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Tue 5 May 2015 09:08 AM

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Saudi sets ownership caps as $575bn bourse opens to foreigners

Overseas investors can buy stocks from June 15

Saudi sets ownership caps as $575bn bourse opens to foreigners
(Getty Images)

Foreign investors can own no more than 10 percent of Saudi Arabia's
stock market by value, the regulator said on Monday as it announced rules
opening the $575 billion bourse to direct foreign investment next month.

A single
foreign investor will be able to hold no more than 5 percent of any listed
company, while total foreign ownership of a firm will be limited to 20 percent.

The Saudi
market is by far the biggest in the Arab world and one of the last major bourses
globally to open up, so the reform is attracting huge foreign interest.

Fund managers
estimate the market could draw $50 billion or more of new foreign money in
coming years if it is included in global indexes. Analysts believe it could
enter the widely watched MSCI emerging market index as soon as mid-2017, if it
satisfies requirements for liquidity and transparency.

But by placing
a range of restrictions on the operations of foreign investors, the Capital
Market Authority (CMA) made clear on Monday that it did not want a sudden,
destabilising rush of money into the bourse.

The rules were
identical in major respects to a set of draft regulations which the CMA
published last August, and which were privately criticised by some fund
managers then as overly restrictive.

For example,
the 10 percent cap on foreign ownership of the market's value may be hard to
enforce in real time, creating uncertainty for investors. Foreign ownership in
some other big emerging markets is much higher, at around 20 percent or more.

Foreign
institutions, including central banks, will be required to apply for permission
to invest. They must have at least $5 billion of assets under management,
although the CMA has the discretion to reduce this to $3 billion when it
wishes.

Saudi income
tax laws will apply to foreign investors and a 5 percent tax will be levied on
dividends paid to them by listed companies.

Direct
purchases of Saudi stocks by foreigners can start on June 15, the CMA has said.
At present, they are limited to indirect investment through swaps and
exchange-traded funds, which can be inconvenient and expensive. Foreigners are
estimated to own no more than about 3 percent of the market.

Saudi Arabia is
not opening its market because it needs the money; its banks and state coffers
are flush with oil wealth. Instead, it wants to use the market to diversify its
economy beyond oil, expose firms to market discipline and create jobs.

The
market-opening rules are similar to those used by some Asian markets, including
China as it opened up over a decade ago. China used the rules to expand foreign
participation in its market in small stages.

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