The Saudi Arabian Capital Market Regulation, Royal Decree No. M/30 of 2nd Jumada Thani 1424 Hejra corresponding to 31st July 2003 Gregorian, sets out the framework for the capital market including:
01. The establishment of the Saudi Arabian securities and exchange commission, known as the Capital Market Authority (CMA), with objectives of protecting investor interests, ensuring orderly and equitable dealings in securities business, and promotion and development of the capital market.
02. Vesting the CMA with the powers to:
(a) License non-bank financial intermediaries; and
(b) Authorise the offering of securities to the public.
03. The establishment of the Saudi Arabian Stock Exchange (SASE) incorporating the national securities depository centre.
The CMA was constituted on 1st July 2004 and is governed by five Commissioners who are appointed by Royal Decree, one of whom being nominated as the Chairman and the second as the Vice Chairman. On 4th October 2004 the CMA issued the Glossary of Defined Terms used in the Regulations and Rules of the CMA (amended on 18th August 2008), the Market Conduct Regulations, the Offers of Securities Regulations (amended on 18th August 2008), and the Listing Rules (amended on 22nd January 2006). Regulations which govern the conduct of persons who are authorised to carry on securities business (the Authorised Persons Regulations) and the Securities Business Regulations were issued on 28th June 2005. The remaining Regulations that have been issued by the CMA to date are the Real Estate Investment Funds Regulations issued on 15th July 2006, the Corporate Governance Regulations issued on 12th November 2006 (amended on 5th January 2009), the Investment Funds Regulations issued on 24th December 2006, the Mergers and Acquisitions Regulations issued on 3rd October 2007 and the Anti-Money Laundering and Counter-Terrorist Financing Rules issued on 1st December 2008.
Offers of securities in Saudi Arabia must comply with the Listing Rules and the Offers of Securities Regulations. The definition of “offer” is fairly broad, and includes the direct or indirect marketing of or any statement, announcement or communication that has the effect of selling, issuing or offering securities, but does not include preliminary negotiations or contracts entered into with or among underwriters. Offers of securities are categorised as public offers or private placements. Public offers must comply with the Listing Rules. Securities offered by way of private placement must comply with the Offers of Securities Regulations and can be carried out by means of a limited offer or to sophisticated investors. A limited offer is directed at no more than sixty offerees in Saudi Arabia and the minimum amount to be paid by each offeree is not less than one million Saudi Riyals. An offer to sophisticated investors is directed at a number of potential investors including professional investors who are natural persons who fulfil at least two of the following criteria: he has carried out at least ten transactions per quarter over the previous four quarters of a minimum total amount of forty million Saudi Riyals on securities markets; the size of his securities portfolio exceeds ten million Saudi Riyals; or he works or has worked for at least one year in the financial sector in a professional position. The offeror must notify the CMA and submit to it copies of the offering documents at least ten days prior to the proposed date of the offer.
The Listing Rules set out the requirements and serve as guidelines for the public offer of securities. An offeror must appoint a financial advisor when applying for the admission of securities to the official list, and the issue of securities which have not been previously admitted to the official list must be fully underwritten by an underwriter authorised by the CMA.
An applicant for admission and listing must be a Saudi joint stock company, and must have been carrying on as its main activity, either by itself or through one or more of it subsidiaries, an independent business for at least three financial years under substantially the same management. The CMA has the discretion to accept an application if the CMA is satisfied that such admission will be in the interests of the applicant and of the investors, and that the investors have received the necessary information to arrive at an informed judgment concerning the applicant and the securities that are the subject of the application.
On an application for the admission of securities to the official list, the financial advisor must satisfy itself, having conducted due diligence, that the issuer has satisfied all conditions required for admission of its securities stipulated in the Listing Rules and must provide to the CMA any information and clarifications it may request to ensure that the financial advisor and the issuer have complied therewith and with the Capital Market Regulation.
To be admitted to the official list, there must be a sufficiently liquid and open market for the shares that are the subject of the application, as follows:
01. there must be at least 200 public shareholders; and
02. at least 30% of the class of shares should be owned by the public.
The CMA may permit a lower number of public shareholders or a lower percentage of the class of shares if it considers that it is appropriate in view of the number of shares in the same class and the distribution to the public.
The Listing Rules set out the extensive requirements as to the prospectus which must be submitted for application for the issue of securities by way of a public offering. The prospectus must contain all information necessary to enable an investor to make an assessment of the activities, assets and liabilities, financial position, management and prospects of the issuer and of its profits and losses. The CMA endeavours to review the prospectus within forty five days of receiving all the requisite information and documentation, after which time it shall accept or reject the prospectus. The issuer must publish the prospectus and make it available to the public at least fourteen days prior to admission to the official list free of charge in sufficient numbers to satisfy public demand at the CMA’s principal place of business and at the head office of the issuer. The CMA will post on its website no later than the next business day following the date of such publication a note concerning such publication and stating that the prospectus is available at the head office of the issuer.
Issuers also have notification obligations vis-à-vis the CMA and must notify it of certain events which include any amendment to its By-Laws or the location of its principal office, any change in its external auditors or the presentation of a winding-up petition, the passing of any winding-up order or the appointment of a liquidator in respect of the issuer, its holding company or any of its subsidiaries, or the commencement of bankruptcy proceedings.
The CMA has the power to, at any time, suspend or cancel the listing in the following circumstances:
01. the CMA considers it necessary for the protection of investors or the maintenance of an orderly market;
02. an issuer fails, in a manner which the CMA considers material, to comply with the Listing Rules (including a failure to pay on time any fees or fines due to the CMA);
03. there are insufficient securities of the issuer in the hands of the public to comply with the conditions set out in the Listing Rules;
04. the CMA considers that the issuer does not have a sufficient level of operations or sufficient assets to warrant the continued trading of its securities on the Exchange; or
05. the CMA considers that the issuer or its business is no longer suitable to warrant the continued listing of its securities on the Exchange.
The Listing Rules impose specific restrictions on certain shareholdings:
01. A person or group shown in the prospectus to own a controlling interest in the issuer is not allowed to dispose of the securities of the issuer during the six months following the date on which trading of the issuer’s securities on the Exchange commences.
02. For the purposes of this provision a person or group owns a controlling interest in the issuer either where he owns, individually or together with his relatives or affiliates, directly or indirectly, a minimum of 5% of a class of voting shares of the issuer.
03. During the period of six months from the date on which trading in securities of the applicant commences on the Exchange, a person or group in the prospectus shown to hold a controlling interest in the issuer must ensure that the registered holder does not dispose of any of those securities of the issuer of which he is shown in the prospectus to be a beneficial owner, a beneficial owner being a person having the ultimate beneficial ownership or control of the securities.
Rules concerning the prohibition of market manipulation, such as effecting a trade in a security that involves no change in its beneficial ownership, insider trading and untrue statements are stipulated in the Market Conduct Regulations.
There are general sanctions stipulated in the Capital Market Regulation that may be placed on any person that engages in or is about to engage in acts or practices that constitute a violation of the Capital Market Regulation or its Implementing Rules. The range of such sanctions includes:
01. damages and right to indemnity;
02. issuing a warning to the concerned person;
03. issuing a cease or desist order;
04. requiring the person to take necessary steps to avert the violation, or, where appropriate, to make restitution to those who have suffered damages;
05. requiring the violator to pay for the CMA’s account the gains realized as a consequence of the violation;
06. suspending the trading in the security;
07. barring the violator from acting as a broker, portfolio manager or investment adviser;
08. the seizing and executing of property;
09. issuing a travel ban;
10. barring the violator from working with companies whose securities are traded on the Exchange; and
11. disciplinary action, revocation or suspension of licence.
*This Saudi Arabian Law Overview is not intended to be legal advice, and cannot be relied on as a substitute for legal advice. We make no representation that the contents of this Saudi Arabian Law Overview are or will remain accurate or current.
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