Adel S Al-Ghamdi: Saudi Stock Exchange Opts for Quality

Adel S Al-Ghamdi leads the Saudi Stock Exchange, the largest and most liquid in the Middle East and North Africa, since July 2013 when he left his job as general manager of the Corporate Finance and Issuance Division at the Capital Market Authority to become Tadawul’s CEO. Mr Al-Ghamdi is in charge of executing the process by which the Saudi Stock Exchange opens its trading floor to foreign investors. The liberalisation process now set in motion is not so much an exercise in raising additional capital, as it is one of improving the overall quality of the market by inviting in discerning and experienced investors who will help develop the Tadawul. It is hoped that long-term value investors will assume an active role in shaping the direction of listed companies.

Mr Al Ghamdi explained that active shareholder may help the exchange align with best global practices and encourage convergence to higher standards of corporate governance, investor relations, issuer disclosures, and broaden research efforts.

In an exclusive interview with CFI.co Mr Al Ghamdi addressed some of the more relevant events and consideration surrounding the opening of Tadawul to participation by foreign investors.

On access to Saudi Stock Exchange of foreign investors.

The launch of the QFI [qualified foreign investor] framework is a significant step in a gradual process that over the longer-run will serve to increase the level of professional participation in the Saudi stock market. We anticipate that the introduction of international institutional investors through this framework will help improve corporate governance amongst our listed companies, enhance research and market sophistication, and contribute to a reduction in volatility particularly as individual investors currently account for approximately 90% of day-to-day trading volumes.

“The Saudi Stock Exchange, as a major artery at the heart of the economy, does have a major role in advancing ESG values in the kingdom and will continue to seek further opportunities to enhance these values as we move forward, whether through the SSEI or organically.”

Indeed, the QFI rules have been specifically designed to ensure that only the largest and most experienced foreign investors are allowed to enter the stock market. Amongst other conditions, the rules require that foreign institutional investors have a recognised investment track record and assets under management of at least $5bn. This means that institutions deemed to be qualified under this framework are more likely to have high standards of corporate governance, advanced investment practices, and longer term investment horizons; attributes which are expected to enhance the stability and institutionalisation of the Saudi market.

On corporate governance.

The Saudi Stock Exchange, amongst other capital market stakeholders, is exploring a number of options focused on enhancing corporate governance standards and practices at listed companies. Such options include the introduction of mandatory Board Induction Programmes for newly listed companies, which could be prescribed as a listing condition in future versions of the Listing Rules. Structural changes to the stock market could also be enacted, possibly leading to the introduction of a higher tier market segment, with higher standards of corporate governance. Incentives could also be introduced by the exchange, and other stakeholders, to encourage companies to comply with the optional standards prescribed in the CMA’s [Capital Market Authority] Corporate Governance Regulations.

The reporting requirements for listed companies are prescribed in the CMA’s Listing Rules, which were conceived following a rigorous benchmarking exercise against major developed and emerging markets back in 2010. These rules were approved in 2012, after public consultation, and comply with the highest international regulatory standards.

On ESG – Environmental, Social, and Governance.

Socially responsible businesses are an increasingly important asset class – indeed the international growth in recent years of Islamic finance reflects the high level of interest in investments that adhere to particular ethical standards. We anticipate that the introduction of qualified foreign investors will help to enhance businesses’ focus on their adherence to international standards in these areas. The Saudi Stock Exchange, as a major artery at the heart of the economy, does have a major role in advancing ESG values in the kingdom and will continue to seek further opportunities to enhance these values as we move forward, whether through the SSEI or organically.

On IPOs.

Since the promulgation of the Capital Market Law in 2003, which triggered the modern day Saudi stock market renaissance, a hundred companies have come to the market, raising a total of $31.1bn. Whereas 41 of these listings were in the form of discretionary IPOs (private companies coming to market at their own discretion), the remaining 59 were mandatory government-induced IPOs.

We have seen a number of IPOs in recent years – perhaps most notably the public offering of NCB, which was one of the largest IPOs in the world last year and one of nine companies listed on the Saudi Stock Exchange since the beginning of 2014.

As with any market, the IPO pipeline depends on the overall position of the economy and the attractiveness of the stock market as a source of financing. While many companies in the region have traditionally looked to banks, rather than the capital markets, for financing, the increasing maturity of capital markets in the Gulf is expected to cause a shift in this trend. While every company will approach its funding needs differently, depending on their particular circumstances, we anticipate that the capital markets route will continue to become increasingly more attractive for businesses in the future.

The Saudi Stock Exchange remains the largest and most liquid exchange in the Middle East and North Africa and the Saudi economy continues to expand – with the non-oil sector outpacing headline growth. As a result, we are confident that the exchange will continue to attract businesses looking to raise growth capital and gain access to the various qualitative and quantitative benefits of life as a listed company. As market professionalization continues to improve we expect this trend to continue.
That being said, the Saudi Stock Exchange does take an active role in trying to bring companies to market and has conducted several awareness sessions across the major cities of Saudi Arabia over the last three years. These events successfully attracted hundreds of small and medium sized enterprises interested in understanding more about the IPO process and the benefits the capital market offers to their businesses and ultimately, their sustainability. We plan to significantly increase our efforts, as we move forward, in a collaborative manner with other capital market stakeholders, to bring more companies onto our platform.

On market volatility.

International institutional investors participating through the QFI framework are expected to play an influential role in expanding coverage and enhancing the sophistication of analyst research, which should benefit market stakeholders as a whole.

We are also looking at means of promoting a more active corporate access culture amongst our listed constituents which should foster more progressive investor relations practices, periodic analyst interactions, and market guidance.

Other efforts are being invested in creating leading and lagging market intelligence indices to provide investors with simpler means of monitoring changes in the financial performance of the various market sectors, and changes in the investment behaviour of different investor classes.

Increasing market knowledge, whether by research or market information, is at the heart of our plans to enhance the professionalization of the stock market.

Please see for the article in CFI.co Summer 2015.