Saudi Arabia opens Stock Market to Foreign Investors May 2015
2 Saudi Arabia opens Stock Market to Foreign Investors May 2015 Following the restriction on direct ownership of securities listed on the Saudi Arabian Stock Exchange (Tadawul) by non-resident foreign (non-gcc) investors, the Saudi Arabian Capital Markets Authority (the CMA) published on 4 May 2015 its Rules for Qualified Financial Institutions Investment in Listed Shares (the QFI Rules) allowing certain foreign investors registered with the CMA to directly invest in shares listed on Tadawul in accordance with the QFI Rules (the QFI). KEY DATES June 1, 2015: QFI Rules go into effect. June 15, 2015: QFIs to commence trading in shares listed on Tadawul. Khoshaim & Associates in cooperation with Allen & Overy 2015
3 Anything noteworthy? WHY ALLOW DIRECT INVESTMENT? The decision to allow direct investment in shares listed on Tadawul came after a comprehensive study of the Saudi Arabian stock market and the means of its development. In this regard, the CMA aims to achieve the following objectives, both in the short term and long term: 1. market stability and reduced price volatility by increasing institutional investment. 2. enhancing professionalism and transferring knowledge and expertise to market participants, including local investors and financial institutions. 3. enhancing market efficiency and performance by improving the levels of transparency, financial information disclosure and governance practices. 4. strengthening the position of the Saudi Arabian capital market to become a leading market and raising its rating to be classified as an emerging market under global indices, specifically Morgan Stanley Capital International (MSCI). 5. enhancing research, studies and evaluation conducted on markets generally and listed companies particularly, with a view of reaching fair assessments and accurate information. www.allenovery.com www.khoshaim.com
4 Saudi Arabia opens Stock Market to Foreign Investors May 2015 DIRECT V. INDIRECT INVESTMENT IN LISTED SHARES Swap Arrangements Prior to the QFI Rules, non-resident foreign (non-gcc) investors could only invest in Saudi Arabian listed shares through SWAP arrangements. Under those arrangements, the non-resident foreign investor s investment was indirect as it was only contractual: the non-resident foreign investor would enter into a contract with a local Authorised Person who would purchase the shares in the latter s name and only pass along the economic benefits (dividends and capital gains) to the non-resident foreign investor, without any associated voting rights or rights to board representation. QFI Arrangements In contrast to SWAP arrangements, QFI arrangements will allow QFIs and QFI Clients to have legal ownership of listed shares, and to have such shares registered in their respective names. Given this, QFIs and QFI Clients will effectively become shareholders in the relevant listed company and may accordingly exercise all rights conferred on the shareholders of such listed company in accordance with the Saudi Arabian Companies Regulations and other applicable regulations, including without limitation: voting rights, trading rights, the right to nominate and appoint representatives for the board of directors. Khoshaim & Associates in cooperation with Allen & Overy 2015
5 ELIGIBILITY CRITERIA The permission to invest in Saudi Arabian listed shares is not an automatic one. Unless a specific waiver applies, foreign investors must first meet the eligibility criteria set out below (the QFI Eligibility Criteria) before registering as QFIs. Foreign investors holding shares for their own accounts must meet all the following conditions: 1. Type of Institution 2. Size of Institution 3. Investment Experience be either: (i) banks; (ii) brokerage and security firms; (iii) fund managers; or (iv) insurance companies, all licensed or otherwise subject to regulatory and monitoring standards equivalent to those of the CMA or acceptable to it have Assets Under Management worth at least USD 5 Billion, which value may be reduced by the CMA to USD 3 Billion at the CMA s discretion have been engaged in investment and securities related activities, either directly or through an affiliate, for a minimum of 5 years www.allenovery.com www.khoshaim.com
6 Saudi Arabia opens Stock Market to Foreign Investors May 2015 REGISTRATION PROCESS A foreign investor meeting the QFI Eligibility Criteria can submit an application to register itself as a QFI or its client as a QFI Client by following the process described below, which is estimated to take up to 11 days from the date of the AAP s receipt of all required documents and information. 1 2 3 4 5 6 7 8 Submission of Application: a QFI application or QFI Client application, as the case may be, must be submitted (in the form prescribed by the CMA) to an AAP. Determination by the AAP: unless otherwise agreed, the AAP must provide the CMA with a determination on the application within 5 days of receiving all required documents and information. QFI Assessment Agreement: The AAP must agree a draft form QFI Assessment Agreement with the QFI applicant in accordance with the QFI Rules. Notice of Determination to the CMA: the AAP is required to send the CMA a written confirmation of either its acceptance determination or rejection determination of an application, together with all supporting documents required under the QFI Rules within one day of reaching such determination. Review by the CMA: the CMA must notify the AAP immediately of its receipt of the application and all supporting documents (the Notification). A rejection determination: becomes final upon its receipt by the CMA. On the other hand, an acceptance determination: (i) will be reviewed by the CMA and either accepted or rejected within 5 days of sending the Notification or such additional time period as may be notified by the CMA in writing; however (ii) if 5 days lapse from the date of the Notification without CMA rejection, the acceptance determination will become final. Registration: as soon as the acceptance determination becomes final or is approved by the CMA, the CMA will register the QFI applicant as a QFI and must immediately notify the AAP in writing of the same. Notice of registration: in case of registration, the AAP must (i) notify the QFI of its registration within 1 day of receiving the CMA s notice of registration; (ii) accept the QFI as a client in accordance with the APR; and (iii) sign the QFI Assessment Agreement with the QFI and submit an executed copy to the CMA. Notice of rejection: in case of rejection, the AAP must notify the QFI applicant in writing when the rejection determination becomes final. Khoshaim & Associates in cooperation with Allen & Overy 2015
7 COMMENCEMENT OF TRADING Before trading in shares listed on Tadawul can commence, each of the QFI and the QFI Client must satisfy the conditions described below. 1. Client Account: hold a client account with a local bank in the Kingdom of Saudi Arabia in the name of an Authorised Person in compliance with the Clients Money Rules of the CMA. 2. Depositary Centre Account: hold an account with the Tadawul Depository System or the Saudi Arabian Securities Depositary Center, once established. 3. Other: satisfy any other conditions that may be imposed by the CMA. www.allenovery.com www.khoshaim.com
8 Saudi Arabia opens Stock Market to Foreign Investors May 2015 QFI CLIENTS In addition to investing for their own accounts, QFIs will be able to invest in listed shares on behalf of clients who, in turn, must meet the eligibility criteria described below (the QFI Client). The QFI Client must: 1. be an Investment Fund established in a jurisdiction applying regulatory and monitoring standards equivalent to those of the CMA or acceptable to it; or 2. a financial institution that meets the QFI Eligibility Criteria but is not registered as a QFI or a client of another QFI. In addition, to become approved as a QFI Client, the QFI Client s funds must be managed by the QFI or QFI applicant when invested in listed shares. Khoshaim & Associates in cooperation with Allen & Overy 2015
9 INVESTMENT LIMITS The ability of a QFI and QFI Client to invest in shares listed on Tadawul must not exceed to the following maximum limits: 5% of the listed shares of any single issuer: for shares held by either: (i) a QFI and its affiliates; or (ii) an approved QFI Client and its affiliates. 20% * of the listed shares of any single issuer: for the aggregate shares owned by all QFIs and approved QFI Clients. 49% * of the listed shares of any single issuer: for the aggregate shares owned by all categories of foreign investors, including interests under swaps. 10% * (by market value) of all shares listed on Tadawul: for the aggregate shares owned by all QFIs and approved QFI Clients, including any interests under swaps. other applicable legislative or corporate limitations. * the relevant statistics will be published on Tadawul s website. www.allenovery.com www.khoshaim.com
10 Saudi Arabia opens Stock Market to Foreign Investors May 2015 About Us We are a team of veteran Saudi and internationally qualified lawyers who advise on a wide range of practice areas, including debt and equity capital markets, local and cross-border M&A, corporate, projects, banking, Islamic finance transactions, litigation, and international arbitration. The Riyadh team is led by three partners: Zeyad Khoshaim, who is a Saudi Arabian and New York qualified lawyer; Julian Johansen, a UK qualified lawyer who is fully fluent in Arabic; and Johannes Bruski, a corporate lawyer with over twenty years of experience. Together, the team has an unparalleled understanding of the Saudi Arabian commercial landscape, legal framework, and cultural issues. The team routinely handles all aspects of sophisticated transactions and works seamlessly with Allen & Overy s offices around the world, providing first class, efficient, and integrated legal services. Khoshaim & Associates in cooperation with Allen & Overy 2015
11 Ranking CHAMBERS BAND 1 LEGAL 500 TIER 1 IFLR 1000 TIER 1 Banking & Finance Capital Markets Corporate/Commercial Corporate and M&A Banking and Finance Capital Markets Projects and Energy Capital Markets Project Finance Banking M&A www.allenovery.com www.khoshaim.com
12 Saudi Arabia opens Stock Market to Foreign Investors May 2015 Glossary QFI Assessment Agreement An agreement between the Assessing Authorized Person and the QFI, meeting the minimum requirements set out in the QFI Rules (the QFI Assessment Agreement). Assessing Authorised Person A person authorised by the CMA to conduct securities business (the Authorised Person) in accordance with the Authorised Persons Regulations (the APR) who has agreed with a QFI applicant to assess its application for registration as a QFI, or an Authorised Person who has executed a QFI Assessment Agreement with a QFI (the AAP). Investment Fund For the purpose of the QFI Rules, an investment fund (the Investment Fund) includes any of the following legal persons: a. a sovereign wealth fund fully owned by a government entity, whether directly or indirectly. b. a pension fund with the main objective of collecting fees or periodic distributions from participants or for their interests, for the purpose of compensating them according to a specific mechanism. c. a collective investment scheme aimed at providing its investors with an opportunity to collectively participate in the profits of the scheme. Assets Under Management For the purpose of the QFI Rules, assets under management (the Assets Under Management) include: a. assets held by the QFI applicant or its group for investment purposes; and b. assets managed by the QFI applicant or its group for the account of another person or persons. Khoshaim & Associates in cooperation with Allen & Overy 2015
13 Interested in learning more? KEY CONTACTS Zeyad Khoshaim Partner zeyad.khoshaim@allenovery.com Johannes Bruski Partner johannes.bruski@allenovery.com Julian Johansen Partner julian.johansen@allenovery.com Mashael Alshebaiky Associate mashael.alshebaiky@allenovery.com www.allenovery.com www.khoshaim.com
GLOBAL PRESENCE Khoshaim & Associates has a cooperative relationship with Allen & Overy. Khoshaim & Associates is the law office of Zeyad S. Khoshaim, a sole proprietorship licensed to practice in Saudi Arabia under Ministry of Justice license number (29/90), registered with the Chamber of Commerce under registration number (253904), and operates from the 17th Floor, Tower B, Olaya Towers, Olaya District, Post Office Box 230667, Riyadh, Post Code 11321, Kingdom of Saudi Arabia. Allen & Overy is an international legal practice with approximately 5,000 people, including some 527 partners, working in 44 offices worldwide. Allen & Overy LLP or an affiliated undertaking or cooperative firm has an offi ce in each of: Abu Dhabi Amsterdam Antwerp Bangkok Barcelona Beijing Bucharest (associated office) Budapest Casablanca Doha Dubai Düsseldorf Ho Chi Minh City Hong Kong Istanbul Jakarta (associated office) Johannesburg London Moscow Munich New York Paris Perth Prague Seoul Shanghai Singapore Sydney Tokyo Warsaw Belfast Bratislava Brussels Frankfurt Hamburg Hanoi Luxembourg Madrid Milan Riyadh (cooperative office) Rome São Paulo Washington, D.C. Yangon Allen & Overy means Allen & Overy LLP and/or its affiliated undertakings. The term partner is used to refer to a partner of Khoshaim & Associates or a member of Allen & Overy or an employee or consultant with equivalent standing and qualifications or an individual with equivalent status in one of Allen & Overy LLP s affiliated undertakings. Unless otherwise stated, all information contained in this document shall not be reproduced, in whole or in part, without the specific written permission of Khoshaim & Associates. Khoshaim & Associates makes no warranty, representation or undertaking whether expressed or implied, nor does it assume any legal liability, whether direct or indirect, or responsibility for the accuracy, completeness, or usefulness of any information that contain in the document. It is not the intention of the publication to be used or deemed as recommendation, option or advice (including legal advice) for any action(s) that may take place in future. Doha: Allen & Overy office opened in 2010 www.allenovery.com www.khoshaim.com CA1505010