Saudi Arabia’s CMA permits foreigners to invest in debt instruments

On 2 September 2020, the CMA issued a resolution on 22/12/1441 H, which permits both resident and non-resident non-nationals to invest directly in listed and unlisted debt instruments. This development forms part of the CMA's strategic goal to increase the liquidity (and therefore stability) of Saudi Arabia's capital markets, in line with the Financial Leadership Program and Financial Sector Development Program.

Additionally, the CMA has released a guide, the Foreign Investor Guide in the Saudi Securities, which further clarifies which entities may invest in securities and the differences between the various types of foreign investors. Four distinct categories apply to foreign investors who are not residents of Saudi Arabia they now may invest in securities as: (i) a qualified foreign investor; (ii) an ultimate beneficiary in a swap agreement; (iii) a foreign strategic investor; or (iv) a direct investor. Below is a brief explanation of which entities fall into these four categories and some of the differences between them.

Qualified foreign investors

A qualified foreign investor may invest in all types of listed securities. Broadly, a qualified foreign investor must be a licensed financial institution subject to regulatory oversight in a jurisdiction that the CMA considers to have equivalent standards of oversight. An applicant must have legal personality and be one of the following types of entity: bank, brokerage or securities firm, insurance company, government or government related entity, investment fund or another financial institution considered eligible by the CMA. Unless the applicant is a government or government related entity, they must have at least 1,875,000,000 Saudi Riyals (or an equivalent amount) under management or custody. The application must be submitted to a capital market institution that has been licensed by the CMA to conduct custody or dealing activities,

If the relevant capital market institution accepts a qualified foreign investor's application, he can invest in this capacity. However, any investment will be subject to the restrictions set out in the Rules for Qualified Foreign Financial Institutions Investment in Listed Securities (available on the CMA's website here). As a result of such restrictions, each individual qualified foreign investor may not own 10 percent or more of the shares in any listed company or any debt instruments that are convertible into such shares (convertible debt instruments) and, in aggregate, qualified foreign investors may not own more than 49 percent of such listed shares or such convertible debt instruments Please note that the investment restrictions mentioned above are not exhaustive and further advice must be sought prior to investing in securities.

Foreign strategic investor

A foreign strategic investor may purchase shares of listed companies, although they may not invest in the debt market or purchase units in investment funds. Although an entity which qualifies as a foreign strategic investor may also qualify as a qualified foreign investor, ultimate beneficiary in a swap agreement or a direct investor and may invest in the debt market or investment funds in such capacity.

A foreign strategic investor is a non-resident foreign legal person (not necessarily a financial institution) who may invest in the shares of listed companies in accordance with the Instructions for the Foreign Strategic Investors Ownership in Listed Companies (available on the CMA's website here). Such foreign strategic investors must be established or licensed in a country which applies regulatory or supervisory measures which are recognised and accepted by the CMA. Any investment in the shares of a listed company will be subject to certain investment restrictions set out in Part 6 of these Instructions, which include a requirement that the foreign strategic investor does not dispose of such shares for at least 2 years after the date that they were purchased.

Direct investor

A direct investor may invest in listed and non-listed debt instruments, as well as listed shares on the parallel market and investment funds.

All non-national legal and natural persons may invest directly in debt instruments. To invest in debt instruments as a direct investor, a non-resident foreign investor must submit an application to open an account at one of the licensed capital market institutions. Non-resident foreign investors may not invest in debt instruments if they seek to invest as a direct investor and as a qualified foreign investor or ultimate beneficiary in a swap agreement at the same time. A foreign person who invests directly in debt instruments will not be able to convert them into shares listed in the Main Market unless they are one of the categories of investors who are allowed to invest directly in shares listed on the main market, or becomes an ultimate beneficiary in a swap agreement according to the provisions of the CMA's instructions regarding swap agreements.

To invest in an investment fund as a direct investor, a non-resident foreign investor must open an investment account at the capital market institution that has been licensed by the CMA and that has issued the units of the chosen fund and complete the requisite documentation for subscription and redemption. Additionally, a non-resident foreign investor may buy and sell units of listed investment funds.  

Non-resident foreign investors can invest in the Parallel Market by submitting an application to open an account directly at one of the capital market institutions that have been licensed by the CMA. Legal persons can open an investment account in the Kingdom of Saudi Arabia and an account at the Depositary Center if they are licensed or incorporated in a jurisdiction that applies a standard of regulatory oversight which is considered equivalent by the CMA. Natural persons must hold the nationality of a country which applies such equivalent oversight and reside in such a country. A natural person must also fulfil any of the following criteria:

• has conducted transactions in security markets of not less than 40 million Saudi Riyals in total and not less than ten transactions in each quarter during the last twelve months;
• his net assets are not less than 5 million Saudi Riyals;
• works or has worked for at least three years in the financial sector;
• holds the General Securities Qualification Certificate, which is recognized by the CMA; or
• holds a professional certificate that is related to securities business and accredited by an internationally recognised entity.

Investments in a Parallel Market are subject to the investment restrictions stipulated in the Guidance Note for the Investment of Non-Resident Foreigners in the Parallel Market. As a result of these restrictions each non-resident foreign investor may not own 10 percent or more of any listed shares or convertible debt instruments. Additionally, non-resident foreigners will be prohibited from investing in a parallel market if they seek to invest both as direct investors and qualified foreign investors at the same time.

Ultimate beneficiary in a swap agreement

A non-resident foreign investor may receive the economic benefits of the securities listed on the Saudi Stock Exchange through entering into certain swap transactions executed under a swap agreement with a capital market institution licensed by the CMA to conduct dealing activities. Under such swap arrangements, an investor can obtain exposure to all types of listed securities, provided that the duration of the swap agreement does not exceed four years and the total amount of securities underlying the swap transaction must be less than 10 percent of the aggregate amount of such shares or convertible debt instruments.

For any queries in relation to the above, please contact Lee Irvine or Muneer Khan.