Saudi Capital Market Authority intensifies regulatory activities
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.