Be the Bourse

You began your tenure on very strong footing, at the helm of a robust and diversified stock market that accounts for 77% of the region’s liquidity. In 2014, many new IPOs are expected. How will you deal with these new entrants, and what are your plans moving forward?

Our new X-Stream INET trading platform, the latest in NASDAQ OMX’s trading technologies, which is to be deployed by the end of 2014, is more than capable of accommodating all future IPOs, both from a local context, but also from a regional perspective, particularly if you consider the likelihood of cross-listings. The platform is also highly customizable and can accommodate the listing and trading of multiple security formats, which positions us well for future developments in the capital market. It is also worth noting that a recent regulatory policy initiative is also set to have an impact on the way we deal with IPOs. In fact a number of activities have been underway focused on updating processes in the primary and secondary markets. To put this into context it is worth revisiting the Capital Market Authority’s 2012 annual report, which was published in 1Q2013, within which HE Mohammed Abdulmalik Al Sheikh, the Chairman and CEO of the Capital Market Authority (CMA), in his first statement to the market, outlined four primary initiatives for implementation, foremost amongst which was the application of Chapter Three of the Capital Market Law, which defines the roles and responsibilities, authorities, and controls prescribed on the Saudi Stock Exchange. The outcome of this regulatory initiative will not only empower the Saudi Stock Exchange by allowing us to activate our full scope of responsibilities, but it will also introduce a number of transient challenges that will be dealt with in an orderly and collaborative manner with our regulator to ensure the continued wellbeing of our capital markets. Ultimately we are confident that the full implementation of this initiative will open the door to a number of capital market development opportunities. As part of this initiative, for example, the Saudi Stock Exchange will assume jurisdiction for setting listing conditions for all types of securities. Currently all listing requirements are determined by the CMA, and are prescribed within the provisions of its Listing Rules. The migration of these incubated responsibilities to the Saudi Stock Exchange will allow us to work more actively with our regulator to consider further optimizations to our capital markets, primary amongst which would be the possible adoption of a tiered stock market structure, allowing a separate SME market to be born with its own listing conditions and, potentially, its own trading rules. Stimulating SMEs has been a major topic of discussion in Saudi Arabia over the last few years, with a broad range of policymakers weighing in to influence the viability and contribution of these enterprises to the creation of a sustainable and compelling economic growth story for the Kingdom. Our role in supporting this important segment of our economy seems quite clear.

What will you be doing, in that respect, to protect investors?

The Saudi Stock Exchange, by virtue of law, sits as both the national securities exchange and sole securities depository in the Kingdom. As such we are in a very privileged position acting as the exclusive gateway to the Saudi capital markets. As a result of this exclusivity we are not only a commercial entity seeking to grow our business with the aim of generating strong and sustainable financial performance, but we are also a national interest entrusted with tremendous social and economic responsibilities, primary amongst which is upholding the integrity of our capital market and protecting its stakeholders. We will continue to honor this privilege and responsibility by continuously acting with due regard to our corporate socioeconomic obligations, and by empowering our issuers, members, data vendors, and investors with cutting-edge market technologies and a highly liquid and efficient trading platform. We must also require and foster a high degree of disclosure, transparency, and corporate governance amongst our issuers by evolving ourselves into a representative beacon of excellence. It is by these fundamental means that we protect our investors. Ultimately, investors shoulder the burden of the investment decisions they make, while we simply facilitate the provision of the information they need to make that decision, and offer them a highly liquid platform to efficiently act on it. In this spirit, we recently enhanced the quality of the information investors receive by introducing the IFSAH XBRL-based issuer disclosure system. This platform allows issuers to post bi-lingual corporate announcements and financial reports using standardized electronic templates designed to enhance the investment decision-making process, by making it easier for investors to compare financial performance indicators across companies. We also worked closely with the CMA and our members on the recently approved regulatory framework to govern listed companies suffering from significant levels of capital erosion. The framework is scheduled to enter into force in July, 2014, with the primary purpose of ensuring that investors are made fully aware of an issuer’s status as a distressed company prior to being able to buy its shares. Going forward, our aim is to adopt progressive and innovative approaches to fostering a knowledge-based investor culture. For example, we are studying different means of stimulating wider and deeper analyst research of our listed companies, perhaps through the introduction of a research funding model to subsidize the efforts of research houses. We are also working on introducing an interactive investor relations platform and call center to enhance the communication of listed companies with their shareholders and the general investing public.

There is a rumor that you are hoping to open the market to FDI. Is there a timeline for that?

As far as the Saudi capital markets are concerned, I think that the issue of allowing direct foreign portfolio investments has been discussed and debated at many levels and, ultimately, I believe it is a simple matter of “when” rather than “if” Saudi Arabia enacts policies to allow such investment flows. As a member of the global community, we have implicit harmonization commitments that we must continue to work actively to honor. In this respect, it is worth mentioning that the Saudi Stock Exchange is already positioning itself well for any potential changes to foreign investment policy. Indeed, the IFSAH issuer disclosures system, since its launch in June, 2013, has enabled all of our listed companies to announce their periodic financial results in both English and Arabic. We will continue to lay down the required groundwork to ensure that the Saudi Stock Exchange is ready for this highly anticipated policy shift.

How do you think the market will react when that change occurs?

I think the market has, to a certain extent, already started to react. The Saudi stock market, over the course of 2013, has grown by around 25% in terms of market capitalization. Over the same period, the Tadawul All Share Index (TASI) has outperformed the MSCI World Index, the Emerging Markets Index, whilst marginally underperforming the Frontier Markets Index. This appreciation has occurred under the backdrop of trading metrics that show a decline of 29% in year-on-year trading values, a 36% decline in volumes traded, and a 31% decline in transactions conducted. Although our liquidity metrics remain relatively robust, from a regional perspective, the statistics nevertheless suggest that investors may be adopting a longer-term investment horizon compared to historical standards, perhaps increasing their exposure to prime issuers in preemption of the entry of foreign investors into the market.

Energy and insurance have both been strong segments over 2H2013. Which sectors do you envisage being strong in 2014?

I think that both the consumer- and infrastructure-related segments will continue to do well in 2014 in light of the projected growth in the non-oil economy, and continued government infrastructure spending. The healthcare sector is also likely to expand with the potential of further IPOs in this segment.

How does the Saudi Stock Exchange promote economic diversification?

We promote economic diversification by providing companies with an efficient venue for accessing capital. We augment this operational aspect of our business by conducting various marketing and educational activities. Indeed, the Saudi Stock Exchange has been very active in reaching out to family-owned businesses across the Kingdom with the aim of enhancing awareness about the virtues of becoming a listed company, particularly in areas related to business continuity, corporate governance, inheritance and succession planning. In fact, over the course of the last two years we have conducted three IPO events in three of the key provinces in the Kingdom. These events have attracted the attendance of more than 220 family-owned businesses, resulting in more than 70 one-on-one meetings, of which around 50% have culminated in companies seeking further counsel from licensed financial advisors. Ultimately, we are committed to growing the national economy by offering value-added capital raising frameworks for all sectors of our market, with an invigorated focus on SMEs. We believe that the new developments in our ecosystem will provide us with the right tools to achieve this.

© The Business Year – March 2014