Saudi regulator removes cap on ownership for strategic investors

Riyadh-based Capital Market Authority said there are no maximum or minimum limits on the ownership of listed companies for foreign strategic investors
Saudi regulator removes cap on ownership for strategic investors
The decision is a milestone for the kingdom, which started opening its market about four years ago when it first allowed foreigners to trade stocks directly.
By Bloomberg
Thu 27 Jun 2019 07:45 AM

Saudi Arabia removed a cap on ownership of publicly traded companies for foreign strategic investors, paving the way for international investors to take controlling stakes in sectors from banking to petrochemicals.

The Riyadh-based Capital Market Authority said there are no maximum or minimum limits on the ownership of listed companies for foreign strategic investors, according to a statement on Wednesday after trading hours. The limit was previously 49%.

The instructions don’t apply to qualified foreign investors, according to another document on the CMA website.

The decision is a milestone for the kingdom, which started opening its market about four years ago when it first allowed foreigners to trade stocks directly. The nation has been pursing plans to diversify its oil-dependent economy since energy prices plummeted, and has identified its equity market as a means to attract foreign cash. MSCI last month started to include the kingdom’s stocks in its emerging-market index.

“Saudi Arabia, increasingly, is open for business, not just for local investors but for international investors,” Capital Market Authority chairman Mohammed El-Kuwaiz said in a telephone interview from Riyadh on Wednesday.

“It is ironic, I would say, that Saudi is rapidly opening up and embracing the world in a period when the rest of the world seems to be closing down.”

While the market watchdog has removed the cap, limits by other regulators or a company’s own rules still apply. Some sectors in which authorities still have to approve deals that surpass a pre-established threshold are banking, insurance and telecommunications, El-Kuwaiz said. Such limits don’t prohibit investors from going beyond them, “but require approval for investors to build stakes larger than that threshold. And that applies for both Saudis and non-Saudis,’’ from now on, he explained.

Another example is Jabal Omar Development, a real-estate developer that doesn’t allow any participation from traders abroad. Its flagship project is located within walking distance from the Grand Mosque in the holy city of Mecca, an area restricted only to Muslims.

Two years

A strategic investor buying a stake in a listed company will need to maintain the holding for at least two years, according to the CMA.

For strategic holders that already hold stakes in listed companies, the two-year lock-up period is not pertinent, unless they decide to add shares to their current stake. In that case, they also have to respect the 24 months without selling the shares, the chairman of the CMA said.


Glossary
Foreign Strategic Investor: A foreign legal entity that aims to own a strategic shareholding in listed companies in Saudi Arabia, according to the CMA.

Strategic Shareholding: The direct ownership percentage in the listed company’s shares, and through which the aim is to contribute in promoting the financial or operational performance of the listed company.

Qualified Foreign Investor: A foreign entity that has assets under management higher than 1.875 billion riyals, or $500 million.


Removing limitations on strategic foreign ownership could allow international banks to take majority stakes in commercial lenders for the first time since the 1970s, when the government forced foreign lenders to sell majority stakes in their local operations to Saudi nationals.

International banks including HSBC Holdings Plc, Royal Bank of Scotland Group Plc, and Credit Agricole SA are still some of the largest foreign strategic investors in listed companies in the country.

“Since few strategic investors will gladly invest cash or reputation in ventures controlled by others, this removes a major obstacle to raising foreign investment from 2% to 10% of GDP by 2030,” said Chris Johnson, the managing attorney at Al-Sharif Law in Riyadh. “In earlier days, Citibank and its peers were major players; after being required to divest majority stakes to local partners in the 1970’s many lost interest, to the economy’s detriment.”

Saudi Arabia’s stock market is the largest in the Middle East and Africa, with a capitalisation of $540 billion, according to data compiled by Bloomberg. The main Tadawul All Share Index has risen 11% this year, beating the advance in emerging market equities by about three percentage points.

“We see this as a step forward in ensuring Saudi Arabia’s sustainability as an attractive foreign direct investment destination, an objective that national authorities have strived to achieve,” said Naresh Bilandani, an equities analyst at JPMorgan Chase & Co. in Dubai.

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