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Saudi to impose 20% foreign ownership ceiling on stocks Dubai creates new fund class to lure asset managers

DUBAI, Aug 19, (RTRS): Overseas investors in the Saudi Arabian stock market will face restrictions including a 20 percent ceiling on combined foreign ownership of any listed stock, a major Saudi newspaper reported on Tuesday. The Capital Market Authority announced in late July that the market, the Arab world’s biggest bourse, would open to direct investment by foreign institutions in the first half of next year. Currently, foreigners are limited to indirect investment through swaps and exchange-traded funds. The CMA said it would publish draft regulations for the reform in August, before a 90-day public consultation period.

The Asharq al-Awsat newspaper quoted unnamed sources on Tuesday as saying the decision to open the market was based on the principle that foreigners would not be allowed to own more than 20 percent in total of the paid-up capital of any firm. Also, “foreign funds will not be permitted to hold more than 10 percent of the market value of Saudi stocks,” the newspaper said without elaborating. If foreigners are limited to owning only 10 percent of the overall Saudi market, which has a capitalisation of about $580 billion, that could disappoint investors; foreign ownership of some other major emerging markets around the world is considerably higher.

A CMA spokesman, contacted by telephone, said the rules were still in the final consultation stage in the CMA’s legal department, and would be published in a few days for public consultation. He said he could not comment on the accuracy or otherwise of the Asharq al-Awsat story. Foreign funds investing in Saudi Arabia would need to have minimum assets of $1 billion, and individual or retail investors would not be allowed to own shares in Saudi companies except through these funds, the newspaper said.
Also, foreign funds would not be allowed to own shares in certain real estate developers with operations in the holy cities of Mecca and Medina, to ensure that non-Muslim investors did not own assets there. Such companies include Makkah Construction and Development Co, Taiba Holding and Jabal Omar Development Co, the newspaper said. The foreign ownership limits could reduce Saudi Arabia’s weighting in major international equity indexes compiled by companies such as MSCI, if the index compilers choose to include the country after foreign investors are allowed in. When Qatar and the United Arab Emirates were added to MSCI’s emerging market index in May this year, their ceilings on combined foreign ownership — in many cases, around 20 percent or higher — caused MSCI to restrict their weightings.
Meanwhile, Dubai is changing its financial rules in an effort to attract more asset managers — particularly those serving the richest and most risk-tolerant investors, such as hedge funds and private equity funds — to base themselves in the emirate. The rules create a new class of funds that can be domiciled in the Dubai International Financial Centre (DIFC), facing less stringent regulation and thus lower costs than existing funds. Authorities hope this will boost the DIFC’s growth as a domicile for funds, which has lagged other areas of the emirate’s rapid financial development over the past decade. The DIFC has boomed since it was set up as a financial free zone in 2004, becoming the Middle East’s main banking hub. The number of registered firms operating there jumped 14 percent to 1,039 last year.
But the DIFC has not come close to competing with the likes of Luxembourg, Dublin and the Cayman Islands as a top domicile for funds. Only about nine funds have been domiciled in the DIFC since its current funds regime was introduced in 2010, compared with hundreds established in the leading centres.
That is partly because Dubai still lacks an extensive “human infrastructure” of financial lawyers, custodians and other professionals to compare with the other centres, and because of the costs of meeting regulatory requirements. The new rules from the Dubai Financial Services Authority (DFSA), which were published this week and will take effect on Thursday, seek to cut costs by creating a class of funds that can be offered only to experienced professional investors and so need less regulation. The qualified investor funds (QIFs) can be offered only through private placements, rather than public offers, and can have no more than 50 investors, the DFSA said.
Minimum subscriptions to QIFs must be $500,000. That is lower than the $1 million minimum initially proposed by the DFSA in a draft of the rules for public consultation earlier this year. The advantages of QIFs include not having to file interim reports on their operations, only annual reports; flexibility in appointing custodians; and exemption from some investment restrictions. For example, a QIF can invest in a fund of funds, while funds of other types may be prohibited from doing so. While it is likely to take years for Dubai to build the human infrastructure which the European centres have, many asset managers think the emirate could prosper as a fund domicile in the long run because of its role in handling the Gulf’s oil wealth and its proximity to major emerging markets such as India. QIFs may appeal in particular to the “family offices” which manage the money of the Gulf’s wealthy business dynasties and are increasingly establishing presences in Dubai as their managements become more professional.

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