* Market to open in first half of next year
* Three-month consultation period for draft rules
* $580 bln market is biggest in Arab world
* 20 pct cap on combined foreign holdings in any stock
* Minimum $5 billion AUM for foreign institutions
(Adds comment by fund managers, analysts)
By Andrew Torchia
DUBAI, Aug 21 Saudi Arabia's stock market
regulator proposed rules on Thursday for opening the $580
billion market to direct investment by foreign institutions,
including a 10 percent cap on foreign ownership of the market's
Among other draft rules, a single foreign investor could own
no more than 5 percent of any listed firm, while all foreign
institutions combined could own no more than 20 percent. The
Capital Market Authority published the draft on its website.
The Saudi market is the biggest in the Arab world and one of
the last major bourses to open up, so the reform is attracting
massive foreign interest. Fund managers have estimated the
market could draw $50 billion or more of new foreign money in
coming years if it is included in global equity indexes.
"A lot of foreign smart money will want to enter the Saudi
market given that other markets might be reaching their upper
limits going forward," said John Sfakianakis, a prominent
Riyadh-based investment strategist.
He noted that the Saudi market was more liquid and diverse
than markets in neighbouring Gulf states such as Dubai.
Authorities in the world's biggest oil exporter, keen to use
the stock market to diversify the economy beyond oil and create
jobs, considered opening the market for years. But they held
off, concerned about the risk of destabilising stock prices.
Currently, foreigners other than residents of Saudi Arabia
and citizens of neighbouring Gulf states can only invest in the
market in indirect ways such as swaps and exchange-traded funds.
The Capital Market Authority (CMA) said in July it would
open the market in the first half of 2015, causing a surge in
the stock index which is up 10 percent since then.
It is expected to issue a final version of its rules after a
three-month consultation period. The draft provides for further
curbs to be placed on foreign ownership of individual stocks by
"supervisory or regulatory authorities".
For example, fund managers believe foreigners may not be
allowed to hold shares in certain real-estate developers with
operations in the holy cities of Mecca and Medina, to ensure
that non-Muslim investors do not own assets there.
Ali Adou, portfolio manager at The National Investor in Abu
Dhabi, said he expected the Saudi market eventually to be
included in MSCI's influential Emerging Market Index, but that
the proposed foreign ownership limits might reduce its weighting
within that index.
"The CMA is taking a conservative approach," he said.
The draft rules are similar to those used by some Asian
markets including China as it opened up over a decade ago.
China expanded foreign participation in its market in small
stages; Riyadh is expected to adopt the same approach, granting
investment permits to individual institutions only gradually to
avoid any sudden flood of foreign funds.
The draft says foreign institutions will have to qualify for
permission to invest. For example, they would usually need to
have at least $5 billion of assets under management, and
investment experience of no less than five years.
Daniel Broby, chief executive at Gemfonds, a global emerging
market specialist firm, said the $5 billion minimum was
disappointing, and might be an effort to preserve the lucrative
market in swaps that foreigners currently use to invest.
Some banks in Saudi Arabia have profited by arranging the
swaps for foreigners, and under the draft rules, smaller foreign
funds would have to continue to use those instruments.
The 10 percent cap on foreign ownership of the market's
value could be difficult to enforce, creating uncertainty for
investors, some fund managers said. Foreign ownership in some
other big emerging markets is much higher, at around 20 percent
For the CMA website, click on:
(Additional reporting by Matt Smith in Dubai and Carolyn Cohn
in London; Editing by David Clarke and Pravin Char)