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The Saudi Arabian Capital Market Authority (CMA) has given the green light to a new regulatory framework aimed at managing foreign investments in securities. This framework imposes a maximum limit of 49% on total foreign ownership of any publicly traded company and its convertible debt securities. Nonetheless, foreign strategic investors are exempt from this ownership cap, provided they maintain their shares for at least two years.
Understanding the differences between Qualified Foreign Investors (QFI) and Strategic Foreign Investors
As defined by the CMA, a Qualified Foreign Investor (QFI) is a foreign entity that meets the criteria outlined in Part (3) of the Rules for Foreign Investment in Securities, allowing them to invest in shares listed on the Main Market.
Criteria for QFIs according to Part (3) of the regulations:
- The investor must possess a legal identity.
- They must manage assets worth at least SAR 1,875,000,000 (approximately $500 million) or an equivalent amount at the time of their application to open an investment account, though the CMA may set a lower threshold for asset value.
Foreign Strategic Investor: is defined as a foreign legal entity that intends to hold a direct stake in the shares of a publicly listed company for no less than two years, with the objective of enhancing the company’s financial or operational performance.
The newly established guidelines were published in Umm Al Qura, the official governmental gazette of Saudi Arabia, highlighting the kingdom’s commitment to regulating capital flows while ensuring market stability.
Ownership restrictions and strategic exemptions
The CMA stipulates that non-resident foreign investors can only own a maximum of 10% of the shares in any publicly listed issuer. Additionally, foreign investors are prohibited from converting debt instruments into equity unless they qualify under specific investor categories or have approved swap agreements.
Foreign strategic investors, typically long-term institutional investors with operational interests in Saudi Arabia, are exempt from the 49% ownership limit. However, to benefit from this exemption, they must retain their investment for at least two years, aiming to attract stable, long-term capital into the Saudi markets.
Categories of Foreign Investors
Investment in Saudi Arabia’s primary market is classified into six distinct categories for non-resident investors:
- Qualified Foreign Investors (QFIs).
- Foreign Strategic Investors.
- Beneficiaries of swap agreements with authorized financial institutions.
- Foreign investors who engage with CMA-licensed management firms.
- Foreign investors based in a Gulf Cooperation Council (GCC) country.
- Individuals who formerly resided in Saudi Arabia or a GCC country and had opened an investment account while residing there.
This classification ensures that access to the market is controlled while allowing seasoned or strategically aligned investors to participate effectively.
Strict monitoring of swap agreements
The CMA has established comprehensive conditions for institutions involved in swap agreements, which include:
- Complete segregation of client funds and assets.
- Thorough coverage of transactions throughout the duration of the agreement.
- Retention of exclusive voting rights by the licensed institution.
- Strict adherence to anti-money laundering (AML) regulations.
Flexibility for exceptional circumstances
Notably, the CMA retains the authority to provide exemptions from any part of the regulations, whether at its discretion or upon request, allowing for flexibility in unique or strategic situations.