19 November 2014
Practice Group(s):
Investment
Management, Hedge
Funds and
Alternative
Investments
Saudi CMA Draft Rules to Open Foreign Investment
in Listed Shares
Middle East Investment Management Alert
By Natalie Boyd
The Saudi Capital Market Authority (the CMA) has published for consultation its draft rules
for Qualified Foreign Financial Institutions - Investments in Listed Shares (the Draft Rules).
Despite the restrictive eligibility criteria imposed by the Draft Rules, their circulation marks a
significant move towards the long-awaited opening up of Saudi Arabia's capital markets to
foreign investment.
The Draft Rules introduce the concept of a qualified foreign investor (QFI), being a foreign
institutional investor authorised by the CMA to invest directly in shares traded on the Saudi
Stock Exchange, and introduce a registration regime whereby applicants seeking to become
QFIs must apply to the CMA (via a CMA authorised person) and satisfy certain eligibility
criteria.
A publication date has not yet been confirmed. However, the consultation process is
anticipated to be open until the end of 2014, with the Draft Rules being published in early
2015.
Eligibility Criteria:
In order to qualify as a QFI, an applicant must be a foreign legal entity which meets the
following criteria:
1. be a bank, brokerage/securities firm, fund manager or insurance company which is duly
licensed or otherwise subject to regulatory oversight by a regulatory body with standards
equivalent to those of the CMA; and
2. have assets under management of at least SAR 18.75bn (USD 5bn) (subject to
discretionary reduction to SAR 11.25bn (USD 3bn) by the CMA); and
3. have been engaged in securities/investment related activities for at least five years.
CMA Authorised Assessing Person:
The concept of a CMA authorised assessing person (an AAP) is central to the Draft Rules.
An AAP is an institution which is authorised by the CMA to review, process and submit to the
CMA the application by a foreign applicant to become a QFI.
A QFI may not invest in listed shares on the Saudi Stock Exhange on behalf of any of its
clients unless the QIF has been approved and registered by the CMA in accordance with the
Draft Rules.
Saudi CMA Draft Rules to Open Foreign Investment in Listed Shares
Assessment Process:
The QIF must notify the AAP of its intention to invest in listed shares on behalf of its clients
and provide the AAP with all information required to make its assessment. The Draft Rules
provide that the assessment should take no longer than five days.
The AAP will not approve the assessment unless the applicant agrees to enter into a
standard QIF agreement, the form of which has not yet been circulated.
The AAP's determination of an application must be submitted to the CMA within one day
thereafter and becomes final three days after submission, unless extended by the CMA.
CMA Review and Registration Process:
The CMA is required to process the review of the application, which will be deemed
approved if not dismissed by the CMA within the three day (or extended) period. If the CMA
approves the application, the CMA will register the applicant as a QFI, following which the
AAP must accept the QFI as a client in accordance with the Authorised Person Regulations
and execute the QFI agreement with the QFI.
Investment Limits:
The Draft Rules impose a number of investment limits on the QIF, including provisions that:
1. no single QFI may hold more than five per cent. of the shares of any traded company;
2. QFIs in aggregate may not hold more than 20 per cent. of the shares of any traded
company; and
3. foreign investors (QFIs, foreign persons investing through CMA Swap Agreements and
foreign residents in Saudi Arabia) may hold no more than 49 per cent. of the shares of
any traded company.
Ongoing requirements:
The Draft Rules impose a number of ongoing requirements on QFIs, including:
1. A QFI may not invest in any listed shares unless (i) it holds a client account with the AAP,
(ii) it holds an account with the CMA's Depositary Centre and (iii) satisfies any other
conditions imposed by the CMA.
2. QFIs must comply at all times with the CMA and Saudi Stock Exchange laws and
regulations.
3. QFIs must at all times be engaged with an AAP and have a QFI agreement in place with
that AAP.
4. QFIs must meet certain disclosure and reporting requirements imposed by the Draft
Rules.
The AAP is also subject to strict requirements in order to ensure that its relationship with the
QFI does not breach any CMA laws, rules or regulations.
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Saudi CMA Draft Rules to Open Foreign Investment in Listed Shares
Tax implications:
There is currently no capital gains tax imposed on disposals of listed shares. It is not clear
yet as to whether this exemption will extend to QFIs. Independent tax advice should be taken
in this regard.
Authors:
Natalie Boyd
natalie.boyd@klgates.com
+971.4.427.2731
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