View / Saudi market reforms could stall IPO recovery

Saudi Arabia’s recently appointed stock market regulator has had a whirlwind few weeks. Mazen Al-Sudairi is leading an overhaul of the Capital Market Authority’s rules, one of the kingdom’s biggest revamps since it opened its stocks to foreign investors in 2015.

That shift, from shunning so-called “hot money” to courting foreign capital, was essential to boosting the market’s global importance and bringing in foreign cash to help fund Crown Prince Mohammed bin Salman’s economic transformation program.

Bankers and lawyers here in Riyadh worry, though, that the latest effort, rather than fueling a revival of the Tadawul, may hamper it.

Saudi stocks — which saw a multiyear bull run end in 2022 — have rebounded since the Iran war broke out and outperformed peers in the region thanks to the kingdom’s ability to export crude. But the index is still down 3% since Feb. 28, while the MSCI Emerging Markets Index rose 6% in the same period. Overall, falling valuations, compounded by the war, have added to the poor sentiment and put off new listings. The government needs a thriving market to offload its domestic portfolio and recycle the capital into new ventures.

Investors had anticipated a recovery on promised changes to foreign ownership limits. Instead, the regulator turned its attention to listing rules, aiming to attract mature, well-run companies onto the stock exchange — quality over quantity.

The proposals are under consultation and could change before they are finalized, but critics (none of whom would go on the record, fearing reprisal) warn that requirements such as hard underwriting, which forces banks to take on more IPO risk, could delay deals already in the pipeline. Smaller banks may not be able to participate in the process and even large ones may initially be wary of untested new rules.

Therein lies the CMA’s dilemma: By weeding out listings that aren’t ready for public markets — and many weren’t, based on the performance of many recent IPOs — the regulator could end up depressing IPO activity and ultimately dragging down valuations, instead of restoring confidence among local investors sitting on underperforming portfolios.