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Saudi Arabia opens Stock Market to Foreign Investors May 2015
Saudi Arabia opens Stock Market to Foreign Investors
May 2015
© Zeyad S. Khoshaim Law Firm in Association with Allen & Overy 2015
Saudi Arabia opens Stock Market to Foreign Investors | May 20152
Following the restriction on direct ownership of securities listed on the Saudi Arabian Stock Exchange (Tadawul) by non-resident foreign (non-GCC) investors, the Saudi Arabian Capital Markets Authority (the CMA) published on 4 May 2015 its Rules for Qualified Financial Institutions Investment in Listed Shares (the QFI Rules) allowing certain foreign investors registered with the CMA to directly invest in shares listed on Tadawul in accordance with the QFI Rules (the QFI).
– June 1, 2015: QFI Rules go into effect.– June 15, 2015: QFIs to commence trading in shares
listed on Tadawul.
KEY DATES
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Anything noteworthy?
WHY ALLOW DIRECT INVESTMENT?
The decision to allow direct investment in shares listed on Tadawul came after a comprehensive study of the Saudi Arabian stock market and the means of its development. In this regard, the CMA aims to achieve the following objectives, both in the short term and long term:
1. market stability and reduced price volatility by increasing institutional investment.
2. enhancing professionalism and transferring knowledge and expertise to market participants, including local investors and financial institutions.
3. �enhancing�market�efficiency�and�performance by improving the levels of transparency, financial information disclosure and governance practices.
4. strengthening the position of the Saudi Arabian capital market to become a leading market and raising its rating to be classified as an emerging market under global indices, specifically Morgan Stanley Capital International (MSCI).
5. enhancing research, studies and evaluation conducted on markets generally and listed companies particularly, with a view of reaching fair assessments and accurate information.
© Zeyad S. Khoshaim Law Firm in Association with Allen & Overy 2015
Saudi Arabia opens Stock Market to Foreign Investors | May 20154
DIRECT V. INDIRECT INVESTMENT IN LISTED SHARES
Swap Arrangements Prior to the QFI Rules, non-resident foreign (non-GCC) investors could only invest in Saudi Arabian listed shares through SWAP arrangements. Under those arrangements, the non-resident foreign investor’s investment was indirect as it was only contractual: the non-resident foreign investor would enter into a contract with a local Authorised Person who would purchase the shares in the latter’s name and only pass along the economic benefits (dividends and capital gains) to the non-resident foreign investor, without any associated voting rights or rights to board representation.
QFI Arrangements In contrast to SWAP arrangements, QFI arrangements will allow QFIs and QFI Clients to have legal ownership of listed shares, and to have such shares registered in their respective names. Given this, QFIs and QFI Clients will effectively become shareholders in the relevant listed company and may accordingly exercise all rights conferred on the shareholders of such listed company in accordance with the Saudi Arabian Companies Regulations and other applicable regulations, including without limitation: voting rights, trading rights, the right to nominate and appoint representatives for the board of directors.
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ELIGIBILITY CRITERIA
The permission to invest in Saudi Arabian listed shares is not an automatic one. Unless a specific waiver applies, foreign investors must first meet the eligibility criteria set out below (the QFI Eligibility Criteria) before registering as QFIs.
Foreign investors holding shares for their own accounts must meet all the following conditions:
be either: (i) banks; (ii) brokerage and security firms; (iii) fund managers; or (iv) insurance companies, all licensed or otherwise subject to regulatory and monitoring standards equivalent to those of the CMA or acceptable to it
1. Type of Institution 2. Size of Institution 3. Investment Experience
have Assets Under Management worth at least USD 5 Billion, which value may be reduced by the CMA to USD 3 Billion at the CMA’s discretion
have been engaged in investment and securities related activities, either directly or through an affiliate, for a minimum of 5 years
© Zeyad S. Khoshaim Law Firm in Association with Allen & Overy 2015
Saudi Arabia opens Stock Market to Foreign Investors | May 20156
REGISTRATION PROCESS
A foreign investor meeting the QFI Eligibility Criteria can submit an application to register itself as a QFI or its client as a QFI Client by following the process described below, which is estimated to take up to 11 days from the date of the AAP’s receipt of all required documents and information.
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Submission of Application: a QFI application or QFI Client application, as the case may be, must be submitted (in the form prescribed by the CMA) to an AAP.
Determination by the AAP: unless otherwise agreed, the AAP must provide the CMA with a determination on the application within 5 days of receiving all required documents and information.
QFI Assessment Agreement: The AAP must agree a draft form QFI Assessment Agreement with the QFI applicant in accordance with the QFI Rules.
Notice of Determination to the CMA: the AAP is required to send the CMA a written confirmation of either its acceptance determination or rejection determination of an application, together with all supporting documents required under the QFI Rules within one day of reaching such determination.
Review by the CMA: the CMA must notify the AAP immediately of its receipt of the application and all supporting documents (the Notification). A rejection determination: becomes final upon its receipt by the CMA. On the other hand, an acceptance determination: (i) will be reviewed by the
CMA and either accepted or rejected within 5 days of sending the Notification or such additional time period as may be notified by the CMA in writing; however (ii) if 5 days lapse from the date of the Notification without CMA rejection, the acceptance determination will become final.
Registration: as soon as the acceptance determination becomes final or is approved by the CMA, the CMA will register the QFI applicant as a QFI and must immediately notify the AAP in writing of the same.
Notice of registration: in case of registration, the AAP must (i) notify the QFI of its registration within 1 day of receiving the CMA’s notice of registration; (ii) accept the QFI as a client in accordance with the APR; and (iii) sign the QFI Assessment Agreement with the QFI and submit an executed copy to the CMA.
Notice of rejection: in case of rejection, the AAP must notify the QFI applicant in writing when the rejection determination becomes final.
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COMMENCEMENT OF TRADING
Before trading in shares listed on Tadawul can commence, each of the QFI and the QFI Client must satisfy the conditions described below.
1. Client Account: hold a “client account” with a local bank in the Kingdom of Saudi Arabia in the name of an Authorised Person in compliance with the Clients Money Rules of the CMA.
2. Depositary Centre Account: hold an account with the Tadawul Depository System or the Saudi Arabian Securities Depositary Center, once established.
3. Other: satisfy any other conditions that may be imposed by the CMA.
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Saudi Arabia opens Stock Market to Foreign Investors | May 20158
QFI CLIENTS
In addition to investing for their own accounts, QFIs will be able to invest in listed shares on behalf of clients who, in turn, must meet the eligibility criteria described below (the QFI Client).
The QFI Client must:
1. be an Investment Fund established in a jurisdiction applying regulatory and monitoring standards equivalent to those of the CMA or acceptable to it; or
2. a financial institution that meets the QFI Eligibility Criteria but is not registered as a QFI or a client of another QFI.
In addition, to become approved as a QFI Client, the QFI Client’s funds must be managed by the QFI or QFI applicant when invested in listed shares.
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INVESTMENT LIMITS
The ability of a QFI and QFI Client to invest in shares listed on Tadawul must not exceed to the following maximum limits:
5% of the listed shares of any single issuer: for shares held by either: (i) a QFI and its affiliates; or (ii) an approved QFI Client and its affiliates.
20% * of the listed shares of any single issuer: for the aggregate shares owned by all QFIs and approved QFI Clients.
10% * (by market value) of all shares listed on Tadawul: for the aggregate shares owned by all QFIs and approved QFI Clients, including any interests under swaps.
other applicable legislative or corporate limitations.
* the relevant statistics will be published on Tadawul’s website.
49% * of the listed shares of any single issuer: for the aggregate shares owned by all categories of foreign investors, including interests under swaps.
© Zeyad S. Khoshaim Law Firm in Association with Allen & Overy 2015
Saudi Arabia opens Stock Market to Foreign Investors | May 201510
We are a team of veteran Saudi and internationally qualified lawyers who advise on a wide range of practice areas, including debt and equity capital markets, local and cross-border M&A, corporate, projects, banking, Islamic finance transactions, litigation, and international arbitration.
About Us
The Riyadh team is led by three partners: Zeyad Khoshaim, who is a Saudi Arabian and New York qualified lawyer; Julian Johansen, a UK qualified lawyer who is fully fluent in Arabic; and Johannes Bruski, a corporate lawyer with over twenty years of experience. Together, the team has an unparalleled understanding of the Saudi Arabian commercial landscape, legal framework, and cultural issues. The team routinely handles all aspects of sophisticated transactions and works seamlessly with Allen & Overy’s offices around the world, providing first class, efficient, and integrated legal services.
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Glossary
QFI Assessment Agreement
An agreement between the Assessing Authorized Person and the QFI, meeting the minimum requirements set out in the QFI Rules (the QFI Assessment Agreement).
Assessing Authorised Person
A person authorised by the CMA to conduct securities business (the Authorised Person) in accordance with the Authorised Persons Regulations (the APR) who has agreed with a QFI applicant to assess its application for registration as a QFI, or an Authorised Person who has executed a QFI Assessment Agreement with a QFI (the AAP).
Investment Fund
For the purpose of the QFI Rules, an investment fund (the Investment Fund) includes any of the following legal persons:
a. a sovereign wealth fund fully owned by a government entity, whether directly or indirectly.
b. a pension fund with the main objective of collecting fees or periodic distributions from participants or for their interests, for the purpose of compensating them according to a specific mechanism.
c. a collective investment scheme aimed at providing its investors with an opportunity to collectively participate in the profits of the scheme.
Assets Under Management
For the purpose of the QFI Rules, assets under management (the Assets Under Management) include:
a. assets held by the QFI applicant or its group for investment purposes; and
b. assets managed by the QFI applicant or its group for the account of another person or persons.
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Interested in learning more?
KEY CONTACTS
Zeyad Khoshaim [email protected]
Johannes Bruski [email protected]
Julian Johansen [email protected]
Mashael Alshebaiky [email protected]
Doha: Allen & Overy office opened in 2010
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or consultant with equivalent standing and qualifications or an individual with equivalent status in one of Allen & Overy’s affiliated undertakings.
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Zeyad S. Khoshaim Law Firm is the Law Office of Zeyad Khoshaim, a sole proprietorship licensed to practice law in Saudi Arabia.
Allen & Overy means Allen & Overy and/or its affiliated undertakings. The term partner is used to refer to a member of Allen & Overy or an employee
or consultant with equivalent standing and qualifications or an individual with equivalent status in one of Allen & Overy’s affiliated undertakings.
GLOBAL PRESENCE
Allen & Overy is an international legal practice with approximately 5,000 people, including some 525 partners, working in 46 offi ces worldwide. Allen & Overy or an affi liated undertaking has an offi ce in each of:
Abu DhabiAmsterdamAntwerpAthens (representative offi ce)
BangkokBarcelonaBeijingBelfastBratislavaBrusselsBucharest (associated offi ce)
Budapest
CasablancaDohaDubaiDüsseldorfFrankfurtHamburgHanoiHo Chi Minh CityHong KongIstanbulJakarta (associated offi ce)
Johannesburg
LondonLuxembourgMadridMannheimMilanMoscowMunich New YorkParisPerthPragueRiyadh (associated offi ce)
RomeSão PauloShanghaiSingaporeSydneyTokyoTorontoWarsawWashington, D.C.Yangon
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