Enactment Of The Saudi Arabian Capital Markets Law

The Council of Ministers today passed the Saudi Arabian Capital Markets Law. The Law sets out the framework for the capital market including:

• The establishment of the Saudi Arabian Securities and Exchange Commission ("the Commission") with objectives of protecting investor interests, ensuring orderly and equitable dealings in securities business, and promotion and development of the capital market;
• Vesting the Commission with the powers to:
  • License non-bank financial intermediaries; and
  • Authorise the offering of securities to the public.
• The establishment of the Saudi Arabian Stock Exchange ("SASE") incorporating the national securities depository centre.

The enactment of the Capital Markets Law will facilitate the licensing of non-bank financial intermediaries and the issuance of an increased number and variety of securities. Based on international best practice, the Capital Markets Law will result in the restructuring of the capital markets in Saudi Arabia, promoting greater efficiency and transparency. The Law is integral to the government's stated aim of privatisation, leading to increased participation by citizens in the capital market and thus the national economy.

Key Features of the Saudi Arabian Securities & Exchange Commission

The Commission will be governed by five Commissioners to be appointed by Royal Decree, one of which will be nominated as the Chairman and the second as the Vice Chairman. The Commission will develop and regulate a capital market that is dynamic, fair, transparent and efficient, and will contribute to the nation's economic development.

The Securities and Exchange Commission will be the primary regulatory body for the Saudi Arabian capital market. The new Law is expected to promote a more efficient and virile capital market, which would be pivotal in meeting the nation's economic and developmental aspirations. The Commission will endeavour to deepen and broaden the market for enhanced socio-economic development.

In order to enable the SEC to achieve the objectives of investor protection and capital market development The Commission will:

1. Regulate investments and securities business in Saudi Arabia;
2. Register and regulate the Saudi Arabian Securities Exchange (including the national securities depository);
3. Register securities to be offered for subscription or sale to the public;
4. Organise training programmes and promote high ethical standards;
5. Register and regulate non-bank financial intermediaries including members of the Exchange, and employees of these, and others involved in the organisation and operation of the capital market including custodians of securities and credit rating agencies;
6. Protect the integrity of the securities market against abuses arising from the practice of insider trading;
7. Review, approve and regulate mergers, acquisition and all forms of business combinations;
8. Provide investor education and promote investor awareness;
9. Conduct research into all or any aspect of the securities industry;
10. Prevent fraudulent and unfair trade practice relating to the securities industry; and
11. Perform such other functions and exercise such other powers not inconsistent with the Law as necessary, or expedient for giving full effect to the provisions of the Law.

Key Features of the Saudi Arabian Stock Exchange

The Stock Exchange, incorporating the national securities depository, will be a private sector company, the board of which will initially consist of nine members, three from the Government (Ministries of Finance, Commerce, and SAMA) and six from the shareholders of the Exchange. It will be the only stock exchange in the Kingdom and will perform the following functions:

1. Ensure fairness and transparency of the markets operated by the Exchange;
2. Admit members (both brokering and clearing);
3. List and explain the requirements and conditions for the listing of securities;
4. Promote high ethical standards among members, their employees and market participants;
5. Promote high standards of corporate governance;
6. Ensure timely and accurate dissemination of market information;
7. Establish and operate a nation wide system for securities trading, settlement clearing and depository in order to protect investors and maintain fair and orderly markets; and
8. Provide modern communication and data processing facilities in order to foster efficiency, enhance competition, and increase the information available to market participants.

The Stock Exchange Company will have the sole authority to settle and register transactions of securities.

Background

The Saudi Arabian stock market has a long history; shares were first offered to the public in 1954. The market remained informal until the mid 1980's when a Ministerial Committee made up of the Ministers of Finance and Commerce and the Governor of the Saudi Arabian Monetary Agency (www.sama.gov.sa) was formed with overall responsibility for the regulation and development of the market.

Saudi Arabia introduced the world's first fully electronic market in the early 1990's, comprising trading, clearing, settlement and depository. A new infrastructure for the market - Tadawul - was implemented in 2001 (www.tadawul.com.sa). The market has grown significantly during this time. At the end of 11 June 2003, market capitalisation stood at over 477 Billion Saudi Riyal confirming Saudi Arabia as the largest market in the region and one of the largest emerging markets in the world. The number of companies listed on the market remains comparatively low at 65.

Trading in shares of these companies is limited to Saudi nationals and citizens of other Gulf Cooperation Council (GCC) member states. Non-GCC nationals participate in the market by investment in open-end mutual funds offered by Saudi Arabian banks.