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Saudi QFI scheme attracting foreign investors despite tough barriers to entry
Global financial institutions are applying to enter the stock market of Saudi Arabia under the recently launched qualified foreign investor (QFI) scheme despite high barriers to entry and inflexible investment guidelines
Darryl Yu 2 Oct 2015
Global financial institutions are applying to enter the stock market of Saudi Arabia under the recently launched qualified foreign investor (QFI) scheme despite high barriers to entry and inflexible investment guidelines.
 
“I think there is definitely an interest, there are a number of foreign investors who are actively exploring entering the market as QFIs. Also, since 2008, foreign investors have actively invested in the Saudi market through swaps, which shows a healthy appetite for Saudi equities from foreign investors,” says Salman Al-Sudairi, managing partner at Latham & Watkins’s Saudi Arabian office. 
 
Institutional investors including the Ashmore Group, Acadian Asset Management, Blackrock and Fidelity Investments are some of the firms that have reportedly applied for entry under the QFI scheme.
 
In an effort to improve corporate governance standards of its listed companies, the Saudi Arabian government along with its financial services regulator the Capital Markets Authority (CMA) decided last June to open up its stock market, known as Tadawul, to direct investment by foreign investors under  the QFI scheme.
 
With a market capitalization of around US$550 billion, the Tadawul is the biggest stock market in Middle East and is equivalent to the size of Russia’s stock market.    
 
“CMA has focused significantly on improving Saudi disclosure standards. A number of listed companies became public prior to formation of the CMA and prior to the implementation of improved disclosure standards and corporate governance standards, but they are catching up and we are seeing a much improved disclosure environment in the market,” says Al-Sudairi.  
 
Aiming to attract top quality institutional investors, the CMA issued stringent QFI requirements such as a mandatory asset under management (AUM) size of US$5 billion and investment experience of at least five years.
 
“Their [CMA] aim is not to bring in every single investor, they want to bring in the highest level of sophisticated investors,” explains Al-Sudairi. “The reason they are opening up to foreign investors is not only to bring foreign capital into the country, that’s not the aim. It’s actually quite a liquid market without foreign investors. They want larger institutions that are going to improve the transparency and corporate governance levels.”
 
Even after qualifying, foreign investors will also have to deal with investment limits. According to CMA rules, a single QFI can only hold up to 5% of shares in any company.
 
Moreover, total QFI limit in any Tadawul listed company is 20% and maximum QFI investment can only be 10% of the whole market. Indonesia’s stock exchange, which is similar in size, has around 65% of its tradable stocks held by foreign investors.  
 
 
Just this September, Blackrock announced it was introducing the first exchange-traded fund (ETF) investing in Saudi Arabia called the iShares MSCI Saudi Arabia Capped ETF.
 
However, foreign institutional players looking at the Tadawul may have to wait till global market volatility dies down before expecting any creditable returns from the Saudi market. The Tadawul All Share Index year-to-date as of October 1 was -11.90%.   

    

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