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Kingdom of Saudi Arabia
Saudi Arabian Monetary Agency
SAGIA ANNUAL RETREAT, THE PROGRESS OF
PRIVATISATION
Session Three: The implications of the
new capital market law on the future of investment opportunities
14th & 15th
October 2003, Rome
By
Jammaz Al Suhaimi, Deputy Governor, SAMA
It is my pleasure to welcome you to this
session on "The implications of the new capital market law on the future
of investment opportunities" in Saudi Arabia. This provides me an
opportunity to recap the achievements of the capital market and to share
with you my views on
the implications of the implementation of Saudi Arabia’s capital market
law.
The equity market has
witnessed tremendous growth over recent years. This has been most
pronounced following the introduction in October 2001 of TADAWUL, the
infrastructure underpinning the market. The TADAWUL All Share Index has
gained 70% so far this year. This follows four years of positive
returns, averaging 17% per year. Market volumes have also increased
dramatically. The average daily value of trades has increased by 430%
over 2002, consistently reaching over 500 million US dollars per day.
Market Capitalisation as of end of 3rd
quarter 2003 reached over 150 billion US dollars. According to the
World Federation of Stock Exchanges, the Saudi Arabian stock market now
ranks 23 out of the 50 largest equity markets in the world, in terms of
capitalisation, and the 13th largest non-G10 market.
The capitalisation and
performance of the equity market has been significantly boosted by the
inclusion of the Saudi Telecom Company. As part of the Kingdom’s
ongoing privatisation process, 60 million shares in the Saudi Telecom
Company were offered to the public. Almost 1 million individuals
subscribed for over 219 million shares with a value of almost 10 billion
US dollars. The IPO was 3.7 times oversubscribed. From the opening of
the subscription period to commencement of trading took less than 6
weeks to complete.
The infrastructure of the
capital market allowed subscribers to subscribe via any branch of any
bank, reaching out to every point in the Kingdom and encompassing the
widest possible number of investors, in line with our aim of nurturing
an investment culture throughout the populous.
The Saudi Telecom IPO
process not only demonstrated the markets ability to absorb such a large
issue, it also highlighted the technological capability of the market to
handle future privatisations effectively and in a timely manner.
In 1990 Saudi Arabia became
the world’s first fully electronic equity market. From the very
beginning, we have focused on the needs of the investor. We consider
these as being:
First Accessibility:
Orders can be delivered to the central order book via multiple channels,
including the Internet and bank branches. Investors enjoy equal access
to the market, irrespective of their physical geographical location.
Second
Efficiency: Straight-through-processing means that orders placed
by investors can be executed, settled, cleared and registered without
the need for human intervention. This has greatly reduced the cost of
processing transactions and negated errors.
Third Certainty:
Transfer of ownership occurs immediately following execution. Funds are
cleared through the national Real-Time-Gross-System – SARIE – which is
recognised as one of the most sophisticated payments systems in the
world. It is noteworthy that in Saudi Arabia we have no failed trades –
therefore a 100% settlement rate. Internationally it is estimated that
the cost of failed trades to the market is equivalent to 3% of the
traded value.
Fourth Transparency:
Full market depth is available real-time to all participants. Issuers
are required to publish all material announcements and financial
statements. These are made available instantaneously, again via
multiple channels, including the Internet, international news vendors,
and television.
Our focus on investor needs
has resulted in increased private investor participation. Over 1.6
million individuals are shareholders of joint stock companies. At
present Tadawul processes over 500 new accounts per day. It is
interesting to note that significant portions of those entering the
market for the first time are relatively young.
Growth has not only been
limited to the equity market. Saudi Arabian banks offer 154 open-end
mutual funds. The numbers of unit-holders in these funds and assets
under management have grown at annual rates of 20% and 14% respectively
over the last ten years.
Turning to the Capital
Market Law.
The law was enacted with
the broad objective of repositioning the Saudi Arabian capital market as
a major propellant of the nation’s economic development.
The law establishes a
strong government regulatory body, the Saudi Arabian Capital Market
Authority, which has rule making authority and enforcement powers
necessary to assure a fair, efficient and vibrant securities markets for
the Kingdom.
The Law also establishes
the Saudi Arabian Stock Exchange. The Exchange will be the exclusive
securities market in the Kingdom providing support for the primary and
secondary markets for all traded financial instruments and conduct
settlement, clearing and registration via its depository centre. The
Exchange will be incorporated as a joint stock company, with
shareholders initially drawn from market participants.
SAMA and the other
concerned government authorities have been working for sometime in
preparation for the enactment of the Capital Market Law. A great deal
of work remains, but I am confident that this can be achieved within
four (4) months.
Time does not permit me to
present a full discussion of all the implications of the implementation
of the Capital Market Law but I would like to highlight some of the more
important ones:
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A well
organized, appropriately staffed Capital Market Authority will ensure
that the highest standards of investor protection are maintained and
promote accountability, transparency and good corporate governance in
the private sector.
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The move from
merit to disclosure-based regulation removes any possibility of
subjectivity; issuers therefore will have greater access to the Capital
Market. Savings can be directly channelled into productive projects.
This will lead to greater participation by citizens in the capital
market and thus the national economy.
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The projected
capital demands from sectors such as electricity, water, gas and mining,
must be met from a combination of financing via the capital market and
bank lending. New instruments are required such as the securitisation
of physical assets or revenue flows, and most importantly the ability
for companies to raise debt, whether in the form of convertibles, sukook
or bonds.
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The Capital
Market Authority will also encourage and support the
incorporation of family owned companies, and where suitable obtain a
public listing. An important part of the CMA will be to mentor and
guide family owned companies, ensuring that these companies are aware of
the opportunities that the capital market provides.
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The ability
to raise capital, whether equity or debt or simply obtain a public
listing to reflect the value of an investment is of vital importance to
foreign participants in the economy. An efficient capital market will
reduce capital costs and also provide those wishing to do so, with an
exit mechanism. The latter is important when foreign investors are
pricing a potential investment in Saudi Arabia. The ability to raise
capital easily will enhance Saudi Arabia’s attractiveness for foreign
direct investment and strengthen its position as the regional hub for
companies. The ability for foreign companies to have majority stakes in
ventures in Saudi Arabia, allows the parent company to consolidate
financial statements. Thus the parent will view the Saudi Arabian
subsidiary as being part of the parent encouraging investment in
research and development and human resources locally.
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A capital
market that is functioning well complements the role of banks and thus
rounds out the financial system. A World Bank study of 74 developed and
developing economies, found that the licensing of non-bank financial
institutions had a substantial and significant impact on economic
growth. According to their estimates, the creation of financial
intermediation along the lines of the developed economies could have
resulted in private sector GDP growth increases of between 0.6 per cent
and 1 per cent per annum in certain countries.
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A number of
different types of licenses will be available, based largely on the
functions of the licensee. For example, there will be firms that will
specialise in corporate advisory, whereas others will offer full service
investment banking including brokerage, asset management, underwriting
etc. The CMA has full authority to determine the most appropriate
licensing criteria.
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It is
important to note that only licensed institutions, and those qualified,
fit and proper individuals, will be permitted to engage in investment
business activities in the Kingdom. One of the primary roles of the CMA
is to ensure that investors are properly protected and this can only be
achieved by regulating the institutions and individuals operating within
the capital market.
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A major
priority for the government has been the training, development and
utilization of the indigenous human resources.
Studies conducted by the
United Nations have shown that the employment in the financial sector
and related industries in developed countries accounts for close to 12%
of the total workforce, whereas in developing countries it is as low as
1%. By licensing new entrants and providing increased access to the
capital market, job opportunities for Saudi nationals in the financial
sector and the private sector as a whole will increase.
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While
encouraging domestic and regional direct investment, we recognise that
foreign portfolio investment has a role to play. The Capital Market
Authority will as a priority study the issue with the aim of overcoming
current impediments.
There are some things that
will not change. SAMA remains committed to its role in providing a
favourable and attractive environment for growth by ensuring the
soundness of the financial system and maintaining the stability of
domestic prices and exchange rates.
In conclusion, the
implementation of the Capital Market Law creates significant
opportunities for domestic, regional and international financial
companies to participate in the Saudi Arabian financial system. Given
that it is the largest financial market within the GCC and Arab world,
there are tremendous opportunities for those wishing to raise capital
and those wishing to invest. The Law is not a panacea for ills but,
combined with a clear understanding on the part of the Government and
the private sector of its role, we will ensure that the capital market
plays its role in the economy.
Thank you for your
attention. |
