Saudi Arabia's Tadawul is the biggest stock market in the Gulf region, but it stands out for a restrictive rule: foreign investors are allowed to hold no more than 49% of any listed company's shares. This ceiling has kept many international funds on the sidelines, limiting the market's appeal.
The cap is the only one of its kind among major Gulf exchanges, making Saudi Arabia an outlier. According to Morgan Stanley strategist Matthew Nguyen, the restriction has been a key barrier to greater foreign participation.
This month, Mazen Al-Sudairi was named chairman of the Capital Market Authority (CMA), succeeding Mohammed ElKuwaiz, who had led the regulator for nearly a decade. Al-Sudairi brings a strong financial background: he previously headed research at Al Rajhi Bank, advised the government's Council of Ministers, and sits on the investment committee of the Public Investment Fund (PIF), which manages over $1 trillion in assets.
His appointment has revived expectations that the CMA will push forward with market liberalization. Analysts believe Al-Sudairi's experience and connections could accelerate reforms, particularly regarding foreign ownership limits.
In an August 2024 note, Nguyen calculated the potential impact of easing the cap. If the limit were removed entirely, passive investment flows could reach $7.4 billion. Even a partial relaxation to 75% would attract an estimated $4.3 billion. These figures highlight how much money is waiting on the sidelines for a policy change.
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The urgency is tied to MSCI's index review schedule. MSCI, which runs global equity indices, will conduct its next review in November. To be included in that cycle, any rule change must be implemented by late October. That gives Al-Sudairi a narrow window to act if he wants to capture the attention of index funds that track MSCI benchmarks.
The push for a more open stock market fits into Crown Prince Mohammed bin Salman's vision to diversify the Saudi economy beyond oil. A deeper, more liquid equity market is a key part of that strategy. The government has already taken steps, such as opening direct trading to foreign investors in February, but progress has been uneven.
Despite the reforms, the IPO market has struggled. Only two main-market listings have occurred this year, each raising less than $100 million. One contractor's planned listing was scrapped due to regional conflict, and several other companies postponed their offerings after poor performances.
There is also a significant backlog of companies waiting for regulatory approval. Once approved, they have a six-month window to go public, which adds pressure. Additionally, a rule requiring issuers to allocate up to 30% of shares to retail investors has become problematic, as retail demand is not strong enough to absorb that allocation.
The CMA is currently examining banks involved in weak IPOs, particularly cases where companies missed their earnings forecasts after listing. This scrutiny could lead to stricter oversight, but it may also make issuers more cautious.
For international investors, the potential removal of the 49% cap would be a significant step. It would align Saudi Arabia with other Gulf markets and could trigger substantial inflows. However, the timing is tight, and the new chairman faces a steep learning curve.
If he can push through the change before the MSCI deadline, the impact could be felt quickly. Otherwise, the market may have to wait another year.
The appointment of Al-Sudairi signals that the government is serious about reform. But whether he can deliver on the promise remains to be seen. For now, investors will be watching the calendar closely.
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