Saudi Arabia wants to boost secondary deals

Saudi Arabia is taking steps to end the kingdom's lack of secondary offerings, which have failed to gain traction in the Persian Gulf even as initial public offerings (IPOs) have surged, Bloomberg reports.

Last week, Saudi Arabia's Capital Markets Authority announced it was calling for a 30-day public consultation on a regulatory framework for secondary offerings. According to the authority, these secondary offers will make it possible for shareholders to sell their stakes, thereby increasing liquidity in the Gulf's largest market.

Sales of secondary stocks are few in the Gulf, hampered by a lack of a clear regulatory framework, investors not being familiar with them, and a price gap between buyers and sellers, according to the source cited. Investors and bankers want to see more such deals, as they improve market liquidity and are an essential part of equity capital markets elsewhere.

"Encouraging secondary offerings could help increase the volume of shares available on the market, thereby increasing liquidity and market importance in regional indices," said Achraf Drid, Managing Director at XTB Middle East and North Africa, adding: "Such a move it could help create better trading conditions and attract more local and international investors, and it could also open up opportunities for foreign investors to expand their participation in the Saudi market."

According to the CMA, more shareholders selling their stakes would increase the weight of the Saudi capital market in emerging market indices such as MSCI and FTSE Russell.

In the past three years there have been only four secondary sales of shares in the Gulf, which have collectively raised less than $5 billion. Of those, three were in Saudi Arabia, Bloomberg data show. The most recent transaction took place a year ago, when the kingdom's sovereign wealth fund sold a $610 million stake in the country's stock exchange operator, Saudi Tadawul Group Holding. However, the stock has since traded just above the offer price of 191 riyals.

There are currently no official rules on secondary offerings in Saudi Arabia, and previous offerings, such as Tadawul's, have been made with exemptions from the regulator, according to Bloomberg.

The lack of secondary offerings in the region contrasts with the situation in other markets, such as Europe, where IPOs are in crisis but shareholders have already raised nearly $38 billion by selling stakes in listed companies. This is a 50% increase over the previous year's figures, Bloomberg concludes.