Nomu Room for You

Saudi Arabia’s capital markets witnessed a historic boost on February 26, 2017 as the long-anticipated alternative market, the “Nomu-Parallel Market,” officially launched. In an official launch event attended by a number of representatives from the government and the local stock exchange Tadawul, Saudi’s bourse—the largest in the Middle East—opened the doors to its smaller, yet ever-dynamic, alternative listing platform.

According to the government’s broad-based Vision 2030, the country is on course to becoming a “market maker in selected sectors, as well as a leader in competitively managing assets, funding, and investment. All of this will require the formation of an advanced financial and capital market open to the world, allowing greater funding opportunities and stimulating economic growth.”

For most observers, the highlight of the reforms in the capital markets relates to the opening of the USD420 billion Tadawul to qualified foreign investors, or the much-anticipated listing of the world’s biggest energy company, Saudi Aramco, projected to be the biggest IPO in history. Yet, in order for the markets to really stimulate widespread growth, the on-going reforms must go deeper into the business landscape and help strengthen the backbone of any economy—its small and medium enterprises.

Ranging from food distribution firms to industrial trading groups, with authorised capital varying from SAR11 million (USD2.9 million) to as much as SAR225 million (USD60 million), SMEs secured regulatory approval from the Capital Markets Authority (CMA) to list their shares on the opening day of Nomu-Parallel Market’s landmark launch.

Officially, the main objective of the alternative market is, first, to secure additional sources of funding for issuers to access capital, and, second, to increase diversification and deepen the capital market. The mechanism for achieving this will include offering lighter restrictions to issuers, restrict trading to qualified investors, and give companies the opportunity to eventually list on Tadawul’s main market, providing they file a new request with the CMA.

Speaking exclusively to TBY, Tadawul’s CEO, Khalid Al Hussain, explained: “The main benefit of developing a parallel equity market that caters toward small- and medium-sized enterprises is that it provides an alternative platform for companies to access funding. This in turn allows companies to successfully expand their operations (organically or inorganically) and increases the creation of job opportunities with the ultimate goal of achieving sustainable growth.”

Specifically, the key differences between the main market and Nomu are that the latter requires a market cap of SAR10 million (USD2.6 million), compared to Tadawul’s SAR100 million (USD26.7 million) cap. In addition, the main market requires issuers to offer at least 30% of total shares, while Nomu permits a minimum 20%, presumably to encourage family groups who are reluctant to part with large proportions of their stakes. On the issue of public shareholders, Tadawul-listed firms require at least 200, while the parallel market stipulates that, if the aggregate listed value exceed SAR40 million (USD10.7 million), 50 shareholders are required, whereas if it is under, only 35 are needed. Nomu issuers will also be prone to higher volatility, as daily fluctuation is limited to +/- 20%, compared to the main market’s 10%

The final key difference between the two relates to transparency and disclosure requirements. While companies listed on both are obliged to provide financial statements quarterly, the parallel market gives its issuers an extra 15 days (45 days total) to disclose their results at the end of each quarter.

This point is vital, not so much because of the difference itself, but rather because it encourages corporate visibility to a segment where such practices were widely neglected. As Vision 2030 looks to attract foreign capital to Saudi Arabia’s largely untapped sectors of the economy, a crucial condition for investors will be to ensure transparency and sound corporate governance. While Nomu’s launch has been modest and widely underreported, the broad reforms it will promote amongst SMEs could make it the most important addition to Saudi Arabia’s ever-evolving business landscape in years to come.