Saudi regulator to increase allocation for institutional investors in IPOs

'Markets with a big tranche of institutional investors are characterised by low volatility and high efficiency,' Saudi Arabia’s Capital Markets Authority said in a filing.

Saudi Arabia’s Capital Markets Authority plans to increase the proportion of shares offered via initial public offerings allocated to institutional investors to help reduce market volatility.

The move comes as Saudi Arabia’s Tadawul stock exchange prepares for the direct entry of foreign investors for the first time.

The CMA said that the move to increase institutional investor involvement in IPOs would be a boost for the Arabian Gulf’s biggest stock market.

“Markets with a big tranche of institutional investors are characterised by low volatility and high efficiency,” the regulator said in a filing late Monday.

“Increasing institutional investors’ strategic ownership in listed companies supports governance practices and increases transparency, a target that is hard to achieve amid the dominance of retail investors in the market.”

The regulator’s statement did not give details about what the new allocations levels would be, nor when they would be implemented.

Retail investors currently account for about 90 per cent of daily trades on the Saudi stock market.

The regulator’s announcement comes less than three weeks before the stock market opens to qualified foreign investors (QFIs) for the first time.

The CMA published final regulations this month, stipulating that QFIs must hold a minimum of 18.75 billion riyals (Dh18.36bn) under management, and will be prohibited from owning more than 10 per cent of the total market.

The new rules will be enacted on Monday, with the market open to foreign investors from June 15.

Mohammed Al Jadaan, chairman of the CMA, this month said that foreigners would be allowed to participate directly in IPOs of Saudi companies on a case-by-case basis.

The CMA’s announcement on Monday is in line with recent market trends, with recent IPOs allocating a lower proportion of shares to retail investors than before, according to Sameer Nawaz, managing director and co-head of investment banking at Saudi Fransi Capital in Riyadh.

“This is not a new development as such, as the allocations for institutions have been rising steadily,” he said. “But it’s definitely a welcome signal from the CMA, as it’s better in the longer term to attract the more value-driven larger institutions.”

Retail investors were the major beneficiaries of last year’s $6bn IPO of National Commercial Bank, the largest offering to date in the Arab world, with an allocation of 60 per cent of the total number of shares going to Saudi investors.

However, in this year’s IPOs of Saudi Company for Tools and Hardware and Middle East Paper Company, retail investors were allocated just 40 per cent.

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