JEDDAH, 3 February 2006 — The Saudi Capital Market Authority (CMA) enforced new measures last week to limit the participation of large companies in financial securities trading. The measures will also control the market activities of large shareholders. This is CMA’s second step in less than one month aimed at limiting unregulated and speculative activities in the market. CMA made history in January by imposing fines of SR170 million ($45 million) on three stock traders for violating the authority’s regulations and engaging in suspicious speculative activities.
Prior to CMA’s recent actions, Saudi Arabian Monetary Agency (SAMA) imposed regulatory measures on Saudi banks in response to negative developments in the Saudi financial market. The inflated prices of Saudi stocks, the high level of Saudi bank lending and stock market speculations were worrying enough to evoke a response from SAMA. SAMA required banks to cut the amount, and the maturity period, of personal loans in order to reduce the liquidity in the financial market and thus reduce stock market inflation and attendant risks.
“The new measures aim at preserving the rights of shareholders and sparing them possible losses since listed firms have been speculating in other companies stocks looking for capital gain,” said Abdul Aziz Alzoom, the CMA spokesman. Alzoom explained that when companies engage in trading securities of other companies, they expose their shareholders to the risk of losing capital investments.
“Instead of relying on other activities to generate profits, these measures should prevent listed firms from moving away from their basic activities, and this will generate true and solid value for shareholders,” Alzoom added. Luckily with the three-month period, which CMA has put into force, companies with risky securities trading would have enough time to reorganize their trading and withdraw from such activities.
CMA’s new regulation aims to control large shareholders and business tycoons who are accused by many experts of manipulating the market for their own benefits. CMA made some changes in its listing regulations in article 30, which deals with the notification related to substantial shareholdings. CMA is prohibiting shareholders who own 10 percent or more of voting shares or convertible debt instruments from trading their shares without CMA approval. CMA also made changes to article 25, which deals with the obligation of listed entities to disclose major developments in their activities. CMA is focusing on activities that might affect the trading volume and the prices of stocks such as obtaining new loans.
Henry Azzam, CEO of Dubai International Financial Exchange (DIFX) and also of Amwal Invest, was among the firsts to suggest tighter monetary policies to combat negative developments in Gulf and Arab stock markets. He pointed out that limiting speculation in the stock markets requires central banks to raise interest rates more than current rates and to increase banks’ reserve requirements ratio. Azzam, however, acknowledged that raising interest rates and using other monetary tools do not always contribute to ending speculation in Gulf markets.