Saudi CMA Draft Rules to Open Foreign Investment in Listed Shares

The Saudi Capital Market Authority (the CMA) has published for consultation its draft rules for Qualified Foreign Financial Institutions - Investments in Listed Shares (the Draft Rules).

Despite the restrictive eligibility criteria imposed by the Draft Rules, their circulation marks a significant move towards the long-awaited opening up of Saudi Arabia's capital markets to foreign investment.

The Draft Rules introduce the concept of a qualified foreign investor (QFI), being a foreign institutional investor authorised by the CMA to invest directly in shares traded on the Saudi Stock Exchange, and introduce a registration regime whereby applicants seeking to become QFIs must apply to the CMA (via a CMA authorised person) and satisfy certain eligibility criteria.

A publication date has not yet been confirmed. However, the consultation process is anticipated to be open until the end of 2014, with the Draft Rules being published in early 2015.

Eligibility Criteria:

In order to qualify as a QFI, an applicant must be a foreign legal entity which meets the following criteria:

1. be a bank, brokerage/securities firm, fund manager or insurance company which is duly licensed or otherwise subject to regulatory oversight by a regulatory body with standards equivalent to those of the CMA; and 
2. have assets under management of at least SAR 18.75bn (USD 5bn) (subject to discretionary reduction to SAR 11.25bn (USD 3bn) by the CMA); and 
3. have been engaged in securities/investment related activities for at least five years.

CMA Authorised Assessing Person:

The concept of a CMA authorised assessing person (an AAP) is central to the Draft Rules.

An AAP is an institution which is authorised by the CMA to review, process and submit to the CMA the application by a foreign applicant to become a QFI.

A QFI may not invest in listed shares on the Saudi Stock Exhange on behalf of any of its clients unless the QIF has been approved and registered by the CMA in accordance with the Draft Rules.

Assessment Process:

The QIF must notify the AAP of its intention to invest in listed shares on behalf of its clients and provide the AAP with all information required to make its assessment. The Draft Rules provide that the assessment should take no longer than five days. P>

The AAP will not approve the assessment unless the applicant agrees to enter into a standard QIF agreement, the form of which has not yet been circulated.

The AAP's determination of an application must be submitted to the CMA within one day thereafter and becomes final three days after submission, unless extended by the CMA. 

CMA Review and Registration Process:

The CMA is required to process the review of the application, which will be deemed approved if not dismissed by the CMA within the three day (or extended) period. If the CMA approves the application, the CMA will register the applicant as a QFI, following which the AAP must accept the QFI as a client in accordance with the Authorised Person Regulations and execute the QFI agreement with the QFI.

Investment Limits:

The Draft Rules impose a number of investment limits on the QIF, including provisions that:

1. no single QFI may hold more than five per cent. of the shares of any traded company;
2. QFIs in aggregate may not hold more than 20 per cent. of the shares of any traded company; and
3. foreign investors (QFIs, foreign persons investing through CMA Swap Agreements and foreign residents in Saudi Arabia) may hold no more than 49 per cent. of the shares of any traded company.

Ongoing requirements:

The Draft Rules impose a number of ongoing requirements on QFIs, including:

1. A QFI may not invest in any listed shares unless (i) it holds a client account with the AAP, (ii) it holds an account with the CMA's Depositary Centre and (iii) satisfies any other conditions imposed by the CMA.
2. QFIs must comply at all times with the CMA and Saudi Stock Exchange laws and regulations.
3. QFIs must at all times be engaged with an AAP and have a QFI agreement in place with that AAP.
4. QFIs must meet certain disclosure and reporting requirements imposed by the Draft Rules.

The AAP is also subject to strict requirements in order to ensure that its relationship with the QFI does not breach any CMA laws, rules or regulations.

Tax implications:

There is currently no capital gains tax imposed on disposals of listed shares. It is not clear yet as to whether this exemption will extend to QFIs. Independent tax advice should be taken in this regard.