Saudi Capital Market Authority intensifies regulatory activities

Friday 17/04/2015
Saudi investors monitor stocks at the exchange market department of the National Commercial Bank (NCB) in Riyadh

London - Saudi Arabia’s market regu­lator is pursuing an aggres­sive transparency policy to prepare the kingdom’s stock exchange to open up to foreign investment.
The kingdom’s Capital Market Authority (CMA) announced last year that foreign investors would be permitted to invest in compa­nies listed on the stock exchange, Tadawul, in the first half of 2015. But an accounting scandal at tel­ecommunications firm Mobily has led the regulator to increase pres­sure on corporate managers to pur­sue stricter governance and tighter internal controls.
Mobily’s troubles came to light in November 2014 when the com­pany revised its 2014 earnings from a $58.6 million profit $243 million loss. As a result, the telecommuni­cations company suspended Chief Executive Officer Khalid Al Kaf while launching its own investiga­tion into accounting errors.
In the four months after the scandal broke, Mobily lost an es­timated $9 billion of its market value and officially removed Al Kaf from his CEO position in February this year, ending his 19-year career with the company.
On April 12th, the market regu­lator suspended trading on a joint venture between Saudi Aramco and Sumitomo Chemical called PetroRabigh, only to reinstate the firm the following day.
According to a CMA statement on the Tadawul website, the sus­pension, which was due to the firm’s failure to disclose essential information before a deadline, will continue until PetroRabigh meets regulatory requirements on disclo­sure.
The CMA has also targeted audit­ing firms. In November 2014, the kingdom’s market regulator sus­pended the local branch of Deloitte & Touche from auditing activities in Saudi Arabia. The ban, effective June 1st, is believed to be tied to Deloitte’s auditing work for a Dam­mam-based construction com­pany Mohammad al-Mojil Group (MMG), which saw trading of its shares suspended in 2012 due to debt-related issues. Saudi Telecom and Al Rajhi Bank, two of the top five listed firms in terms of market value, had their last set of accounts audited by Deloitte, Reuters said.
Abdul Khaliq Madani, a Jeddah stockbroker for a private invest­ment firm, said the payoff from opening the Saudi stock market to foreign investors is worth the extra scrutiny from the CMA.
“If everything goes as planned and the market opens up to foreign investment, this could diversify the economy, and in the process lessen dependency on the oil sec­tor, while also increasing the li­quidity of Saudi corporations,” he said.
Madani said the campaign by the CMA is intended to raise the level of transparency and efficiency of the Saudi stock market, while the benefits to potential foreign inves­tors is the direct access to the king­dom’s market, which currently can only be done through a third party broker, in effect cutting out the middle man.
In terms of risk, Madani sees the potential overpricing of stocks as a possibility, but he said that is a common occurrence when an emerging market opens its ex­change to foreign investors for the first time.
Foreigners are now believed to own no more than about 5% of the Saudi market and to account for a smaller fraction of stock trading turnover, a Reuters report said. In contrast, foreign investors are es­timated to own about 15% of other, much smaller stock markets in the Gulf such as Dubai. If foreign­ers raise their share ownership in Saudi Arabia to that level, it could mean an inflow of an extra $50 bil­lion into the kingdom.
The kingdom’s stock market is the largest in the region and is valued at more than $530 bil­lion, almost the combined value of the rest of the Gulf Arab Stock exchanges. But unlike the Egyp­tian Exchange, the Dubai Financial Market and other regional bourses, Saudi Arabia’s stock market is yet to be included on the MSCI World Index, which it will once direct for­eign investment is permitted.