A strategic step to develop the Saudi financial market
In a move aimed at enhancing the depth and resilience of the Saudi Stock Exchange (Tadawul), the Capital Market Authority (CMA) has introduced a draft amendment to the “Rules for the Offering of Securities and Ongoing Obligations.” This amendment primarily aims to establish a comprehensive regulatory framework that allows for the direct listing of shares of subsidiaries of companies listed on the main market. These amendments are part of the CMA’s ongoing efforts to develop the regulatory environment of the capital market, in line with the objectives of the Financial Sector Development Program, a key pillar of the Kingdom’s Vision 2030.
General context and historical background
Historically, the initial public offering (IPO) has been the traditional path for companies seeking to list their shares on the stock market. However, in recent years, global markets have witnessed a growing trend towards alternative and more flexible listing mechanisms, such as direct listing. Direct listing differs from an IPO in that it does not involve issuing new shares to raise capital; instead, it allows existing shareholders to sell their shares directly on the market. This mechanism provides companies with a faster and less costly route to public markets. The Saudi Capital Market Authority's adoption of this approach reflects the market's maturity and its desire to keep pace with international best practices, further solidifying Tadawul's position as one of the leading markets in the region.
The importance of the event and its expected impact
These new rules are expected to have multiple positive effects on various levels:
- Locally, this move will provide significant flexibility for large family businesses and listed groups with successful subsidiaries, enabling them to list these units independently, thus showcasing their true value and diversifying their funding sources. It also offers local investors new and diverse investment opportunities in promising sectors.
- Regionally and internationally: This development enhances the attractiveness of the Saudi financial market to foreign investors and demonstrates the Kingdom's commitment to modernizing and developing its financial and regulatory infrastructure. This step could serve as a model for other markets in the region, thereby raising the level of regional competitiveness.
The 7 most important rules and key themes in the proposed project
The new project is based on a set of precise rules and conditions that ensure investor protection and maintain market stability, the most important of which are:
1. A clear regulatory framework for direct listing
The project regulates the terms and requirements for submitting an application to register the shares of subsidiary companies for the purpose of direct listing on the main market, specifying the necessary supporting documents and the restrictions that will be applied to the shares of specific categories of shareholders after listing to ensure the stability of trading.
2. Strict conditions for registration and inclusion
Article 23 included a set of conditions that must be met, the most important of which is that the issuer must have practiced a major activity for at least three financial years, and must submit audited financial statements for those years in accordance with the approved accounting standards.
3. Working capital requirements and financial stability
The rules require the issuer to provide sufficient working capital for a period of twelve months following the date of publication of the registration document, which reassures investors of the company’s ability to continue and meet its operational obligations.
4. A pivotal role for financial and legal advisors
Articles 21 and 22 emphasized the vital role of the financial advisor as the primary point of contact with the Authority, and the necessity for them to exercise due professional care to ensure that the issuer meets all requirements. They also obligated the legal advisor to submit a declaration confirming the soundness of the legal procedures.
5. Strict governance and approval safeguards
Article Seventeen stressed that the offering or registration may not proceed until all required approvals have been obtained under the company’s articles of association and the Companies Law, including approvals from boards of directors and general assemblies.
6. A highly detailed and transparent document package
Article 26 stipulated a detailed list of supporting documents that must be attached to the registration application, including the articles of association, financial statements, letters of approval from advisors, and a draft of the registration document, to ensure that all necessary information is provided to investors and the authority.
7. Controls for document storage and order cancellation
The regulations require the issuing authority to retain original copies of all documents for a minimum of ten years. The authority is also empowered to cancel any application that remains pending for an unjustified period, ensuring the seriousness of submitted applications and their prompt processing.
