​The Capital Market Authority (CMA) explained that the Rules for Qualified Foreign Financial Institutions Investment in Listed Shares (the Rules) - issued on May 4, 2015 and consisting of 29 Articles allow QFIs and their approved clients to exercise all the rights related to listed shares owned by them, including trading in rights issues.

According to the Rules, applications for registering qualified foreign financial institutions shall be submitted through the Assessing Authorised Persons (AAPs) (financial institutions  authorised by CMA to conduct dealing activities) in the form prescribed by CMA, where these AAPs are responsible for submitting the application to CMA to register the foreign investor, to become a QFI from the date of its registration with CMA. The Rules do not apply to natural persons who hold the citizenship of one of the Cooperation Council for the Arab States of the Gulf (GCC) countries, or legal persons holding the citizenship of one of the GCC countries and  the capital of which is majorly owned by citizens or governments of the GCC. Also, the foreign investor applicant must be a financial institution that has a legal personality which falls within one of the following types: banks, brokerage and securities firms, fund managers and insurance companies. The foreign financial institutions applying for registration must be licensed or otherwise subject to regulatory oversight by a regulatory authority, and incorporated in a jurisdiction that applies regulatory and monitoring standards equivalent to those of the CMA or acceptable to it.  On that note, CMA has provided the APs duly authorised to conduct dealing activities with a list of the countries that  apply regulatory and monitoring standards equivalent to those of CMA or acceptable to it.

In order to have experienced and financially prudent foreign financial institutions, the Rules require that the applicant or any of its affiliates must have been engaged in securities activities and investment therein for a minimum of 5 years. It must also have assets under management of SR18,75 billion (or an equivalent amount) or more. CMA may reduce the minimum for these assets to SR 11,25 billion (or an equivalent amount). This includes the assets owned by the applicant or its group for the purposes of investment and the assets managed by the applicant or its group for the account of another person or persons.

As for the clients whose money will be invested in the Exchange by the QFIs after being approved by CMA, the client must be an investment fund incorporated in a jurisdiction that applies regulatory and monitoring standards equivalent to those of the Authority or acceptable to it or a financial institution that meets all the registration conditions applied to the QFI as stated in the Rules.

According to the Rules, the AAP who accepts an application for registration must agree with the applicant a draft form of “QFI assessment agreement” and send a copy of the draft agreement to the CMA in addition to a signed copy by both parties after receiving the CMA’s notification for registration.

The QFI assessment agreement includes several requirements including: an undertaking by the applicant to abide by the Capital Market Law and its Implementing Regulations and the rules of the Exchange and other relevant laws. After registering the QFI or approving its clients, they must not invest in any listed shares unless they hold a client account with a local bank and an account with the Depositary Center at the Saudi Stock Exchange (Tadawul).

The rules include a number of limitations on investments. One of them is that each QFI, together with its affiliates, or each approved QFI client together with its affiliates may own a maximum of 5 percent of the shares of any issuer whose shares are listed and the QFI must not execute any transaction which would result in the relevant client, together with its affiliates, owning more than 5 percent of the shares of any issuer whose shares are listed. The Rules also state that the maximum proportion of the shares of any issuer whose shares are listed that may be owned by all foreign investors (in all categories, whether residents or non-residents) in aggregate is 49 percent, including interests under swaps. The maximum proportion of the shares of any issuer whose shares are listed that may be owned by QFIs and approved QFI clients is 20 percent. In addition, the maximum proportion of the shares of all issuers whose shares are listed that may be owned by QFIs and approved QFI clients in aggregate is 10 percent by market value, including any interests under swaps.

Other legislative limitations on foreign ownership in joint stock companies will also be applied on the investments of Qualified Foreign investors and their approved clients in the Exchange in addition to the limitations set forth in the articles of association or by-laws of the listed companies or any instructions issued by the supervisory or regulatory authorities to whom these companies are subject.