Tadawul updates index to limit Aramco's dominance

Tadawul all share index to be capped with a threshold of 15 per cent

A Saudi man heads to the stock market with the start of Aramco's IPO, in Riyadh, Saudi Arabia. Reuters

The Saudi Stock Exchange, Tadawul, issued a new index methodology which places a limit on the influence of any one firm over the index.

The measures, which are being introduced just ahead of Saudi Aramco's hotly anticipated float of its shares on the market, include the introduction of a 15 per cent threshold "to reduce dominance of larger companies on the index performance" Tadawul said in a statement on Monday. Any company whose index weight reaches or exceeds the 15 per cent threshold "will be capped in accordance with the set limit", the statement said.

“The update to Tadawul’s indices methodology reflects our continuous efforts to further develop the Saudi capital market and ensure more balanced indices, which will accurately represent the movement of the market, enhance disclosures and transparency and minimise securities’ dominance within Tadawul Indices,” said Khalid Al Hussan, chief executive of Tadawul.

“Through our available information on indices, our market participants can easily obtain an accurate perspective on the performance of the main market and Nomu. Today, Tadawul has 203 listed securities, with an average capitalisation of 10 billion Saudi riyals (Dh9.79bn) and an overall market capitalisation of over 1.9 trillion riyals. A market with such large size requires balanced indices," he added.

Saudi Aramco is expected to conclude a bookbuilding phase among institutional investors for its initial public offering this week, after which a price for its listing is expected to be revealed.

The company is set to float 1.5 per cent of its shares, which have been offered to potential investors within a range of 30-32 riyals. If it floats at the lower end of this range, the company is likely to comprise 9.1 per cent of the total index, according to a research note issued last month by Aj Rajhi Capital. If it floats at 32 riyals per share, it is likely to form 9.7 per cent of the index. Al Rajhi Bank currently has the highest weighting, forming 14.6 per cent of the index due to the higher number of free floating shares.

Other measures being taken by Tadawul as part of its update include a new “fast entry” rule, in which shares of significantly large IPOs are included in the Tadawul All Share Index at the close of their fifth trading day.

The exchange is also changing the way it calculates shares considered to be free floating. Shares held by a government entity that owns 5 per cent or more of an entity, shares repurchased by companies via buybacks, restricted shares that can't be traded within certain periods and shares owned by controlling entities (which have a stake of 30 per cent or more) or board directors will all be excluded from calculations of the amount of 'free float' shares.

Tadawul said the changes to its rules will only become effective at the end of the year as part of its quarterly indices maintenance, except for the "fast entry" rule which is effective immediately.