Breaking the deadlock or reshaping the rules? Saudi capital market regulation “changes hands”, investors look forward to loosening foreign investment and revising IPO rules

The Zhitong Finance App notes that senior changes in Saudi Arabia's capital market regulators have rekindled the hopes of investors and bankers. The market expects Saudi Arabia to further promote market liberalization, including the relaxation of restrictions on foreign shareholding ratios — this is a measure that the market has been looking forward to for a long time, and is expected to attract billions of dollars in capital to the country's stock market.

At the beginning of this month, Mazen Al-Sudairi (Mazen Al-Sudairi), a former head of the research department of Rajhi Bank and an adviser to the cabinet secretariat, was appointed chairman of the Saudi Capital Markets Authority (CMA) to replace Mohammed ElKuwaiz (Mohammed ElKuwaiz), who had been at the helm for nearly a decade.

According to people familiar with the matter, Sudairi's accumulated capital market experience in some large Saudi banks and his close ties with the government have aroused investors' expectations for him, believing that he may push for further deregulation of the market.

Morgan Stanley strategist Matthew Nguyen (Matthew Nguyen) said the change of supervisory authority brought potential reform of foreign shareholding rules back into focus. Nguyen pointed out in an August 17 report that Saudi Arabia currently has a 49% limit on foreign shareholding, making it the last major market in the Gulf region to retain such restrictions.

According to Morgan Stanley estimates, easing this limit to 75% could bring about $4.3 billion in passive capital inflows to the Saudi stock market; if the restrictions were completely lifted, it could attract about $7.4 billion. However, Nguyen also added that the time window for implementing reforms this year is narrowing because any measures must take effect in late October before they can be included in Morgan Stanley Capital International (MSCI)'s November global equity index assessment.

The Saudi Stock Exchange is the largest exchange in the Gulf region. Releasing access to foreign investment will not only help Saudi Arabia attract more overseas capital, but also deepen market liquidity. This is also in line with Saudi Crown Prince Mohammed bin Salman's strategic vision of developing financial markets to support its ambitious economic diversification agenda and reduce the country's dependence on oil revenues.

After Saudi Arabia opened direct stock trading to all foreign investors in February of this year, market expectations for the relaxation of foreign shareholding rules rose for a while. However, since then, the momentum has stagnated, and the geographical conflict has put even more pressure on the market. Saudi Arabia was an extremely popular IPO listing market until the beginning of last year, but now the scale of stock issuance has slowed drastically.

Saudi Arabia's benchmark stock index is still up about 5% since this year. However, there were only two IPOs in the main board market this year, and the amount raised was less than $100 million. Meanwhile, a contractor's major listing plan was put on hold due to regional conflict. In fact, long before the conflict broke out, the Saudi Stock Exchange had already experienced a series of weak performance in its listing debut, and some companies even delayed their original distribution plans.

Sudairi also serves as an external member of the investment committee of Saudi Arabia's sovereign wealth fund, the $1 trillion public investment fund (PIF). PIF plans to go public with more companies in its new five-year strategy. Sudairi will enjoy ministerial treatment, and his appointment was announced during a cabinet reshuffle earlier this month.

In addition to restrictions on foreign shareholding, bankers and investors also hope that the new leadership can push forward broader reforms to unleash the vitality of the listed market while increasing market liquidity and trading volume.

Earlier this year, bankers called on the CMA to review the relevant guidance — which encouraged Saudi issuers to allocate up to 30% of their IPOs to retail investors. The bank pointed out that at a time when retail demand is weak, there are policy risks in allocating too many shares to individuals. They also expressed similar concerns about guidance encouraging issuers to allocate significant IPO shares to mutual funds.

People familiar with the matter revealed that investment bankers are concerned about the large backlog of companies awaiting regulatory approval, and only a very small number of companies can obtain approval at the end of each quarter.

Executives in the financial sector are also frustrated by the six-month time window for listing after approval. This may force the company to forcibly push for listing in an unfavorable market environment; otherwise, they face the risk that the approval will fail and they will have to re-apply.

According to people familiar with the matter, the relationship between capital market institutions and regulators is also being tested because the CMA is investigating some banks. The reason is that some companies' initial results after listing did not meet profit expectations, which led to poor IPO performance.