Running head: SAUDI ARABIA FINANCIAL STOCK MARKET Saudi Arabia Financial Stock Market Student’s Name University Affiliation Saudi Arabia Financial Market 1 SAUDI ARABIA FINANCIAL MARKET 2 Table of Content Table of Contents 1.0 Introduction ........................................................................................................................................... 3 2.0 Literature Review.................................................................................................................................... 3 3.0 Data Sources ........................................................................................................................................... 7 4.0 Conclusion .............................................................................................................................................. 9 5.0 References ............................................................................................................................................. 10 SAUDI ARABIA FINANCIAL MARKET 3 Saudi Arabia Financial Market Introduction The Saudi Arabia Financial market consists of primary and secondary stock markets. The primary stock markets are where securities are created. The secondary stock market, on the other hand, is where the securities are traded. Securities refer to the negotiable financial instruments holding specific monetary value. They demonstrate ownership in a publicly –traded corporation. In the markets, they can sell their fresh stocks as well as bonds to the public initially. A perfect example of the primary market is the IPO. Saudi Arabia, just like many other top economies of the world, has underlying stocks markets where securities are traded. The Saudi Stock Exchange, Tawadul, is the only institution authorized in the Saudi Kingdom to acts as the securities Exchange. Besides, it also serves the Gulf Cooperation Council (GCC) nations. Presently, there are over 200 companies listed in the Tawadul for trading. The Tawadul All Share Index is the primary stock market index The Tawadul website features the Market Summary of the Main Market, Parallel Markets, Sukuk and Bonds. The core aim of this paper is to examine the Saudi Arabia primary stock market by analyzing the regulator roles for primary and secondary markets, the key players as underwriters in the primary markets, the process of underwriting and the firms authorized to participate in it. Moreover, the paper will also analyze the development of the primary markets in Saudi Arabia by using statistical models. Literature Review The primary stock exchange deals with the creation of securities. The regulator roles for the Saudi Arabia primary stock exchange centers around the CMA. The CMA was established under the securities market Law. It was created to be responsible for regulating as well as developing the securities market in the nation (Alamazi, Liu &Forster, 2011). The CMA applies complete financial autonomy with direct links with the administration. It has full power and SAUDI ARABIA FINANCIAL MARKET 4 authorities to regulate as well as supervise the activities of the Saudi Arabia primary stock market. The CMA develops and monitors the country's CM by giving out rules and canons for the implementation of the securities market Law (Ramady, 2018). The main aim is to create an ideal environment for investment, enhance trust, and bolster openness and disclosure regulations in the companies listed. Besides, it protects participants to form illegal acts (Yousef, Sultan & Ahmad, 2017). The regulatory duties of the CMA centre on regulating and monitoring the acts of the bodies functioning under it. Also, it controls and oversees the complete disclosure of data about securities and also the assures. Moreover, the regulatory activities of the CMA extend to the protection of investors from unethical and inappropriate acts pertaining cheating, manipulation, fraud, control, and trading by insiders (Yousef, Sultan & Ahmad, 2017). To do this, the CMA monitors the authorized individuals, securities issuers and market trading in general carefully. In efforts to available all information to the members of the public, the CMA mandates all the participants to make available all information pertaining to the related securities, financial statements, material developments and information necessary for prospectuses (Ramady, 2018). By reviewing the information sources, investors can make the most appropriate investment choices and thus can protect themselves in a much better way. Also, the CMA protects investors by setting a maximum limit for the broker's commission, as well as regulating the fees and other expenses imposed by the Tadawul and the Depository Center. The secondary stock market refers to where the investors trade the securities. The securities include stocks and bonds. In this market, the investors buy securities from other investors. The sale proceeds emanating from the secondary market go to the investor, and not to the company issuing. The country's Stock Exchange handles the secondary stock market SAUDI ARABIA FINANCIAL MARKET 5 functions in the Saudi Arabia stock exchange, commonly referred to as the Tawadul. The Tawadul is under the supervision of the securities market authority. The Saudi Stock Exchange has considerable regulatory power over various rules and regulations approved by the CMA. These are and not limited to the Short Selling Regulations, Updated Securities Depository Centre Roles, The Updated Exchange, and Centre Procedures, Listing Rule and the Orders Aggregation Accounts Regulations. Underwriters in the primary stock markets refer to any parties evaluating and assuming the risk of another party for a given fee. The fee is paid in terms of a premium, interest, spread or a commission. The underwriter is crucial for the financial world for instance equity markets, Insurance sector, mortgage and the common types of debt security trading (Ramady, 2018). The primary markets are normally under the facilitation of investment banks setting a price range for certain security, and oversee its sale to the investors. In Saudi Arabia, the underwriter is the ultimate critical player in the IPO issuing. In most instances, the investment banker is the underwriter and he is thought to have the most ideal distribution channels as well as conducts appropriate for the enterprise's shares (Ramady, 2018). Besides, the underwriter aids in the determination of the price of the IPO and in creating a buzz for its listing (Ramady, 2018). There are various investments banks in Saudi Arabia which are responsible for the underwriting process in the primary stock exchange market. The top investment banks in the country are the Alisthitmar Capital, Al-Khaberr Capital, AlNefaie Investment Group, BMG Group, Falcom Financial Services, Swicoprp, Saudi Hollandi Capital, The Investor for Securities Company, Jadwa Investment Company and the Ithraa Capital LLC (Yousef, Sultan & Ahmad, 2017). SAUDI ARABIA FINANCIAL MARKET 6 The Saudi Arabia finance market is relatively young and undeveloped, thus has many players from abroad. The underdeveloped market implies great potential. Among the services offered by these investments banking institutions include mergers and acquisitions advisory, private placements, corporate finance advisory, and the issuing of the IPOs (Yousef, Sultan &Ahmad, 2017). There are also advisory and accounting firms that offer underwriting services in the country. A good example of these firms is the Al-Hamli & Partners accounting firm, founded and licensed in 1979. The firm offers a wide range of audit and accounting services in the Saudi Kingdom (Yousef, Sultan & Ahmad, 2017). Another firm is the UBS, which is an international accounting firm providing securities market services to clients. Its Saudi Arabia branch offers investments banking services licensed by the Saudi CMA. They include underwriting and acting as custodians of securities. The process of underwriting in the Saudi Arabia primary stock market is preceded with an issuing of an IPO. The IPO is a public offering entailing the sale of the shares of a company to individuals and also institutional investors. Before going public, the IPO is first valued to authenticate the share price offered to the members of the public. After that, the process of due diligence is done to ensure there is no chance for uncertain information (Ramady, 2018). The IPO is underwritten by one of the investments banks highlighted in his paper, who make arrangements for the listing of the shares in the Saudi Stock Exchange (Ramady, 2018). Through the services offered by the investment firm or bank, the investors can correctly assess the value of shares and establish the public market for stocks. As an underwriter, the investments banks purchase the company’s shares, selling them to the public on the company’s behalf (Ramady, 2018). The Saudi Stock Exchange requires that the offer of securities must be entirely underwritten by the underwriters licensed by the CMA. The firms and authorities involved in the SAUDI ARABIA FINANCIAL MARKET 7 underwriting process in the Saudi Arabia Primary stock market are over 25, as recently revealed during the issue of the IPO for the Saudi Aramco company. 3.0 Data Sources The primary stock market in Saudi Arabia is relatively young, and there are ongoing reforms to revamp it. The current wave of changes is aimed at increasing foreign investor access, improving transparency levels and streamlining processes. However, there has been recent success stories highlighting the developments in the Saudi Arabia primary stock market. One of these success stories is the Aramco IPO. The Aramco is a Saudi Arabia based multinational oil and natural gas company with its headquarters in Dhahran. It is one of the largest companies globally with regard to revenue. In November 2019, the company issued its prospectus for an IPO of part of its shares (Gamal, Rashad & Azhar, 2019). The move to release the prospectus can be traced back to 2016 when the Crown Prince announced his aspirations to sell at least 5 % of the Saudi Aramco to fund the nation's economic stimulus program. He aimed at raising over $100 billion from the sale (Gross, 2019). The shares began trading at the Saudi Arabia stock exchange During the IPO offer, the company engaged over 25 investment banks, for example, the Citigroup Saudi Arabia, HSBC Saudi Arabia, JP Morgan Securities PLC, Goldman Sachs International, and NCBC, BNP Paribas and Credit Agricore CIB (Gross, 2019). The terms and conditions for the underwriting agreement and coordination agreement were that the selling shareholders gave the underwriters the power and ability to offer an allotment to subscribed institutions participating in the bookbuilding process according to the distribution specified by the company, and also subscribed retail, investors whose subscription requests are accepted from the receiving entities. SAUDI ARABIA FINANCIAL MARKET 8 The IPO of the company did not meet the high buzz in the market that had been created. Many investors were against the $2 trillion valuations of the energy giant. Following the low reception of the IPO offer, the Saudi government postponed the IPO for some time, but management shakes up later in September 2019 got the process on the move again (Gross, 2019). However, the efforts were hit with another setback, with the company’s management and Saudi’s top government officers valuing the multinational $1.1-1.7 trillion (Gross, 2019). The foreign investors were spooked by the geopolitical risks associated with the company, following a damaging missile attack that struck the Aramco’s leading crude oil processing plant (Martin &Blas, 2019). Also, they were perturbed by the murder of the Saudi journalist, Jamal Khashoggi, who was butchered mercilessly in Turkey in 2018. Transparency and valuation issues remained to be the greatest challenge for the company and ultimately became its main undoing. In the IPO, the company made available a record 3 billion shares to the public investors (Gamal, Rashad & Azhar, 2019). About two-thirds of the shares offered were sold to institutional investors, while the Saudi-based companies bought 37. 5 % of the portion. To encourage the Saudi citizens to purchase the shares, the company stated it would be paying dividends to shareholders for at least $75 billion (Gamal, Rashad & Azhar, 2019). The shares of the company rose sharply in the first moment of trading to hit a 10% limit on the stock price fluctuation, pushing the price to 35. 2 riyals where it remained until the closing 3.0 pm. The company was able to raise $25. 6 billion, a record for an initial public offering, overtaking the Apple company as the largest publicly-traded company ever (Gross, 2019). SAUDI ARABIA FINANCIAL MARKET 9 Conclusion The paper has analyzed the financial market in Saudi Arabia, which is relatively new and is continuing to develop. In particular, it has examined the primary stock market and the secondary stock market in the company and the core regulator’s in these markets. From the analysis, it is evident that the Capital Markets Authority is the main regulatory body of the Saudi’s primary stock market, while the nation’s Stock Exchange is the central regulatory agency for the secondary stock market. Moreover, the paper has analyzed the underwriters in the stock market, who are the parties and firms offering advice to companies and facilitating sales of the share on behalf of companies. The main underwriters in Saudi Arabia are the investments banks and accounting firms. Also, the paper has examined the underwriting process, where the due diligence is done to ensure there is no chance for uncertain information. The IPO is underwritten by one of the investments banks highlighted in his paper, who make arrangements for the listing of the shares in the Saudi Stock Exchange. Finally, the paper has examined a real-life example of an IPO in Saudi Arabia, which entailed the Armco Company. The company broke records to become the largest IPO in the world, managing to raise $25. 5 billion. The IPO offer of the company highlights the regulatory issues around IPO offers in Saudi Arabia, as well as the role of underwriters. It is clear that the Saudi Arabia financial market is making strides, and there is a need for continuous support to sustain growth. SAUDI ARABIA FINANCIAL MARKET 10 References Alanazi, A. S., Liu, B., & Forster, J. (2011). The financial performance of Saudi Arabian IPOs. International Journal of Islamic and Middle Eastern Finance and Management. Gamal, R., &Rashad, M., & Azhar, S. (2019).Saudi Aramco Kick-Starts What Could be World's biggest IPO, Offers Scant details. Retrieved from https://www.reuters.com/article/us-saudi-aramcoipo/saudi-aramco-kick-starts-what-could-be-worlds-biggest-ipo-offers-scant-detailsidUSKBN1XD02V Gross, S. (2019). The Saudi Aramco IPO breaks records, but falls short of expectations. Retrieved from https://www.brookings.edu/blog/order-from-chaos/2019/12/11/the-saudi-aramco-ipo-breaksrecords-but-falls-short-of-expectations/ Mahmood, H., & Alkahtani, N. S. (2018). Human resource, financial market development and economic growth in Saudi Arabia: a role of human capital. Economic annals-XXI, (169), 31-34. Martin, M., &Blas, J. (2019).Saudi Aramco Seeks &1.7 Trillion Valuation in Worlds biggest IPO. Retrieved from https://economictimes.indiatimes.com/markets/ipos/fpos/saudi-aramco-seeks-171-trillion-valuation-in-worlds-biggest-ipo/articleshow/72093104.cms?from=mdr Ramady, M. A. (2018). The Aramco IPO: Governance, Listing, Options, and Policy Implications. In Saudi Aramco 2030 (pp. 167-248). Springer, Cham. Yousef Alkhateeb, T. T., Sultan, Z. A. A., & Ahmad, N. A. A. (2017). Financial market development and employment nexus in Saudi Arabia.
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