As part of ongoing efforts to make Saudi Arabia more accessible to foreign direct investment, the Saudi Arabian Capital Markets Authority recently issued Instructions for Foreign Strategic Investors Ownership in Listed companies (FSI Rules). The FSI rules allow foreign strategic investors to own shares from listed companies directly to promote the financial and operational performance of the listed companies. The CMA lifted the 49% cap on share ownership with effect from June 26, 2019. The aim of the new rules is for the Kingdom to reduce its overreliance on the oil-dependent economy since the global energy prices plummeted. CMA identified the equity market as a strategic industry to attract foreign cash industries by opening up shareholdings in insurance, banking, real estate, and petrochemicals.
Traditionally, foreign ownership of shares from publicly listed companies in the Saudi Kingdom has been highly regulated where foreign investors could not invest directly. Liberalization of the highly regulated regime commenced in 2015 with the introduction of the QFI Rules that allowed foreign investors to invest in listed securities indirectly through swap agreements with CMA authorized personnel for a period not exceeding four years.
Who Can Become an FSI?
Under the Capital Markets Authority, foreign strategic investors should be non-GCC legal entities. Non-GCC is defined under the definitions set out in the resolution of the Supreme Council of the Cooperation for the Arab States of the Gulf and satisfy the following eligibility criteria;
- Be established and licensed in a country applying similar regulatory and supervisory measures as the CMA. Based on this guidance, the CMA deems a country to be acceptable if it is a member state of the International Organization of Securities Commissions,
- The entity must hold a client account with the Saudi Arabian Securities Depository Center (Edaa), and
- Must meet any other requirement that the CMA deems applicable
Despite lifting the cap on ownership of shares by foreign investors, the following limits validated by the CMA and relevant authorities in specific industries hold;
- Ownership limits: A foreign investor cannot be an FSI and QFI owning shares from the issuer listed on Tadawul at the same time. To hold stock from the same company at the same time, one must convert from FSI to QFI and vice versa by meeting the criteria set out in the FSI instructions or QFI rules where applicable. They will then transfer their shares from the FSI account to the QFI account, and vice versa.
- Trading limits: A Foreign strategic investor cannot dispose of shares owned, in accordance with the FSI instructions, before the lapse of two years upon purchase of the shares
- Limitations outlined in the bylaws of the listed company or guidelines issued by regulatory and supervisory authorities to which such companies are subject
- Other legislative restrictions of foreign ownership of joint-stock companies.
These strategic investment restrictions apply to all stocks listed in the Saudi capital market except for companies that prohibit foreign investor stock ownership, real estate firms with core investments in Makkah and Madinah, and companies operating in banking, insurance, and communication industries. Businesses listed under these categories are subject to regulations that limit ownership; hence, the share ownership limitation is 70%.
Other Considerations for FSI
- Regulatory approvals
Despite deregulating the ownership of shares in Tadawul, FSIs are still subject to industrial regulations, especially for companies operating in banking, insurance, and telecommunications. In these industries, any changes in ownership of shares by FSI will need approvals from relevant authorities. This means that in addition to the two-year trade limit, an FSI will need additional mandatory permissions to be able to trade part of the strategic ownership
- Mergers and Acquisition rules
If an FSI acquires 50% or more of the voting rights of a listed Saudi company after approval, the CMA can mandate the person to apply for a mandatory takeover bid to all the shareholders of the target. However, CMA may waive this rule based on the submitted appeal or its initiative.
- Competitions approvals
Saudi Arabia’s competition laws provide that where a company wishes to acquire majority shareholding from another company and the transaction results in economic concentration, it must seek approval from the General Authority of Competition prior to completion of the acquisition. GAC will review and vet any transaction relating to mergers and acquisitions in major industries in the Saudi market to determine if the purchases will result in economic concentration. The vetting process takes 60 days.
- Listing rules
Under Tadawul’s listing rules, the minimum float required for a company to be listed in the primary market is 30% and 20% for listing in the Parallel market unless the CMA approves a lower threshold. Even though FSI instructions do not impose minimum or maximum limits on strategic shareholding, the maximum FSI shareholding in the Main market is 70% and 80% for the Parallel market at any given time, subject to other investment restrictions
The implication of FSI Instructions to Saudi Arabia
Since the approval of the FSI instructions, the Kingdom of Saudi Arabia has reported an increase in foreign cash flows. The number of foreign investors rose by 163.7% to 1,195 investors as of 20/06/2019 compared to 453 investors in January. Moreover, the ownership percentage of foreign investors in the Capital Market increased to 7% as of 20/06/2019, compared to 4.7% in January.
Additionally, lifting restrictions for FSIs will allow international banks to hold majority stakes in commercial lending for the first time since the 1970s. The Kingdom’s government issued a directive in 1970 compelling foreign financial institutions to sell their majority shareholdings in local operations to Saudi nationals.
The liberalization of stock ownership is part of Saudi Arabia’s ongoing efforts to open up its capital markets to foreign direct investment and lower its reliance on oil. Local shares have been introduced in the FTSE emerging markets index and MSCI market benchmark to attract further foreign direct investment. Through these benchmarks, the Kingdom’s watchdog hopes to solidify Tadawul as the primary stock exchange in the MENA region. The move guarantees foreign investors wishing to invest in the territory protection from regulatory obstacles.
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