, venture capital, equity crowdfunding, and debt crowdfunding are all viable options for businesses looking to raise capital, but each with its own set of legal implications.

To discuss the legal implications of the options suitable to you, contact our team.

The Kingdom of Saudi Arabia (KSA) has been making significant strides in developing its capital market and promoting investment in recent years. The listing and initial public offering (IPO) trends in KSA are a reflection of the growth and development of the country’s financial sector.

Listing on the stock exchange allows companies to raise capital and increase visibility, while IPOs provide a platform for new and growing companies to enter the public market. Understanding these trends is essential for investors, entrepreneurs, and stakeholders in the financial sector to make informed decisions and capitalize on the opportunities available. This article will provide a brief overview of the listing and IPO trends in KSA, including some of the key drivers and future outlooks.

Current Market Trends

Saudi Arabia boasts the highest growth rate among G20 nations, backed by the government’s strong effort to diversify its economy and a steady flow of foreign direct investment. Despite global market volatility in 2022, Saudi Arabia’s stock market has remained relatively resilient. Ending 2022 with a bang, the economy grew by 8.8% in the third quarter, with the market capitalization of publicly traded companies totalling around $2,706 billion (USD) by January 2023. However, the nation’s stock exchange experienced its first dip since 2015, with the Tadawul All Share Index (TASI) slipping by 7.1% by the end of 2022.

Despite this, the overall trend in KSA’s stock market has been positive. Q4 of 2022 saw the MENA region, and more specifically Saudi Arabia, become a dominating force in listing activity. Seven Initial Public Offerings (IPOs) were conducted on the Tadawul Main Market with an impressive collective sum of $4.7 billion raised from investors.

Additionally, six IPOs brought in an additional $65 million while two direct listings occurred on Nomu – Parallel Market as well. Luberef subsidiary Saudi Aramco Base Oil Company achieved the largest IPO, which raised a staggering $1.3 billion – amounting to more than double what had been collected through all Saudi offerings during Q3 2022.

Key Drivers of Saudi Arabia’s Listing and IPO Market

The key drivers of Saudi Arabia’s listing and IPO market can be attributed to the nation’s successful economic policies and several serendipitous global events. Here are some of the factors at play:

• Reforms such as Vision 2030, the National Transformation Program (NTP), and introducing a new regulatory framework for public offerings have played a pivotal role in driving investment and making it easier for businesses to list. This has enabled companies to gain access to capital markets, broadening their investor base and allowing them to scale up quickly.
• Increased investor confidence and a low-cost capital environment have also contributed to the growth in listing and IPO activity. Direct and indirect foreign investments into KSA have risen significantly, with more international investors participating in public offerings.
• Recent geopolitical events that contributed to the global increase in oil prices have bolstered the Saudi economy and prompted investors to seek lucrative opportunities in the region.

What is the Future Outlook?

The outlook for KSA’s listing and IPO market remains positive. There is a strong expectation that the optimism and growth witnessed in 2022 will continue into 2023, with more IPO activity and an increase in the number of listed companies.

The Tadawul Group remains committed to furthering its capabilities beyond what they have already achieved. In 2022, this progress was particularly noteworthy as multiple post-trade upgrades were implemented for the first time ever on the Exchange, in addition to introducing a new Single Stock Futures (SSFs) product on its derivatives market. As a result, we are likely to see more investor interest in listing and IPO activity on the Tadawul exchange as investors become more confident of the market’s potential.

In addition, the number of cross-listings is also expected to increase, with Tadawul hosting its first dual listing of the Americana Restaurants (AMR) in December last year with the Abu Dhabi Securities Exchange (ADX). This follows an agreement in 2019 with ADX to encourage more cross-listings between the two exchanges.

A strong IPO pipeline has been identified, with the potential for even larger offerings than in 2022. The government’s commitment to economic reform and the favourable geopolitical climate will likely sustain investor confidence, making it easier for companies to raise capital through public offerings. Bucking global trends, the outlook for KSA’s listing and IPO market remains promising.