New CMA rules likely to boost foreign investment

28/08/2016 05:08 AST

Industry analysts have described Saudi Arabia’s decision to let qualified foreign investors (QFIs) subscribe to initial public offerings (IPOs) from next year as a positive development that supports the Kingdom’s push to boost foreign investment within its stock market.
The move was announced last week as part of the Capital Market Authority’s (CMA) new list of guidelines on book-building and the allocation process for IPOs on Tadawul, which will come into effect Jan. 1.
According to a report issued by Al-Rajhi Capital, the key highlights include allowing bids outside the suggested price range, enhanced aggregate bid limit for fund managers, allowing participation of QFIs during the book building stage, and a longer period for the book building process.
Participation of funds is also limited by the number of unit holders as the bid amount at the Book building stage shall not exceed SR1 million per unit holder.
“Overall, we believe that the framework provides more clarity to the process and allows price discovery in a more competitive way,” researchers from Al-Rajhi Capital said. On the other hand, the report said that the enhanced price range is likely to limit the significant post listing rallies, which had generated considerable interest in IPOs in the past, and had also led to the launch of a large number of IPO funds.
Additionally, this will also make the bidding process more competitive, maximize IPO proceeds for issuer, and require greater scrutiny and diligence from participants. According to economists, the new guidelines provide more clarity on the bidding process by public funds and aims for a more level playing field for the managers.
At present, funds are guided by the relevant Investment Fund Regulations’ (IFR) provisions which did not cover detailed bidding limits as provided in the new guidelines. Enhancement of aggregate bidding limit from 10 percent to 25 percent of the total offering value will be beneficial for managers with larger equity fund AUMs as they were limited by the 10 percent cap earlier given the low offering sizes.
Similarly, there was not much clarity on bids that can be placed by individual funds earlier as IFR dealt with mainly investment limits. As per new guidelines, individual public funds are not allowed to bid more than 10 percent of the total offering value, and exceed 20 percent of its net asset value (NAV) to the issuer and 10 percent of the funds’ NAV in the offered shares.
Only funds that follow a customized sub-category benchmark within the broader market are allowed to bid an amount that exceeds 10 percent of its net asset value (up to the issuer’s weight in the respective benchmarks, but seems capped by the 20 percent issuer limit) in the offered shares.
This will ensure that specific theme based funds such as IPO funds can bid for a higher amount compared to broader market funds subject to meeting other guidelines.
On the one hand, the relaxed price range will give an advantage for IPO funds to bid aggressively based on prices but, the bid size restrictions will lower the risk of aggressive bidding by managers by reducing exposure to a single issuer.