New Foreign Investment Regulations in Saudi Arabia

The Capital Markets Authority (CMA) of Saudi Arabia has unveiled updated regulations concerning foreign investments in publicly traded securities. These new guidelines aim to clarify ownership limits and define who is eligible to invest. This initiative is part of a larger plan to reform and open up capital markets in the kingdom while ensuring adequate oversight and security.

Ownership Restrictions and Exemptions for Strategic Investors

The recently approved regulations specify that total foreign ownership in listed Saudi companies, including convertible bonds, is capped at 49%. This limit applies to direct holdings and products that might be converted in the future. However, foreign strategic investors, who are crucial for long-term investment, are exempt from this overall limit, although they must hold their shares for at least two years without the option to sell during that period. This rule is designed to promote stable investment and deter speculative actions.

Non-resident investors, on the other hand, cannot own more than 10% of a company’s shares. Debt-to-equity calculations are only permitted if the investor falls under one of the newly defined categories or engages in swap agreements with a licensed financial institution.

Categories of Eligible Non-Resident Foreign Investors

The CMA has classified eligible non-resident foreign investors into six specific categories:

1. Qualified Foreign Investors (QFIs): Institutional investors with assets of at least SAR 1.87 billion who meet CMA qualifications.
2. Foreign Strategic Investors: Entities aiming to invest in long-term stocks under the two-year holding requirement.
3. Ultimate Beneficiaries of SWAP agreements: Individuals or firms that profit from shares held through swap arrangements with authorized agencies.
4. Licensed Asset Manager Clients: Investors whose portfolios are managed solely by CMA-authorized institutions.
5. Residents of GCC Countries: Individuals living in Gulf Cooperation Council countries, regardless of nationality.
6. Former Residents of Saudi Arabia or GCC: Individuals who previously lived in Saudi Arabia or other GCC countries and open investment accounts during their residency.

This framework is designed to facilitate non-resident foreign participation in Saudi Arabia’s market, allowing only those with qualifications or regional ties to invest.

Regulatory Obligations of Financial Institutions

The new rules impose significant compliance requirements on financial market institutions, especially those facilitating swap agreements. The CMA has specified ten critical terms for these agreements, including:

• Ensuring complete separation of client funds to prevent misuse.
• Full oversight of all transactions during swaps.
• Voting rights are retained solely by the financial institutions involved.
• Strict adherence to Anti-Money Laundering (AML) regulations.

Furthermore, institutions must regularly update client information, reviewing it at least every five years. Clients will be notified prior to their account details expiring, and if they fail to update, their investment accounts may be frozen until compliance is met. The CMA has also outlined procedures for managing sensitive situations, like investor deaths, ensuring orderly transitions of assets to heirs.

Broader Reforms in the Capital Market

This initiative goes hand in hand with a series of comprehensive reforms in Saudi Arabia’s capital markets. Several related programs are currently in progress:

• Revising fund regulations to enable more fluid foreign investment and encourage fintech participation while bolstering risk management.
• Enhancing access for GCC retail investors to major markets.
• Amending the NOMU parallel market regulations to boost investor participation.
• Launching Saudi Arabia’s Deposit Receipts (SDRs) for regional trading of foreign stocks.
• Investigation into establishing dedicated mortgage-backed securities platforms to diversify investment options and solidify financial markets.

Together, these reforms represent a significant move towards increased openness and regulated access within Saudi Arabia’s capital markets, aligning with the kingdom’s broader economic transformation objectives.