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Foreign investors to access Saudi stock market directly for first time

Euromoney learns that a China-style system could be implemented and test trades have been completed in preparation for foreign investors directly participating in the Saudi stock market

Saudi Arabia could implement a Chinese-style system to give access to Qualified Foreign Institutional Investors (QFIIs) by early 2012, in preparation for the country opening its stock market to direct investment from outside the Gulf for the first time, Euromoney has learnt.

Sources close to operations claim that banks and investment firms have conducted test trades in recent weeks for sales of publicly traded stock to investors based outside the Arab Gulf countries.

The local Capital Markets Authority has reportedly overseen the process, testing the functioning of the system at the local exchange (the Tadawul) and ensuring market participants understand the necessary checks.

Although the qualification criteria have not been finalized, Euromoney understands limits could be similar to the Chinese system. In China, to qualify, foreign investors must be institutions in business for at least five years and with at least $5 billion under management. Saudi Arabia might now replicate these limits.

The regulator is also expected, as in China, to set limits to the holdings of QFIIs, both in terms of the proportion of stock held in single companies, and the minimum and maximum absolute amount of investment in the exchange as a whole. In addition in Saudi Arabia, existing rules prevent foreigners from owning local companies in fisheries, land transport, Mecca real estate, and other sectors. Listed firms focusing on these sectors will therefore remain off limits to foreigners.

It is hoped opening the market to foreigners will be an important step towards inclusion in global emerging-market indices, bringing in global insurance firms and pension funds to track these indices. In the longer term, it is hoped the QFIIs could lead to a market based more on economic fundamentals and professional equity research. In the absence of a large pension fund and insurance sector in Saudi Arabia, retail investors predominate on the exchange today.

Aside from the desired boost to the markets global prominence, one analyst says opening access could bring an initial surge in optimism among local investors.

“There has been sufficient preparation for the market to open,” says another source at a firm that has worked with the authorities on the scheme.

For the full story, check out the December issue of Euromoney.

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