Nomu - providing growth opportunities to SMEs

Stock markets are sometimes seen as a barometer of a nation’s financial health. While the main Saudi stock exchange, the Tadawul, has been in the limelight as the Arab world’s largest stock exchange with current market capitalization at $713 billion, the 2017 launch of a parallel market, Nomu, has begun to make its mark.

Nomu, named after the Arabic word for growth, supports the development and sustainability of small and medium-sized enterprises (SMEs), with the aim of increasing the number of listed companies from this economically vital economic sector.

For too long, aspiring SMEs did not seem to have a clear path to progress to a listing on the main Tadawul exchange, and Nomu aims to set this right by enhancing liquidity and providing a platform for SMEs to transit to the main market as they grow and meet Saudi Arabia’s key Vision 2030 objectives.

According to the Kingdom’s Capital Market Authority (CMA), in order to list and offer in Nomu, an issuer must be a joint-stock company with a minimum capital of SR10 million ($2.6 million), compared with SR300 million for the main market; must float at least 20 percent of the issued share at the time of listing; and must have a minimum of two years of operational and financial performance. Like the main market-listed companies, Nomu listing requires annual audited financial statements and disclosures of significant essential information. However, no profitability track record is required. As such, unlike the Tadawul, this parallel market has less restrictive listing rules, thus giving a broader cross-section of Saudi companies the opportunity to have their shares publicly traded.

Nomu offers an opportunity for ambitious SMEs to address their expansion plans and capital-raising needs as well as enhance their market profile and increase brand equity.

Investment activities through Nomu are restricted to qualified investors, but they may invest through qualifying investment funds offered by licensed companies. The results have been encouraging. The Nomu index has risen from 3,200 in 2017 to around 24,500 in July 2021, with capitalization at around SR12.765 billion.

In a further boost to the Nomu-listed companies, the CMA agreed to a change in reporting frequency from a quarterly to a semi-annual basis, which has reduced the cost of compliance and lessened the burden on management, allowing SMEs to spend more time creating value by focusing on developing their core business.

The CMA and Tadawul also introduced several other technical and regulatory changes to enhance Nomu’s attractiveness, such as index capping, with Nomu-listed companies at 30 percent of their index weighting to ensure an accurate reflection of a company’s value of the parallel market.

Market volatility trading can be destabilizing for investors, especially if the volatility guard levels are set low. Nomu’s volatility guard level was raised to 20 percent compared to the main market’s 10 percent, and the trading threshold reduced from SR15,000 to SR2,500 to better capture the trading environment of the Nomu market, leading to a fundamental increase in price stability and confidence in companies’ valuation. There are currently 10 companies listed on this parallel market, with core businesses ranging from consumer staples to materials, industrial production and transportation. Some are well-known names such as SUMOU, Watani Iron and Steel, and Riyadh Cement Co. In the latest bid to join Nomu, Shatirah House Restaurant Co., the owner of the Burgerizzr restaurant chain, has now issued its prospectus for an initial public offering on the Nomu exchange, while the listing and trading of Canadian Medical Centre Co.’s shares on Nomu began on Aug. 2.

Since 2017, six Nomu-listed companies have been able to upgrade and migrate to the main Tadawul market, illustrating that a fast-track path for growth of SMEs to the main market exists. To be able to transit to the main market, a Nomu-listed company must comply with several requirements, including completing two years since listing on the parallel market, approval from the board of directors to transfer to the main market, and disclosure to the public before the start of the trading session after the issuance of approval.

The Saudi exchange is the first Gulf Cooperation Council exchange to allow direct listings of shares on the parallel market, with at least 50 public shareholders instead of at least 200 for the main market. Given the importance the SME sector has in the Vision 2030 programs, the Saudi government has been keen to assist SMEs to list on Tadawul and has provided a list of incentives for companies from multiple government entities to encourage them to take the first steps into the Nomu parallel market.

While the parallel market has provided a window of opportunity for the traditional Saudi SMEs to grow their businesses and brands, it has also given hope to the emerging class of youthful and tech-savvy entrepreneurs, especially for startups in new areas such as data security, artificial intelligence and clean energy.

• Dr. Mohammed Ramady is a former senior banker and professor of finance and economics at the King Fahd University of Petroleum and Minerals, Dhahran.