Saudi sets ownership caps as $575 billion bourse opens to foreigners

By Marwa Rashad

RIYADH (Reuters) - Foreign investors can own no more than 10 percent of Saudi Arabia's stock market by value, the regulator said on Monday as it announced rules opening the $575 billion bourse to direct foreign investment next month.

A single foreign investor will be able to hold no more than 5 percent of any listed company, while total foreign ownership of a firm will be limited to 20 percent.

The Saudi market is by far the biggest in the Arab world and one of the last major bourses globally to open up, so the reform is attracting huge foreign interest.

Fund managers estimate the market could draw $50 billion or more of new foreign money in coming years if it is included in global indexes. Analysts believe it could enter the widely watched MSCI emerging market index as soon as mid-2017, if it satisfies requirements for liquidity and transparency.

But by placing a range of restrictions on the operations of foreign investors, the Capital Market Authority (CMA) made clear on Monday that it did not want a sudden, destabilising rush of money into the bourse.

The rules were identical in major respects to a set of draft regulations which the CMA published last August, and which were privately criticised by some fund managers then as overly restrictive.

For example, the 10 percent cap on foreign ownership of the market's value may be hard to enforce in real time, creating uncertainty for investors. Foreign ownership in some other big emerging markets is much higher, at around 20 percent or more.

Foreign institutions, including central banks, will be required to apply for permission to invest. They must have at least $5 billion of assets under management, although the CMA has the discretion to reduce this to $3 billion when it wishes.

Saudi income tax laws will apply to foreign investors and a 5 percent tax will be levied on dividends paid to them by listed companies.

Direct purchases of Saudi stocks by foreigners can start on June 15, the CMA has said. At present, they are limited to indirect investment through swaps and exchange-traded funds, which can be inconvenient and expensive. Foreigners are estimated to own no more than about 3 percent of the market.

Saudi Arabia is not opening its market because it needs the money; its banks and state coffers are flush with oil wealth. Instead, it wants to use the market to diversify its economy beyond oil, expose firms to market discipline and create jobs.

The market-opening rules are similar to those used by some Asian markets, including China as it opened up over a decade ago. China used the rules to expand foreign participation in its market in small stages.

(Writing by Andrew Torchia; Editing by Pravin Char)