On 21 December 2016, the Capital Market Authority of Saudi Arabia (the CMA) approved the Parallel Market Listing Rules (the Rules), thereby establishing the Parallel Market, an alternative market to the Main Market of the Saudi Stock Exchange (Tadawul) (the Stock Exchange). The stated objective of the Parallel Market has been to provide an opportunity for a wider spectrum of issuers to obtain a listing on the Stock Exchange, as an alternative to obtaining a Main Market listing. This is particularly relevant for small to medium sized enterprises (SMEs) that could benefit from a listing, but are not yet in a position to comply with the more stringent eligibility for listing requirements of the Main Market. The introduction of the Parallel Market also completes another step in implementing "Saudi Vision 2030", which promoted the role of the Stock Exchange in providing additional funding sources, and greater opportunities for growth, to a broader range of businesses.
The Rules come off the back of other significant recent legal developments in the capital markets landscape of the Kingdom, including the Qualified Foreign Financial Institutions Investment in Listed Securities (the QFI Rules), which came into effect on 1 June 2015, the Real Estate Investment Traded Funds Instructions, which came into effect on 24 October 2016, and the Instructions of Book Building Process and Allocation Method in Initial Public Offerings (the Book Building Instructions), which came into effect on 1 January 2017. The Rules can be seen as the next chapter in the Kingdom's ongoing effort to grow and deepen its capital market.
The Rules consist of 29 articles, which regulate all aspects of the Parallel Market, ranging from the investors who are eligible to trade on the market to the eligibility requirements for listing.
Which entities are eligible for listing on the Parallel Market?
The Rules provide that not only Saudi joint stock companies, but also joint stock companies which are majority owned by nationals of the Cooperation Council for the Arab States of the Gulf (GCC), are eligible for listing on the Parallel Market. For example, therefore, a UAE incorporated limited liability company which is 51 per cent. owned by its founding shareholders may, following its conversion to a public joint stock company, apply for its shares to be listed on the Parallel Market.
Who can invest on the Parallel Market?
The Rules provide that only "Qualified Investors" may invest in shares listed on the Parallel Market, which is defined to include, as one may expect, the usual categories of sophisticated investors but also, significantly, "qualified foreign investors" (registered in accordance with the QFI Rules) and companies and funds established in any GCC member state. Any shareholders who owned their shares prior to the issuer's listing may also continue to hold such shares.
Role of an appointed financial adviser
The Parallel Market and the Rules share a number of common characteristics with the Alternative Investment Market (AIM) of the London Stock Exchange (LSE), which is also regarded as an alternative listing venue for smaller or growing companies, and as a stepping stone to an LSE Main Market listing. Similar to AIM, which requires a nominated advisor (typically referred to as the "Nomad") be appointed by the issuer to guide it through the listing process and provide certain confirmations to the LSE, the Rules require a financial advisor be appointed by an issuer requesting an admission to listing on the Parallel Market. As is the case with a Main Market listing, the financial advisor must, among other things, act as a point of contact with the CMA and satisfy itself, having conducted appropriate due diligence, that all relevant listing conditions have been satisfied and confirm the same to the CMA by way of written confirmation. It is essential therefore that CMA approved financial advisors proposing to act on such listings become sufficiently familiar with the Rules, so as to allow them to discharge their responsibilities to the issuer and the CMA.
Eligibility for Listing Requirements
Among the most significant provisions of the Rules are the eligibility for listing requirements, which are less stringent than those applying to the Main Market. The most noteworthy differences in the eligibility requirements of the Parallel Market compared to the Main Market are as follows:
|Parallel Market||Main Market|
|Track Record||Must have been carrying on a main activity for at least one financial year||Must have been carrying on a main activity for at least three financial years under substantially the same management|
|Financial Statements||SOCPA audited financial statements for preceding financial year only||SOCPA audited financial statements for three financial years|
|Aggregate market value of shares to be listed (i.e. expected market capitalisation)||At least SAR 10 million||At least SAR 100 million|
|Minimum shares to be held by the public (i.e. "free float")||Not less than 20 per cent.||Not less than 30 per cent.|
|Minimum number of public shareholders||Not less than 50 shareholders if the total market value of all shares to be listed is more than SAR 40 million||
Not less than 200 shareholders
|Not less than 35 shareholders if the total market value of all shares to be listed is less than SAR 40 million|
As evident from the above, the CMA has sought to balance its objective of encouraging and allowing market access to SMEs by relaxing the Main Market eligibility requirements, while at the same time ensuring there is sufficient liquidity, and an orderly aftermarket, in the shares of any Parallel Market listed entity on and following admission. For this reason, in particular, the minimum free float and minimum number of public shareholders requirements have been retained, albeit lowered (as opposed to being dispensed with altogether). This provides an interesting contrast to other alternative markets, such as AIM, that does not, for example, have a formal minimum free float requirement.
Requirement for a Prospectus/Shareholder Circular
There will still be a requirement for the issuer to produce a prospectus (in the case of a new listing) or a shareholder circular (in the case of a capital increase). However, the disclosure requirements applying to a prospectus/shareholder circular for a Parallel Market listing are substantially less burdensome compared to the Main Market. For example, there is no requirement for a working capital statement or a management's discussions and analysis, both of which would be required in the context of a Main Market listing.
Interplay with other Implementing Regulations
The CMA's Offers of Securities Regulation, which regulates securities offerings in the Kingdom, will apply to any Parallel Market listing. However, to further relax the burden on prospective applicants, the CMA has provided that the recently introduced Book Building Instructions will not apply to a Parallel Market Listing, and that the provisions of the Corporate Governance Regulation will be "deemed indicative" only.
As the latest effort by the CMA to deepen the capital markets in Saudi Arabia, the introduction of the Parallel Market should be welcomed. It is likely that the less stringent regulatory framework for, and consequently the reduced time and costs associated with, such listings will attract SMEs (including those established elsewhere in the GCC) to undertake an initial public offering on the Parallel Market. As of 11 January 2017, the shares of a number of companies have already been admitted to listing, and it is hoped that this will act as a catalyst for further issuances and listings in the near future.
Originally published January 18, 2017
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.