RIYADH, 30 May 2005 — The Saudi Arabian Capital Markets Law (CML) has the potential to bring radical changes to the Kingdom’s banking and financial markets. The chief regulatory body of the CML, the Capital Market Authority (CMA), headed by a 5-member board is charged with:
• Regulating and developing the capital market.
• Protecting investors from unfair practices (e.g., insider trading, market manipulation.
• Regulating and monitoring securities issuance and trading.
Last year, the CMA issued implementing regulations related to: Issuing of securities, (ii) Market conduct, and (iii) Listing requirements for an initial public offering (IPO).
The CMA has just announced the licensing of non-bank financial intermediaries for the first time, the details of which have not yet been published in English.
Under the new regulations, for a company to issue shares for the first time to the public (called an IPO): (1) The issuer must be a Saudi joint stock company; (2) It must appoint a CMA-approved financial adviser to prepare an offering prospectus; (3) The issue must be fully underwritten by a CMA-approved underwriter; (4) The issuer must have been an independent business for at least three years under substantially the same management; (5) It must have published audited accounts covering at least three financial years using officially approved accounting standards; (6) Senior management must have appropriate expertise and experience, and (7) The company must have sufficient working capital for 12 months.
In addition, (8) at least 30 percent of the total (of each class of) shares must be sold and (9) the total IPO amount should be at least SR100 million.
The requirements are not too onerous and introduce much-needed transparency into the process. Moreover, the CMA has discretion to waive requirements No. 4, 5 and 9. The three-year waiting period (unchanged from before) is also not too difficult for most existing companies to meet while it keeps out untested companies. It is notable that there is no profitability test, i.e., the issuer does not have to show profit for a prespecified period before listing. New firms are seldom profitable in the first few years. Moreover startups need external financing, as they would rarely get bank loans. In fact, financing startups is one of the most important roles of a well-designed capital market. It is also notable that the CMA does not set IPO price, the company sets it.
The new regulations also help alleviate the original owners’ fear of losing management control because it allows them to split shares into different classes and float no more than 30 percent of each class. However, further strengthening of this aspect will come when rules governing mergers and acquisitions are developed to calm original owners’ fears that they can be booted out by hostile takeovers.
One key market inhibiting rule that still remains is the minimum size requirement (SR100 million) for an IPO, although, the CMA has the discretion to waive this limitation. Thus a small firm does not have easy access to equity finance.
(Khan H. Zahid is chief economist and vice president at Riyad Bank. He is based in Riyadh.)
