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Fri 4 Nov 2016 11:09 AM

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Saudi Arabia to restrict SME market to professional investors

Expected to go live in early 2017, the SME bourse aims to improve access to capital, boost transparency

Saudi Arabia to restrict SME market to professional investors
(Getty Images)

Saudi Arabia will restrict investment in its planned bourse dedicated to small and medium-sized businesses to professional investors, according to draft rules published on Thursday by the Capital Market Authority (CMA).

Announced in April and expected to go live in early 2017, the market is a bid to improve access to capital and encourage better corporate governance in a country whose economy is dominated by family businesses, many of whom have been reluctant to cede any kind of control to outsiders.

Investment in these companies will only be permitted by qualified investors, such as local and international investment firms and government bodies, according to the document.

Much of the trading on Saudi's main market is dominated by retail investors, even though foreign institutions were allowed to buy directly on the market from the middle of last year.

In May, then-CMA Chairman Mohammed al-Jadaan, who was made finance minister this week, said certain restrictions would be put in place to ensure only investors who understood the risks could buy into the SME market.

Among the mechanisms to encourage firms to list on the SME market is a minimum capital requirement of 10 million riyals ($2.67 million), significantly below the 100 million riyal floor for listing on the main market.

Companies will be required to list upwards of 20 percent of the share capital and have at least 50 public shareholders, although an exception will be granted by the regulator if it is considered "appropriate". The document did not elaborate.

Those firms wanting to list on the SME market must have financial records and been operating for at least one year. Firms wishing to list on the main market must have a minimum of three years of accounts.

Transitioning to the main indice is possible after a minimum of two years listing on the second market, the document added.

No indication was given in the draft rules of whether small companies already traded on the existing bourse would be allowed to, or forced to, transfer to the second market.

Small-cap firms are among the most heavily traded on the Saudi exchange as they are targeted by retail investors aiming to make a quick profit.

A consultation process for the draft rules will now run until Nov. 14, according to the stock market announcement of the draft rules.

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