JEDDAH, 17 April 2007 — Dr. Abdul Rahman Al-Tuwaijri, chairman of Capital Market Authority (CMA), yesterday dismissed as impractical the proposal to establish a market-maker fund in order to stabilize the Kingdom’s bourse.
“The market-maker fund idea was floated and studied and I believe all parties are convinced that no country in the world has set up such a fund,” Al-Jazirah Arabic daily quoted the CMA chief as saying.
“The establishment of such a fund will create a lot of problems. It means that we are telling stock market dealers that the state will put money in this fund to guarantee their investment,” Tuwaijri said.
“It will also create another problem of exchanging shares on the basis of internal information. What are the guarantees to prevent leakage of information on the performance of the fund,” he asked.
Saudi Arabia’s consultative Shoura Council proposed the setting up a market-maker fund as the stock market tumbled from record high in February last year. It lost half its value in the following three months.
A market maker creates liquidity by simultaneously quoting two prices — one at which it will buy a security and another at which it will sell. A market-maker fund would have helped restore confidence by offering to buy stocks even when the market was crashing, Saudi officials argued at the time.
Tuwaijri said it was up to private institutions to play the role of a market-maker fund. “Up to now, we don’t have institutions in the Kingdom that can play this role but it will come with the development of the market,” he said.
The CMA chief also spoke about plans to introduce a system of book-building to allow investor demand to determine the price of shares sold in initial public offerings. He said the CMA would introduce electronic Tadawul system next month. Investor demand plays relatively little part in the pricing of initial public offerings (IPOs) in the Gulf Arab region. In Saudi Arabia, a company either sells shares at a nominal value of SR10 or at a higher price set with its advisers before the IPO opens.
“From now on, any company that is floating shares will be subject to this new system of book-building,” he told the Arabic daily. “It will no longer be up to the authority or the financial adviser to get involved, but up to the market and the people interested in buying,” he added. Jazirah did not give details of the book-building process, which usually involves the IPO’s lead manager tracking demand for shares after announcing the range of prices in which it expects to sell them. The actual price is determined at the end of the book-building period.
Saudi Kayan Petrochemical Co. secured approval from CMA on Wednesday to sell $1.8 billion of shares this month in what will be the second-largest Gulf Arab initial public offering. Kayan, 35 percent owned by state-controlled Saudi Basic Industries Corp., will offer 675 million shares at SR10 each between April 28 and May 7.
The pricing of Saudi IPOs came in for criticism after a crash halved the value of the largest Arab stock market between February and May last year, stinging many retail investors.
Investors had snapped up new share offerings during an equity boom in the previous two years, in some cases paying astronomical prices for what eventually became worthless stock.
Meanwhile, the Saudi stock market rose slightly yesterday. The Tadawul All-Share Index (TASI) gained 38.97 points to 7,499.35.
Out of 86 stocks traded, stocks of 56 companies edged higher while 24 companies were in negative territory.
The stock market turnover yesterday was SR9.73 billion.