The right direction: Changes to Saudi Arabian stock market regulations are welcome, but more needs to be done to enforce existing regulations, says investor advocacy group

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A Saudi trader observes the stock market on monitors at Falcom stock exchange agency in Riyadh, Saudi Arabia February 7, 2018.

A Saudi trader observes the stock market on monitors at Falcom stock exchange agency in Riyadh, Saudi Arabia February 7, 2018.

REUTERS/Faisal Al Nasser

More regulations need to be put in place, and existing regulations need to be enforced, to attract more international investors to Saudi Arabian capital markets, according to an investor advocacy group.

The Saudi Arabian Capital Market Authority (CMA) made two separate announcements this week, urging companies to participate actively in investor relations, and also outlining amendments to the instructions for Real Estate Investment Traded Funds.

Commenting on the CMA’s announcement that it would be urging listed companies to ‘activate the investor relations function’, Shriram Subramanian managing director of InGovern Research Services, which carries out corporate governance advisory work in the Middle East, said: “Many other regulations need to be put in place, and enforced. More importantly, existing regulations need to be enforced. For example, not all companies ha(ve) published annual reports in the English language.”

The Capital Markets Authority (CMA) of Saudi Arabia made the announcement on Sunday on its official website, urging all listed companies on the kingdom’s stock market to ‘activate the investor relations function to enable the most effective communication methods between the company and existing and potential investors by providing them with understanding about the company's activities and strategic objectives’.

This will enable them to make investment decisions towards the company, along with promoting confidence in the company and its board of directors, enhance financial and non-financial disclosure of listed companies and enabling existing investors to exercise their rights related to communicating with the company and the board of directors, the announcement said.

Subramanian said the announcement was a positive move, but a lot still needs to be done to attract more investors into Saudi Arabia and the wider region.

“We notice that the oil price slump in the past few years has made all Middle East countries adopt many more and better capital markets regulations. However, it will be a while (un)til companies internalise these and actually see the spirit of these regulations,” he said, adding that the latest changes were unlikely to affect the ratings of Tadawul, Saudi Arabia’s stock market, by MCSI or FTSE Russell.

Tadawul was upgraded to MCSI emerging market from a standalone market, and the Saudi bourse is expected to be given secondary emerging market status by FTSE Russell in March 2019.

In a separate announcement, the CMA also stated that Real Estate Investment Traded Funds (REITs) will now require a minimum establishing fund of 500 million Saudi riyals ($133 million), up from 100 million riyals, under new amended instructions.

In addition, holders of more than 5 percent of the fund’s units at establishment are now prohibited from disposing of them within the first year of trading.

Raya Majdalani, research manager at Knight Frank, said: “By increasing the minimum required assets value for Saudi REITs from SAR 100 million to SAR 500 million, the CMA is reinforcing barriers to entry. This is a way to improve the quality of market participants which in turn would enhance investors’ protection.”

Responding to the decision to prohibit investors disposing of their units until after a year of trading, she said: “The investor base in Saudi REITs has been dominated by retail and family groups, while fund managers are now seeking more informed investors.

“This regulation is aimed at encouraging long term investment approach based on fundamentals rather than short term investment approach, which tend to be more speculative. This is likely to help in increasing the participation of institutional investors in the Saudi Arabian REIT market.”

After the initial approval of the use and listing of REITs in 2016, which Majdalani said was an important step in increasing the transparency in the Saudi real estate market, the the new rules are targeted at increased investor protection.

Further reading:
Saudi Capital Market Authority urges listed companies to activate the investor relations function
Saudi's REIT market grows in size and scale
Saudi Arabia leads IPO and REIT activity in Middle East in Q2
Number of foreign investors in Saudi stock market doubled last year, says chair
MSCI and Tadawul to launch joint Saudi Arabia tradeable index for domestic and international investors
Saudi Tadawul to attract $408bln investments

(Reporting by Imogen Lillywhite; Editing by Shane McGinley)
(shane.mcginley@refinitiv.com)

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© ZAWYA 2018


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