Listing Saudi Aramco’s Stock Exchange in the Global Markets

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Abstract

The purpose of this paper was to discuss the possibility of listing Saudi Aramco’s shares on New York and London stock exchanges and to make a comparison for these leading centers in order to forecast the future of Saudi Aramco’s initial public offering. With specific reference to corporate governance issues, the paper highlights the readiness of Saudi Aramco for listing on global stock exchanges. The design of the study was qualitative guided by the Framework Method. It was chosen for a comparative analysis and determining relationships between variables to draw descriptive and explanatory accounts centered on major themes or topics. Findings showed that the Saudi Capital Market Authority should review its corporate governance practices to attract foreign investors to the Tadawul. New York and London stock exchanges seem to be ready for the initial public offering, but they will have to review some of their practices to accommodate Saudi Aramco. To list on international stock exchanges, Saudi Aramco will be required to address such issues as the board’s composition, the focus on shareholders’ rights, directors’ responsibilities, the board’s committee, the disclosure issues, transparency, and conflicts of interest. The study also revealed other factors that could possibly influence outcomes of the initial public offering.

Introduction

One standout among the most elaborate and expansive financial related spectacles in the late 20th century and the early part of this century is the tremendous development in global financial exchanges and capital flows among different financial markets in advanced and emerging nations. This occurrence in the global financial system is an aftereffect of the progression of capital markets in advanced and emerging economies and the expanding assortment and intricacy of finance related transactions. It can also be seen as a consequence of the growing dependence of the developed and developing countries, as emerging nations turn out to be more included in global flows of commerce and payments. More flexibility in the movement of capital flows enhances the distribution of capital across the globe, enabling assets and investments to move to regions and countries with higher rates of return. Conflictingly, any attempts to confine capital flows prompt damages to capital structures that are for the most part exorbitant to the economies applying such controls. In this manner, the acceleration in global capital flows and financial exchange is in progress and, to a certain degree, an unalterable process.

This is evident through the growing number of firms whose securities are exchanged on global stock exchanges, which have quickly defied the geographical borders between local and global capital markets. Globalization of securities markets has quickened with the simplification of foreign exchange requirements, floating rates of exchange, domestic interest rate variations, and the expedition of a few different requirements, which beforehand restricted capacities of firms to conduct cross-border businesses. Improvements in technologies have enabled real-time global transactions. Stock exchanges have steadily expanded their understanding of the importance of foreign company listings and are escalating their search for possible new organizations.

The increasing globalization of capital markets provides more opportunities for firms to acquire new capital.¹ It likewise gives a different way for private firms to get public recognition, to bring down the cost of capital, to enhance foreign relations, and to improve the market value of their shares. Over the most recent two decades, an ever-increasing number of organizations have found these opportunities, and the rate of new listings has expanded steadily. In the meantime, the growing incorporation of worldwide capital markets and multinational business dealings generally prompt diminished returns from the global expansion or cross-listing.² As many listings are noted, some data suggest that most organizations have noted that their primary purposes behind cross-listing overseas have not been completely met, and an increasing number of firms are opting to discontinue their global cross-listings.³ Thus, to list on foreign stock exchanges is plainly a complex issue. Nonetheless, from these developments in the international financial market, companies seeking global exposure can decide to list their shares on foreign stock markets, and this is the case of Saudi Aramco.

Saudi Aramco is the biggest state energy firm that plans an initial public offering (IPO) late in the year of 2018. Observers claim that this is most likely to be the largest ever IPO, exceeding the $25 billion of Alibaba recorded in 2014.⁴ The Saudi energy giant firm plans to list its share on deep, active markets in foreign stock exchanges, as well listing on the country’s domestic stock exchange, the Tadawul. This implies that the company may be considering cross-listing of shares; that is when Saudi Aramco lists its equity shares on one or more foreign stock exchanges alongside the domestic exchange.

Saudi Aramco has been assessing various global stock exchange markets for hosting its shares. The New York and London Stock Exchanges are seen as the most viable options for global listing, according to insider information. However, Saudi Aramco has been evaluating other markets, including Tokyo and Hong Kong. Additionally, the company is also reported to be assessing other smaller but robust markets in Europe, Canada, and Singapore. Notably, the largest four stock exchange markets provide access to large reserves of investor cash, but they also present diverse sets of rules and conditions for the company to review, as it gets ready to leave the state firm status to become a public one.

Problem Statement

Some critical past developments have been observed in the Saudi Stock Exchange. In February 2006, the market showed relatively high progress rates that culminated to 20.634, which represented an annum rate increment of 230%. However, after that, market conditions were not as good as they were before and there was a market crash in 2006.⁵ Toward the end of 2006, the Saudi stock market major index, the Tadawul All Share Index (TASI), lost more than 64%. As a result, the market capitalization dropped to more than $325 billion.⁶ Many Saudi investors were losing their investments and the Saudi government intervened by restructuring and disciplining the market.

Problems of the Saudi stock market stemmed from several factors, including a lack of initial public offering, a widespread absence of corporate transparency, the surge of small time and first time investors, illiteracy on the main principles of investment and others. Thus, the market correction represented a greater shock and caused many investors to protest. With the planned Saudi Aramco IPO, it is imperative to study and understand whether the company can thrive in such a stock exchange environment. The Tadawul is generally closed for foreign investors, and its robustness and efficiency could be hard to ascertain, perhaps due to the lack of sufficient data. In addition, the existing anomalies, limited disclosure, and transparency could negatively impact decision-making among investors who lack the thorough knowledge of the stock market. Thus, a comparative study of three stock exchanges (the NYSE, the LSE, and the Tadawul) is extremely important for would-be investors.

Methodology

In this research, a qualitative study design was adopted based on the Framework Method approach. The Framework Method is found in the expansive group of investigation strategies frequently referred to as a qualitative content analysis or a thematic analysis.⁷⁸ These methodologies recognize shared characteristics and contrasts in qualitative data before concentrating on relationships between various parts of the collected data, in this manner, looking to draw descriptive and explanatory accounts centered on major themes or topics. The Framework Method gives clear processes to follow in analyses and delivers profoundly organized results of the shortened data. It, therefore, is valuable where a vast volume of data is involved and an all-encompassing and a distinct review of the whole data is necessary.⁹¹⁰

The major defining feature of the Framework Method is the matrix result: rows that contain cases, columns or sections with codes, and ‘cells’ of abridged data, giving a structure into which the analyst can methodically condense the data with a specific end goal to examine them through case and code. Frequently, a ‘case’ is a single interviewee, but this can be adjusted to different units of examination, for example, predefined cases. Although in-depth investigations of key topics can happen over the entire informational index, perspectives of each study participant bear the relationship with different parts of their views inside the matrix, so the context of the person’s perspectives is not lost during the analysis. Notably, comparing and contrasting information is crucial to the qualitative investigation and the ability to contrast data contained across cases and within each case is incorporated into the structure and procedure of the Framework Method.¹¹

The analysis process involved data coding, which was a conceptual or descriptive label assigned to raw data excerpts. Data were also categorized. This involved the grouping of codes into different clusters based on the same and interrelated concepts and thoughts. Categories were drawn from the raw data, and it led to the process of data abstraction – a move toward the general concepts instead of specific ones. This process was followed by charting, which involved capturing categorized and summarized data into the matrix (a spreadsheet with many cells where all data were captured through codes and cases) of the Framework Method. Data were also indexed in which codes were assigned based on the analytical framework to the data set in the matrix. An analytical memo was also developed to present all specific concepts and themes that emerged in the data during the process of analysis. This process has led to the development of specific themes or concepts for comparison. These interpretive concepts explained certain aspects of the data and reflected the final results of the analysis of the data set. Themes were expressed and established through probing data categories by comparison across and within various cases.

Notwithstanding, care is required before choosing the strategy as it is not an appropriate method for analyzing a wide range of qualitative data or for responding to all qualitative research questions, nor is it a ‘simple’ form of qualitative research for quantitative specialists. Essentially, the Framework Method cannot be applied to extremely heterogeneous data. That is, data for analysis should cover comparative themes or key issues with the goal that it is practical to categorize them.¹² Although the Framework Method is most ordinarily utilized for the thematic analysis of semi-structured interview data, in this research, it was adapted for textual data gathered from different publications, including journals, books, and reports.

Based on the Framework Method, past research was descriptively analyzed. Materials for the study included journal articles, books, newspaper articles, and other literature of interest in the area of global share listing, cross-listing, and other global stock exchange activities. These materials were found through thorough searches in different databases, online journal articles, and reviews of past reference materials in the same field. Further, a qualitative analysis was also used for the stock exchange analysis for comparative practices of the New York Stock Exchange, the London Stock Exchange, and the Tadawul. The analysis involved the extraction of information on stock exchanges from operational literature with listing data and related facts. Additional materials, such as journals and reputational publications, were also analyzed. Further, a qualitative analysis was applied to determine requirements for listing on the London Stock Exchange and the New York Stock Exchange, as well as on the Tadawul. The research involving cross-listing on these stock exchanges was based on data gathered from various publications, including reports, listing requirements, and general requirements for best practices in the market. Finally, all these elements of cross-listing were compared to each other for decision-making and for providing appropriate recommendations.

Literature Review

Stock Exchange

A stock exchange or a bourse (stock market) is a market in which brokers and traders buy and sell shares of stock, bonds, and other securities, as well as offer facilities for issue and recovery, particularly stocks listed by firms, derivatives, unit trusts, and bonds. Dividend and payment incomes also take place at stock exchanges. A stock exchange is a trading market for buyers and sellers to trade stocks and other financial instruments. The IPO is usually conducted in the primary market, and later trading takes place in the secondary market, which makes a stock exchange an extremely important element of a stock market. On the other hand, the capital market is where businesses can raise either short-term or long-term finance. It provides a wide range of financial instruments with risks, yields, and prices. Stock markets bring together speculators to invest in different financial instruments, which spur economic growth. Scholars have always strived to demonstrate the relationship between stock market and capital market and their roles in economic growth.¹³

The Stock Market and Economic Growth

On a fundamental level, securities exchanges are helpful instruments for economic growth of a country. Efficient stock markets attract private investments and assign them for corporate speculation and subsequent growth. This offers companies access to less expensive capital than commercial banks and assists them to manage financial-related risks. Stock markets additionally enhance organizational efficiency through the possibility of a takeover. For instance, if the management team fails to boost investor value, at that point, another agent could take control of the firm, restructure it, and present better workforce and robust practices for value creation to owners. Thus, the Tadawul, like any other stock market globally, is extremely important for the Kingdom’s economy and its investors.¹⁴

Scholarly research demonstrates that different measures of capital market movements are positively associated with significant economic development and productivity in various nations and that the association is especially strong in developing markets. Specifically, this positive correlation between the stock market and economic development is noted in countries with liquid and highly active stock markets, but the causality relationship is not observed across countries where the market is small and less liquid.¹⁵ Another study showed that emerging economies could realize increased economic growth by expanding the size of their stock markets and market capitalization.¹⁶¹⁷ Various indicators of the capital market, such as the total value of stocks traded, market capitalization, stock turnover ratio, and volumes of stock markets, were evaluated in relation to economic growth, and the researchers concluded that market capitalization was the most important indicator of economic growth in a country.¹⁸

Some drawbacks are however noted. For instance, exceptionally liquid stock exchanges may adversely impact corporate governance. When share prices are increasing, investors may be enticed to take a casual perspective of management activities, knowing that they can sell their shares whenever and for a bigger profit, as was the case in Saudi Arabia before the stock crash of 2006. Markets likewise tend to support huge corporations over smaller ones, usually with little attention to their efficiency. In this way, big inefficient companies will probably assume control and additionally buy small efficient firms with no change in their own management culture.

This implies that stock markets need robust supporting agencies, such as well-established regulatory authorities with effective governance structures, to make them successful. However, it is imperative to note that many emerging economies, such as Saudi Arabia, lack such robust oversight agencies. Moreover, countries with limited foreign investment in their stock market may fail to adhere to the best practices in the industry.

The Saudi Stock Market Overview

The Saudi bourse is the leader among the Gulf Cooperation Council (GCC) countries – Oman, Bahrain, Kuwait, Qatar, and the United Arab Emirates (Dubai and Abu Dhabi). As at January 2017, the Tadawul had a market capitalization of US$ 442.30 billion.¹⁹ With a population of about 26 million people and the GDP of US$718.5 billion, the Tadawul is the most robust, active market in the GCC, outdoing the Kuwait one. Market capitalization to the GDP ratio is 61.58%.²⁰ The Tadawul is generally advanced, and presented the world’s first completely electronic market in the 1990s, including exchanging, clearing, settlement, and depository services.²¹ The TASI, the main index, achieved its apex on February 25, 2006, when it closed at 20,635.

In 2008, the Saudi bourse came second just to London based on the new share issuance. However, Saudi IPOs declined quickly following the escalation of the worldwide financial crisis in October of the same year. Previously, the Saudi Stock Market was under the authority of the Saudi Arabia Monetary Agency (SAMA), but this was changed in 2003 when the role was assigned to the Capital Market Authority (CMA) in July 2003.²² The CMA is currently the only body mandated to regulate and supervise the Saudi Arabia’s capital markets and issues, as well as important regulations and guidelines to protect investors and guarantee impartiality and efficiency in the bourse.

Notable changes have taken place in the Tadawul after the crash. Foreign participation has been embraced in the bourse albeit, gradually. For a long time, the Tadawul was available to only Saudi people until December 2007 when foreign participation was allowed to implement the decision adopted to set up a GCC common market. Consequently, the Tadawul was opened to other investors from the GCC. However, their involvement has remained low because other GCC nationals appear to prefer their local markets. Prior to 2008, non-Arab foreigners who did not live in Saudi Arabia could only engage in limited mutual funds for trading. Nonetheless, in August 2008, the Kingdom introduced new guidelines that permitted such foreigners to take part in stock market trading using swap provisions with natives endorsed and authorized by the CMA as intermediaries.²³

The Saudi bourse market’s structure is simple. The two main leading sectors are financials and petrochemicals, representing nearly 70% of the Tadawul market capitalization. The Saudi Stock Market has various listed firms categorized into any of the nine sectors. These sectors include Financials, Basic Materials (Petrochemicals), Industrials, Telecoms, Consumer Goods, Consumer Services, Oil and Gas, Utilities, and Healthcare. The leading firms by market share are Al Rajhi Bank and the petrochemicals manufacturer, Sabic, both of which control more than 10% the market. It is imperative to note that some smaller sectors, such as the Consumer Goods, have relatively a higher number of listed firms despite the fact that they make a minor contribution to the market value.²⁴

Retail investors command the Saudi Stock Market. Thus, retail investors, who dominate the market, usually trade heavily on small cap companies. In fact, in November 2009, they were responsible for 88% of shares traded, with little or no significant change from previous years.²⁵ This implies that Saudi institutional investors play a limited role in the bourse relative to other developed economies, such as London, where institutional speculators take the leading role in the market.

Although the role of Saudi retail speculators cannot be ignored in economic growth, they have also significantly contributed to the bourse volatility. Consequently, the TASI experienced an extremely high run-up in the mid of the last decade. This mirrored various variables, but the major among them was a tremendous entry of small first-time dealers pulled in by different underpriced IPOs, which specifically lured speculators to offer portions of their available stock to raise cash to invest in the new issues, accordingly fuelling volatility in the market.²⁶²⁷²⁸ Between the period of 2003 and February 2006 (the peak), the TASI recorded a stunning 700 percent, with the market capitalization exceeding $800 billion, over two times the nominal GDP. At its zenith, the Saudi bourse was the world’s tenth biggest securities exchange market by value, notwithstanding the fact that it only had 78 listed stocks, numerous with a constrained free float.²⁹

The peak, an enormous run-up in stock price, was followed by a severe downturn, leading to serious losses to Saudi speculators. Obviously, valuations turned out to be progressively elevated with the mean price-to-earnings ratio (applied by investors and analysts to assist ascertain if a given stock/stock market index is reasonably priced) stretching to a high of 47 toward the end of February 2006 – in fact, some firms even recorded a ratio beyond 100.³⁰³¹ Notably, the expected company profit increment started to show up prior to real profits. This was exacerbated by yearly reporting demonstrating that many organizations had invested substantially in the bourse and booked non-existing Tadawul earnings. The market correction finally came, but it was serious, with the TASI losing a large portion of its value in under three months, finishing the year more than 53% below where it started. It is imperative to note that the Saudi bourse shock spread to other GCC markets, including Dubai, Abu Dhabi, and Qatar, which occasionally recorded extreme, abrupt falls.³²

The crash led to massive losses, which affected millions of Saudi investors. With such outcomes and awareness about the misery and attempts to avoid any repeated cases in the future, the CMA adopted a new governance approach. This was a three-pronged governance method designed to enhance better practices. First, it increased the size, in particular, the depth of the market. Second, it embarked on enhancing market transparency and disclosure. Finally, the CMA focused on rooting out insider trading. These measures aimed at reducing Saudi market anomalies commonly exploited by investors.³³

In the recent past, it has been noted that the Saudi authorities are keen on enhancing foreign involvement in the bourse. Today, the Kingdom administration understands that one way of improving the market depth lies in institutional involvement, specifically foreign investors.³⁴ The country has for quite some time looked ways of enhancing the stability of the Tadawul. For example, some new regulations introduced recently now allow foreign investors to take part in initial public offerings within the Kingdom and would give them access to a stockmarket targeted at small and medium-sized companies.³⁵ Additionally, through a parallel market arrangement, non-resident foreign investors would be allowed to invest directly starting January 2018. It has been observed that foreign institutions have capabilities to decrease volatility in the market by purchasing when stocks are undervalued and retreating when valuations start to stretch.³⁶³⁷ Their attention on market studies additionally has a tendency to inhibit potential bubbles from emerging. By advancing a thorough assessment of the market, they enhance corporate governance.

It is however observed that abrupt inflows or outflows of foreign money can disrupt markets, as noted during the 1998 Asian market crisis. Still, all factors considered, foreign investors, especially pension and mutual funds, are viewed as external forces with positive impacts on local stock exchanges. Further improvements on attempts to open the Saudi economy for foreign investments have been noted. For instance, from 2005, the Saudi government has granted licenses to various foreign investment banking that have additionally been permitted to offer brokerage services. Therefore, the volume and quality of market research have improved extraordinarily, and numerous speculators are presently well informed about investment decision-making than previously observed. Constant market assessment of specific firms and shares is currently accessible, giving valuations in light of universally adopted models, for example, the peer-based valuation, the Dividend Discount, the Discounted Equity Cash Flow, and other relevant tools, and in addition to buy, hold, or sell suggestions.³⁸ Improved quality research is usually applied to support various processes of market activities, including execution, which are now considered important on the Saudi bourse.

Additionally, the Saudi government introduced swap arrangements to promote foreign involvement in its market. Such improvements provided an opportunity for the CMA to allow for the first in 2008 non-resident, non-Arab foreign investors to purchase Saudi shares unexpectedly. Preceding this development, such categories of investors could only participate in the Saudi market through mutual funds. Notably, foreign asset managers still cannot directly participate in the market, but the swap arrangement with licensed, approved brokers give them an opportunity to buy and sell shares. One should however note that swap arrangements expose foreign investors to risks due to a lack of ownership rights, counterparty risks, and perhaps discouraging investors from creating significant stake in the firms.³⁹ Overall, Saudi authorities hope that the involvement of foreign investors would enhance transparency as they strive to prevent insider trading and introducing a cap on personal credit to stabilize the market.

Recent Developments on the Saudi Stock Market

Prior to the crash, the TASI experienced unprecedented run-up well above international equity standards as investors disregarded basics and bet that prices would continue to rise. The consequent market crash saw the index run below the world benchmarks for more than a year. However, since the beginning of 2008, the TASI has fundamentally attempted to follow the direction of the world stock markets, and there have been a number of reforms, including the above-mentioned ones.

Fast forward, various significant advancements have occurred in Saudi Arabia over the most recent couple of years, demonstrating the administration’s sense of duty regarding actualizing major structural economic reforms. For instance, in April 2006, the government launched the Saudi Vision 2030.⁴⁰ Critical changes, with regard to this research, have targeted the Saudi bourse. While a part of these changes concentrates on expanding ownership rights of qualified foreign institutional speculators, they likewise provide a roadmap for the presentation of new sorts of trading options, such as securities lending and secured short selling. Moreover, the Saudi agencies have introduced a new settlement procedure from the previous T+0 to T+2 settlement.

It is observed that these new developments are not driven by any issues related to the moderate uptake of shares by foreign investors for now, but are pegged on more extensive macro-economic changes illustrated in the Saudi Vision 2030.⁴¹ Additionally, all the guidelines presented by the CMA provide a roadmap for the future consideration of Saudi Arabia into the Emerging Market Index (MSCI EM) yet some potential impediments, which are all manageable, could slow down the inclusion process. The authority is also keen on implementing changes and on ensuring that operations are conducted within the set regulations to avoid trade delays.

The Saudi Vision 2030 sets an objective that, by the year 2030, the country’s economy, right now the nineteenth biggest on the globe, will be among the world’s best 15. Integral to that will be more focused development in the non-oil sectors in Saudi Arabia by, for instance, empowering many small and growing businesses and, more fundamentally, extending the role of the private sector that currently represents under two-fifths of the Saudi GDP.⁴² In view of that, the country’s administration intends to privatize some of its state-owned corporations, including selling its stake in Saudi Aramco to foreign speculators. This, in turn, implies a greater role for the Riyadh Stock Exchange, which is now the biggest stock market in the GCC but is set for a major development as more formerly state-owned corporations enter the stock market.⁴³

Consequently, the Tadawul has experienced enormous changes during the most recent year or so in preparation. For example, as previously noted, the CMA has changed its requirements concerning the settlement cycle. The settlement cycle here refers to the procedure in which a buyer or a seller of shares provides either cash or securities to an individual or a firm to the other party. Changing the settlement period is meant to align its practices with the other major international exchange markets. The Saudi Stock Market has additionally transformed its standards to enable speculators to loan stock and to take part in ‘short-selling’, a well-developed practice in other markets, in which a speculator sells shares they do not officially own in the expectation of purchasing them back later inexpensively. More importantly, of all, in the year 2015, Saudi Arabia started permitting non-natives to purchase and sell shares on the Tadawul on a restricted basis.

Additionally, at that point, in May of the previous year, it went further, increasing to 10% the maximum of the fraction of a firm’s shares that an individual foreign speculator may own. It further dropped a requirement that demanded foreign investors to own only 20% of Saudi Securities Exchange. However, it is imperative to recognize the fact that a rule that caps at 49% the volume of an individual organization’s shares that can be owned by foreign investors is still in place.⁴⁴ All these new developments imply that Saudi Arabia could attract more of foreign capital into the Saudi Securities Exchange even before any state-owned firms, such as Saudi Aramco and others are completely or to some extent privatized.

It is currently observed that foreign investors control about 4% of the firms listed on the Saudi Stock Market, the dominant part of which are developing markets funds based in London.⁴⁵ At the same time, one must note that these new developments present enormous challenges and opportunities for the Saudi’s financial watchdogs, as Saudi Aramco is expected to increase the market capitalization aggregate. Overall, all these efforts are seen as Saudi Arabia’s attempts to bolster foreign investors in advance of the Saudi Aramco IPO – the expected world’s biggest flotation.

Cross-listing

Saudi government agencies have stated that the company would be listed on both the Tadawul and on one or more global markets. This practice is called cross-listing. Now, Saudi Arabia has New York, London, Hong Kong, and other robust global stock markets among its many options, and the main emerging issue is whether cross-listing is the best option for the impending world’s biggest IPO.

Various reasons have been presented to explain why organizations choose to cross-list their shares in international stock exchanges.⁴⁶ One major advantage of cross-listing is the financial gain. Cross-listing is a primary source of financing, and one of the principle purposes behind a firm’s decision to cross-list and raise funds cheaply compared to debt financing. This emerges in light of the fact that cross-listed stocks would be more accessible to foreign speculators. Gaining access to global stocks may somehow be confined because of global investment barriers, which prevent foreign firms from getting to specific markets. Firms that cross-list also benefit from increased liquidity.⁴⁷ As a company trades across various time zones and in multiple currencies, it enhances liquidity and capabilities to raise capital across different global markets. This expands the issuing organization’s liquidity and gives it greater capacity to raise capital, which are significant factors in share valuation and market liquidity.

Cross-listing increases shares marketability across the globe. For instance, many stock markets, such as London, the US, and Hong Kong, expect Saudi Aramco to list on their markets. This action would extend investors, as foreign investors would gain access to shares from other regions. This makes the organization’s securities to be recognized in foreign markets, allowing a firm to get additional capital, if needed, through selling shares in other global markets. There is a bonding hypothesis that, if their company is successfully cross-listed, managers have to comply with a range of regulatory requirements. The reason is that managers need to address the corporate governance standards related to their home country and to the foreign market.⁴⁸⁴⁹⁵⁰ Increased corporate governance would eventually benefit shareholders.

The traditional way of thinking has long held that organizations cross-listing their shares on robust markets in the developed economies gain access to numerous investors, increased liquidity, favorable prices of shares, and a reduced capital cost. The period between the 1980s and 1990s saw many firms from around the globe appropriately cross-list their shares. However, a recent study demonstrated that firms from advanced economies get no advantages from second listings in foreign securities markets.⁵¹ Hence, companies that still have foreign listed shares ought to rethink. It is argued that this cross-listing never again seems to generate any value, maybe in light of the fact that stock markets have turned out to be more liquid and harmonized and speculators more global in their strategies, or perhaps on the grounds that the advantages of cross-listing were exaggerated from the begin.

The above observation however may not necessarily be said of firms from emerging economies cross-listing on other developed countries. At present, according to Dobbs and Goedhart, there are benefits and drawbacks of cross-listing for corporations in emerging markets in which merits and demerits differ significantly from nation to nation than they do in the advanced economies.⁵² Specifically, the research so far has revealed no direct evidence to suggest value creation for investors of firms cross-listed in developed countries. It further showed that cross-listing had neither significant effects on valuations nor any steady positive effects on share prices responses following cross-listing announcements.

Regardless, some interesting findings specific to firms from developing world were noted. For instance, cross-listed shares account for as much as 33% of their aggregate trading volume. Moreover, some of these firms have performed well with regards to issuing a lot of new shares through cross-listings in the UK or the US stock markets—an occurrence that may have been unimaginable at home. Finally, shareholders are most likely to benefit from strict corporate governance and bourse conditions required in the UK or the US relative to ones applied at home. However, one study concluded that the US policies were not consistently value optimizing for all different groups of foreign private issuers (FPI). Specifically, the existing single-modal policies of undiscerning incremental deregulation cannot address issuers’ concerns effectively in the context of developed countries.⁵³

Further, on market reactions to cross-listings, studies present different results. Past literature has demonstrated that cross-listing on the US stock markets is linked to considerably positive stock market reactions. Comparatively, one study revealed that foreign firms that cross-listed on the US stock exchange recorded an average of 1.3% returns, 1.1% on the London Stock Exchange, and 0.5% on Tokyo Stock Exchange.⁵⁴ It was additionally demonstrated that such cross-listed firms on the US exchanges had improved disclosure (an important aspect of corporate governance for firms in emerging economies) and bonding creating value, while the London Stock Market allowed firms to overcome segmentation and bonding following the higher announcement returns. However, the continental Europe and Tokyo exchanges presented mixed outcomes. This implies that the destination market for cross-listing matters for value creation.

When the Chinese Internet company, Alibaba launched its IPO in New York, it demonstrated that the USA was the global hub for new stocks.⁵⁵ Analysts have attributed the choice of the US markets for many of the IPOs to the raging bull. Markets in Asia, for instance, have been slow for years. Additionally, the US markets are preferred for IPOs because firms are allowed to have a dual-class voting structure. This voting structure permits the owners to trade shares in a firm, but still retain their voting control. Such flexibility appears to be a major factor influencing the decision of some firms, such as Alibaba, to go public in the US, rather than in Asian markets, such as Hong Kong and Tokyo.

Voting control and other rights offer investor protection, which is now being enhanced across several countries. As investor protection progresses in the home country, companies turn out to be less likely to cross-list on foreign stock markets with poor investor protection. On the contrary, they are most likely to cross-list on foreign markets with robust investor protection, particularly in the London Stock Exchange and the US markets. Further, some firms assume that foreign markets give them high valuations, particularly when it is difficult to assess their valuation at home.⁵⁶

Cross-listing however presents some costs to companies. These costs are generally related to disclosure. Those firms that cross-list and sell their shares in foreign markets are subjected to enhanced commitment full disclosure and sustained investor relations efforts. In the US markets, for instance, foreign companies must assess their choice and realize that the process could be tedious and timely as required by investors and regulators. Hence, costs are likely to rise for companies, which have been used to presenting far less information to the public.

Additionally, cross-listing presents some implications related to corporate governance practices. Through cross-listing its stock on the stock market of a different country, an organization can adequately select the level of regulation and control it gives to its investors based on the requirements of that country.⁵⁷ In such a manner, the cross-listed firm will submit itself to the compulsory corporate governance practices required at the advanced securities exchanges. For instance, deciding to cross-list its shares on the US stock exchange, the company needs to revise and improve its corporate governance practices in order to match specific market practices of the selected country.⁵⁸ First, the firm is expected to adhere to corporate governance laws and regulations applied, for instance, in the US, the UK, or Hong Kong, which imposes more strict disclosure conditions. Second, the company would also be assessed with various financial bodies, including auditors, analysts, underwriters, and debt rating agencies among others. These are components of enhanced disclosure conditions.

Finally, the company must subject itself to a thorough analysis of securities, implying that potential incomes would be determined more precisely. Overall, firms should consider all factors that are related to their decision to cross-list shares on any securities exchanges in advanced economies. This would account for stringent disclosure conditions, complying with acquisition rules, adopting well-developed corporate governance terms, and accepting costs that will be incurred to execute these requirements, as well as understanding the separation between shareholders and management. Therefore, companies should carefully weigh their options before deciding to cross-list on foreign securities exchange, and they must be ready for improved reporting, auditing, and risk management, which are common best practices in developed economies.⁵⁹⁶⁰

Aims and Objectives

This research is designed to achieve the following two main aims:

To discuss the possibility of listing Saudi Aramco’s shares on New York and London stock exchanges.
To make a comparison with reference to these leading centers (New York and London) in order to forecast the future of listing Saudi Aramco’s shares.

In order to accomplish the aims set for this research, it is necessary to realize the following objectives:

To examine the corporate governance related to the Saudi Stock Exchange and analyze the mechanism of its work with the focus on its advantages and disadvantages.
To discuss specifics of the New York Stock Exchange.
To discuss specifics of the London Stock Exchange.
To examine the factors of attractiveness of the capital market of New York and London to list Saudi Aramco’s shares in order to attract foreign institutional investors.

Structure of the Paper

This paper consists of five chapters. Chapter 1 has presented the background for the research, literature review, and methodology. Chapter 2 sets the stage for exploring the structure of the existing Saudi Stock Exchange and the relevant company law along with any form of corporate governance. Chapter 3 is focused on the importance and structure of both the New York and London Stock Exchanges, their listing requirements, and both legal and corporate governance issues are discussed. Chapter 4 brings together the changes (if any) to the Saudi company law and corporate governance that might be required in order to obtain a listing on any of the discussed foreign stock exchanges. Additionally, a comparison of benefits and detriments of each market is presented. Finally, Chapter 5 covers recommendations on what needs to be done and why regarding Aramco’s IPO. It presents the prospective benefits that a foreign listing will provide for Saudi companies, as well as other observations.

Saudi Stock Exchange: Structure, Law, and Governance

This chapter sets the stage for exploring the structure of the existing Saudi Stock Exchange and the relevant company law along with any form of corporate governance. It covers the history of the Saudi Stock Exchange; the Islamic law (or Sharia) on the Saudi Arabian capital market; the Saudi Stock Exchange Law and the Regulations and Regulatory. It further presents the difference between numbers of companies on the Saudi Stock Exchange over the last ten years. Finally, the chapter dwells on Saudi Aramco, its relevance to the Saudi economy and the IPO.

Commonly referred to as the Tadawul, the Saudi Stock Exchange is the Kingdom’s only stock exchange and the robust market in the GCC region. The Tadawul is under the authority of the Saudi’s Capital Market Authority. Its best performance was noted on 25 February 2006 when it recorded All-Share Index of 20,634.86. Today, the CMA has embarked on major reforms to attract foreign investors and prepare the ground for Saudi Aramco IPO scheduled for late 2018.⁶¹

History of the Saudi Stock Exchange

The Tadawul: the Boom and the Crash

Set up in 1985 under the administration of the Saudi Arabian Monetary Agency (SAMA), the Saudi Stock Exchange, the Tadawul was replacing the causal agent-based model that had been created since the start of the twentieth century. The Saudi administration’s choice to set up a stock exchange came in light of quick developments in the number of Saudi Arabian business entities, which had multiplied in the 1970s, as the country’s economy started to mature. The TASI, which was given a base value of 1,000 when it was established, was created to record the performance of all listed organizations noted on the exchange.

At the start of 2000, the TASI started a consistent growth, and by the year-end of 2003, the index closed at 4,437.6, up from 2,518.1 noted in a similar period the previous year.⁶² It ascended in value by 84% in 2004 and 103.7 percent in 2005, ending the fiscal year at 16,712.64.⁶³ The Tadawul’s market capitalization displayed comparable development, taking off from $68 billion in the year 2000 to $646 billion by year-end 2005.⁶⁴ It is imperative to note that this stock market boom was not restricted to the Kingdom only. Other markets in the GCC countries – Oman, Bahrain, Kuwait, Qatar, and the United Arab Emirates (Dubai and Abu Dhabi), noted a growth of nearly ten-fold between the years 2000 and 2005.⁶⁵ During this bullish period, the Kingdom remained the leader, however, accounting for generally 50% of the market capitalization and 80 percent of the shares traded in the year 2005. In the vicinity of 2001 and the first half of 2006, the GCC stock markets recorded 59 IPOs, which raised a sum total of $15.5 billion, and the Kingdom accounted for 11 (18.6%) of the aggregate. In addition, the Kingdom’s firms commanded the cash raised, with $7 billion or 45% of the aggregate.

A few elements seemed, by all accounts, to be at play. Liquidity in the entire GCC region had increased. A part of this was attributed to investors’ worries after the 9/11 assaults in the United States, as well-off Arabs sent back home their investments from western markets and looked to invest and contribute locally. What is more, oil prices had multiplied in the period between 2000 and 2005, favored by a worldwide demand and, in this manner, incomes from oil exports.⁶⁶ Therefore, Saudi Arabia’s administration increased its spending on infrastructure, discharged its debt obligation, and put resources in its energy generation systems.

Following the decision to retire the debts, the Ministry of Finance was expanding the banks’ liquidity and subsequently leading to increased lending by the Saudi banks. They found a large pool of willing borrowers, particularly Saudis who wanted to put resources in the money markets. Initial public offerings (IPOs) on the Saudi market have a tendency to offer the stock at average prices with buyers only restricted to Saudi investors. For the most part, the share price was altogether below the real cost of the offers, and share assignments were settled over the number of buyers who had requested. On the first day, prices would demonstrate a huge increment, with a few investors cashing in their earnings and others trying to expand their positions. After the first leap, share prices would settle down, and critics noted that this underpricing normally prompted a triple gain on the IPO issue prices.

In the Saudi market at this period, there were a couple of alternatives for investment other than share trading. It was observed that starting small companies, which could have utilized the accessible money, was a costly and tedious endeavor. In 2005, the year prior to the stock market crash, Saudi Arabia was positioned 38^th out of 155 nations in the World Bank’s Ease of Doing Business report.⁶⁷ Its great positioning generally mirrored the effect of low duty rates and largely, adaptable work and employment conditions. More importantly, money markets had turned out to be progressively appealing to Saudis. The Saudi Telecommunications Company (STC) IPO of 30% in late 2002 had allowed a huge number of the populace to invest their resources in the stock market. Private Saudi investors received an opportunity to buy 60 million shares out of more than 90 million shares. Public pension funds received access to the rest of shares.⁶⁸

Before the listing of STC, the Kingdom had about 40,000 dynamic portfolios. Following the IPO, the number multiplied and increased steadily thereafter, as more accounts were added. In fact, the 2005 IPO of Yansab (the Saudi Arabian petrochemical company) introduced nearly half of the country’s population (then total population was about 17 million) to investment in shares. It was also noted that STC’s 39% initial return was overshadowed by the excellent performances of other organizations, such as Sahara Petrochemical (rose 200% following its June 2004 listing) and Etihad Etisalat (recorded an increment of 500% following its December 2004 floatation).⁶⁹ Additionally, the skyrocketing oil prices supported the performance of petrochemical firms, further providing certainty to speculators.

However, not everything was well. With time, retail investors, who represented over 95% of every day share trading volume on the Saudi stock market, were purchasing on margin. Data collected by SAMA showed that rates of personal obligation climbed considerably between 2002 and 2006. Specifically, advances for “Other Purposes – loans not identified with the real estate investments or durable goods, grew nearly five times, from $7.8 billion of every 2002 to $36 billion by 2005. It was also reported that some individuals from the working class with almost no investment experiences were supposedly selling their autos and liquidating their life savings funds to invest in the Saudi bullish market.

The unexpected inundation of retail investors represented a few difficulties. They were largely new to securities exchange business. Until early 2000s, the main investment options in the Kingdom were generally gold and real estate. Furthermore, the Saudi market had a couple of big institutional investors, and essentially no global corporation to give continuing points of view and to reduce market instability. The current development in access to the Internet and the appearance of Web-based trading additionally convoluted the circumstance for Saudi investors and regulators. Driven by market rumors and trade hyping, it was a near inconceivability for the emerging regulatory system of the Kingdom to manage market and investors’ expectations. Fundamentally, the Saudi stock market was ready for a boom and a crash. No short selling was permitted, investors bought together and now were selling together due to the lack of sophistication. Corporate reporting and filing rules were not generally implemented nor effected. Additionally, there was limited research on equity, and even if they were present, retail investors had limited knowledge and training in deciphering financial information, and the Web acted as a ready source of unverifiable data.⁷⁰

One factor driving this market enthusiasm was its productivity or efficiency. It was observed that the Saudi CMA had embraced a quick settlement cycle of T+0, rather than the T+3 or T+2 settlement cycle for securities transactions, as is the standard in many advanced markets.⁷¹⁷² The T+0 settlement cycle (the immediate settlement) failed to enhance the level of asset safety for investors by not allocating sufficient time to verify trade fundamentals. Hence, the prompt settlement policy, independent of its impact on the nature of price factors, was more likely to lead to a large volume of noise trading on the Tadawul. Further, funds were available for investment, awash with the oil revenue with no other tangible investment options but the stock market, and the result was described as a case of a classic bubble.⁷³

Any endeavors to moderate trading or increase retail speculators’ awareness of the market risks they were assuming was treated with doubts. Moreover, excepting investors from high-risk firms, insisting on accreditation for investment, or even advising potential speculators to complete a short questionnaire with respect to their knowledge of the risks of putting resources in the market were viewed as irritating obstacles to profiting from the boom. Moreover, some stocks were effortlessly manipulated due to limited disclosure.⁷⁴⁷⁵ The so-called paper companies (firms that had been established and gone public in the 1980s and had since deteriorated with merger floats and unconcerned administration) were seen as ready targets for deceitful investors to control for “pumping and dumping” the stock.⁷⁶ Well-off investors could purchase and offload shares of small organizations among themselves to create the figment of interest, just to sell such shares once the prices increased.

In the meantime, the Saudi administration approved another sector, insurance, but announced that all insurance firms that got a permit had to be locally registered and publicly traded before doing business.⁷⁷ In this way, countless insurance firms showed up on the market ready with risky products and inadequate floats. Such risks could have been controlled or avoided with sufficient regulatory requirements in place. For whatever length of time that the share trading market kept on rising, in any case, these issues were generally disregarded.

Toward the end of 2005, the Saudi securities exchange closed over 16,000. Since 2002, share prices were rising steadily, and rational Saudi investors would have been unreasonable to avoid the allure of the stock market. In addition, some government agencies and analysts encouraged speculators to invest and profit from the price rally. It, therefore, was difficult to restrain any Saudi investors focused on profiting from the boom. It is imperative to note that the most recent developments on the Tadawul have also been discussed in the previous chapter.

The Islamic Law (or Sharia) on the Saudi Arabian Capital Market

One major standard driving the Saudi Vision 2030 is ‘Living by Islamic Values’.⁷⁸ These values bear repercussions for the financial sector, the fundamental components of which must stay sharia compliant. For capital market advancement, Islamic finance has both limitations and opportunities. One significant practice in Islamic finance is the proscription of riba or usury and gharar or excessive uncertainty.⁷⁹ Riba significantly affects fixed income products. For instance, deposits must either earn no interests or show some aspects of profit-and-loss sharing. Additionally, bonds ordinarily should be supported by a different asset pool and have quasi-equity characteristics referred to as sukuks.

Short selling is strictly banned under the gharar principle. The model of life insurance is likewise seen as deviant, and is subsequently developed in a type of a shared social help scheme known as takaful. For pensions, sharia laws do not essentially influence them. However, a sharia-compliant financed benefits plan must be invested in assets that are sharia compliant. It is also observed that sharia-compliant counterparts are available for a large number of these banned products, and a study by the IMF noted little distinction between the realistic operational aspects of Islamic and non-Islamic financial systems.⁸⁰

The Saudi Stock Exchange Law and the Key Regulations and Regulatory Agencies

The events of the recent past have demonstrated the increased commitment of the Kingdom to corporate governance and observance to the global best practices and codes. These improvements are widely acknowledged given the role of the Saudi economy in the Middle East region. The notable source of the Kingdom’s law is the Sharia or the Islamic law. Laws and regulations, normally issued by various government agencies, present clear, well-elaborate elements of these laws and specific requirements.

The CMA, established in 2003 under the CMA Law, is the current regulatory regime of the Saudi Stock Market.⁸¹ This agency is the only regulatory and supervisory body of the Kingdom’s capital market. It boasts of a broad range of administrative, legislative, and enforcement authorities and powers within the Kingdom. The CMA is the only agency mandated to approve the offering of securities, listing, invalidation, or deferments of listed stocks. It also grants licenses.

In 2006, the Saudi Capital Market Authority reviewed its corporate governance practices and issued the new Corporate Governance Regulations (CGR) to improve market conditions and investor protection. The Saudi Arabia Monetary Authority (SAMA) has also revised specific corporate governance provisions for banks conducting businesses within the Kingdom. Additionally, the Tadawul is the only agency allowed to conduct trading in securities in Saudi Arabia. Equities can be traded both on the primary market and on the parallel market with the previous settlement cycle arrangement of T+0, but the new arrangement is T+2 to embrace some of the best practices in the global markets. The Saudi bourse is a trading platform for sukuks, bonds, mutual funds, and real estate investment traded funds. Another important body is the Saudi Organization for Certified Public Accountants (SOCPA), which is significantly involved in shaping of the Kingdom’s corporate governance practices.

The Saudi corporate governance practices or standards were revised and the new version was unveiled on 22 April 2017. Other provisions are expected to be effected on 31 December 2017. The Corporate Governance Regulations account for the board’s composition, shareholders’ rights, directors’ roles, transparency, conflicts of interest, disclosure, and other issues. Saudi companies are characterized by a high concentration of ownership, particularly by the government or wealthy families, and corporate governance is expected to account for such ownership structures. The CMA requires Saudi listed firms to present quarterly and half-year financial statements, including the balance sheet, the statement of income, the notes, the statements of cash flow, and the independent audit report.⁸²

Key IPO Regulations

Capital Market Law
Listing Rules
Parallel Market Listing Rules
Offer of Securities Regulations
Corporate Governance Regulations
Market Conduct Regulations
Rules for Qualified Foreign Financial Institutions Investments in Listed Securities
Instructions of Book-Building Process and Allocation Method in Initial Public Offerings

The Numbers of Companies on the Saudi Stock Exchange over the Last Ten Years

Major developments on the Tadawul can be traced back to 2004 when the local telecoms operator, Etihad Etisalat listed on the Main Market of the Saudi bourse under the current regulatory regime. In the year 2007, 26 companies offered their IPOs on the Saudi bourse. The insurance sector was responsible for 17 companies. The service sector produced six firms while three firms came from the industrial sector. The value of offered shares aggregated to SR 18,035.65 million, and the total IPO shares were 1,414.03 million. In this period, only 23 firms were listed and traded on the Saudi bourse, increasing the total number of listed firms to 111 alongside their market capitalization of SR 209.22 billion (10.75% of the total market capitalization).⁸³⁸⁴ The market remained vibrant and bullish throughout the year.

The year 2016 showed difficulties in the Kingdom. Relatively low IPO activities were observed. These were mainly attributed to low global oil prices and enhanced economic and fiscal measures introduced by the Saudi administration to manage its budget deficit. Additionally, short-term liquidity issue persists, and its impact on equity market is noticeable.

In 2017, however, some developments have taken place. For instance, on 26 February 2017, seven IPOs were listed on the Saudi Parallel Market, reflecting an increased intake by small and mid-sized Saudi firms. Under the QFI (qualified foreign investors) regime, the Saudi government has further allowed foreigners to invest directly in the Saudi listed securities, showing an important development from the previous Swap Agreements used until June 2015. Today, foreign investors have increased access to legal rights, and by March 2017, foreign investments in the Saudi bourse accounted for 4.07% of the total Saudi market capitalization.⁸⁵ As of August 20, 2017, the Saudi Stock Market had listed 171 publicly traded firms.

Saudi Aramco

With Saudi Arabia considering a floatation of the world’s biggest initial public offering (IPO) in history, here is the key information that one should know about the company. Saudi Arabian Oil Company or Saudi Aramco is possibly worth well about $2 trillion. At that estimation, the company would be worth more than the aggregate of Apple, ExxonMobil, and Facebook.⁸⁶ The company is headquartered at Dhahran, Saudi Arabia and presently 100% owned by the government but managed by a board of directors that includes both Saudis and foreign nationals.⁸⁷ In 2017, it recorded the revenue of US$510 billion. The company boasts of more than 20 subsidiaries, including Saudi Electricity Company. Today, it is the world’s biggest oil and gas firm based on the revenue.

Saudi Aramco was initially established in 1933 under the guidance of Chevron. It underwent a partial nationalization in 1950, and the headquarters was relocated to Dhahran. After three decades later, the government took full ownership of the company where it has maintained utmost secrecy about the company’s estimated $260 billion barrels worth of oil reserves, which can be easily extracted. Formally, the company is responsible for operations of other numerous oil fields, including large and small ones across the country. Additionally, Saudi Aramco manages many gas fields, refining, marketing, and distribution of products globally. It boasts of about 60,000, including 10,000 expatriates, and a technology research center based in Aberdeen.⁸⁸

The Saudi government plans to issue shares accounting for about five percent of Saudi Aramco. It is estimated that the company has larger reserves, ten times than the ones for ExxonMobil, making it the leading global oil producer. Saudi Aramco market value is estimated to reach about $2 trillion.⁸⁹ As such, this IPO is expected to outdo the $25 billion of Alibaba raised in 2014.

Saudi Aramco as a Joint-Stock Company

As a state-owned company, Saudi Aramco currently realizes certain steps in order to become a joint-stock firm. This move is necessary in order to focus on the IPO and comply with regulations that are typical of other oil companies listed on global stock markets. The planned IPO made the company’s authorities change its status. In the context of these changes, the company will have the board including eleven members in contrast to nine persons who represent the board today. Among them, six persons will be appointed by the Saudi government.⁹⁰ New regulations to control the relationships between the company and the government will also be applied in the context of a complex policy that is conducted by the Saudi Prince in order to reform the country’s economy and successfully enter global stock markets.

It is important to note that, being a joint-stock company, Saudi Aramco receives a range of possibilities to be listed on the Tadawul, New York, and London stock exchanges, and moreover, private sales also become open for the company.⁹¹ In this context, the decision to change the status of the company is based on the Saudi government’s strategic orientation to the development of the country’s economy with reference to attracting more investors and capitals. Therefore, the government will preserve its position related to controlling the production levels of oil and its sale with the help of modifying the structure of Aramco. At the current stage, the change of the company’s status and the focus on the IPO seems to address tendencies in the global financial market in order to contribute to the further progress of Saudi Aramco and other Saudi companies.

Conclusion

The principle issues for policymakers are to accurately put the Islamic financial related products on pertinent risk rating scales, for instance the Basel, and to identify an ideal regulatory way to deal with those establishments that are involved in both Islamic and non-Islamic financial products. The Islamic finance can likewise make significant contributions to the global economy. Its current assets are estimated to worth about US$2 trillion, which has increased five times in the most recent decade. With the most recent reforms and the impending floatation of Saudi Aramco, Saudi Arabia can keep on being a key market for Islamic finance and turn into a source of regulatory best practices for the region.⁹²

Stock Exchange Structures and Future Trends

This chapter focuses on the importance and structure of both the New York and London Stock Exchanges, specifically their listing requirements (both legal and corporate governance issues). It looks at practices across the two markets based on risks and benefits. The future of Saudi Aramco and its share are also covered here. Markets in the most advanced economies are characterized by robust, significant regulatory agencies, highly developed capital markets with high rates of liquidity, huge market capitalization, and high-levels of per capita income. These markets are in western parts of Europe, North America, and Australasia. Canada, the UK, the US, Australia, Japan, and New Zealand are examples of developed markets. In this research, the stock markets of the US and the UK are relevant. It is imperative to note that the development of stockmarkets is a significant factor for explaining why nations develop or deteriorate.⁹³⁹⁴⁹⁵

The Comparison between the New York and London Stock Exchanges

Once the decision is made to go public, the next critical stage for the organization is where to list. Established in 1792, the New York Stock Exchange (NYSE) is the most seasoned and biggest stock exchange globally, with more than 33% of the world’s equities traded on the market.⁹⁶ Throughout its history, the US stock exchanges are seen as broadest, most active, and fairest.⁹⁷ The NYSE has adopted technology for electronic transactions, but the human intervention approach is still used on the argument that nothing can substitute human judgment and accountability, which lower volatility, offer deeper liquidity, and improve prices.⁹⁸ It operates as a strong and transparent financial market with five specific regulatory agencies. These agencies are the NYSE, Arca Options, MKT, Arca Equities, and Amex Options that are used to oversee the stock exchange operations across several trading platforms.⁹⁹

NASDAQ is known for many technology firms trading on its platforms. It boasts of Apple, Starbucks, and Microsoft among others. It previously merged with the Swedish and Finnish OMX to grow business.

Table 1: The Largest Stock Exchanges in the World. (Data compiled from World Federation of Exchanges) ¹⁰⁰¹⁰¹

	Market Cap. (Billion $)	Age (Year)	Listings (Public Firms)	Trade volume (USD Billion)
New York Stock Exchange	19223	224	2,400	11.299
NASDAQ	6831	45	3,058	8.739
London Stock Exchange	6187	215	3,041	2.540

The London Stock Exchange (LSE) is the third largest stock exchange on the planet based on market capitalization.¹⁰² Like other major stock exchanges, the LSE also merged with Borsa Italiana. Most of the companies listed on this stock exchange are based in the UK. Barclays, BP, and GlaxoSmithKline are major firms trading on this market. The Main Market provides access to a large pool of capital in Europe, while the Alternative Investment Market (AIM) now drives successful growth of small firms in the UK and across the globe. The Special Fund Market offers attractive and rather flexible environments for different types of investors. Additionally, the LSE has broadened its market structure with the focus on creating the Professional Securities Market (PSM).¹⁰³ For investors, the New York Stock Exchange is the most attractive due to its large size (three times larger than NASDAQ) and because it hosts some of the most important leading blue chip stocks. Exxon Mobil, Walmart, Coca-Cola and others are the 2,400 firms listed on this stock exchange, bringing its market capitalization to a staggering $20 trillion.¹⁰⁴

Factors of the Attractiveness of the Capital Markets of New York and London

The LSE has adopted technology to support trading and market data collection. Moreover, it is going global like its New York and NASDAQ counterparts, targeting emerging economies in Asia, such as China and Russia. Competition is fierce. As such, the LSE claims that the UK regulatory system offers major advantages in terms of high standards of corporate governance and less expensive compared with the potentially costly requirements of the US Sarbanes-Oxley Act. Further, the AIM is thriving due to a low entry threshold, flexible corporate governance regime, low listing costs (fees and regulatory compliance costs), and enhanced marketing campaigns. It also focuses on specific sectors, such as mining.¹⁰⁵

The New York Stock Exchange is the global leader, the most liquid equities marketplace, and the gold standard based on the listing standards and large blue chip firms it has listed. It also a technology leader and now diversifying, through NYSE Arca, to accommodate other small firms due to competition, attracting firms not previously able to list on the market because of listing standards and costs.¹⁰⁶ More importantly, the above literature review showed that cross-listing on the US stock exchange was associated with the positive market reaction shown through an average of 1.3% returns against 1.1% on the London Stock Exchange.

Companies should possibly consider listing standards, regulatory regime, and fees when choosing a stock exchange. Additionally, other variables, such as the valuation, the possibility of getting research coverage, the quality an exchange’s institutional investors, comprehension of the business, customer visibility, and peer comparison with other trading firms on a stock exchange are equally important. For instance, a poor choice of an exchange often reduces the valuation. Therefore, a firm should assess its primary business drivers alongside its strategic goals when choosing an exchange.

The Advantages and Disadvantages of the Decision to List Saudi Aramco’s Shares on the New York and London Stock Markets

Listing on developed stock exchanges is associated with positive market reactions and better returns. Nonetheless, selecting the most appropriate stock market might not be a direct decision, and it usually depends on multiple factors, such as strategic growth objectives, a regulatory regime, listing speed and efficiency, costs, and investor types.¹⁰⁷ One major challenge for Saudi Aramco is transparency. No one really knows the worth of the firm, but it is estimated to be about $2 trillion. Additionally, the company is excessively secretive. It never opened its financial statements to the public, and the oil reserves’ details remain top state secrets, which the Saudi government may not be willing to release soon.¹⁰⁸ Enhanced transparency would increase the valuation by lowering unknown risks. Further, it could remain a major issue before OPEC with the greater focus on global oil prices and geopolitics.¹⁰⁹¹¹⁰ Observers note that the Kingdom should leave OPEC or stay out of the financial market to avoid market distortion by cartels and, thus, the US and the UK should reject the IPO.¹¹¹ Still, in this context, it is important to assess advantages and disadvantages of listing Saudi Aramco’s shares on New York and London stock exchanges.

The New York Stock Exchange

Unique advantages of listing Saudi Aramco’s shares on the New York Stock Exchange are associated with the fact that it is the largest stock market in the world that is viewed as attractive and suitable by the majority of international energy or oil companies, including such giants as Chevron, Exxon Mobil, and ConocoPhillips. In addition, this stock market does not limit a minimum amount of shares to offer. As a result, the US initial public offerings can potentially be traded at more than 1500% above the offering price.¹¹² Furthermore, Prince Mohammed succeeded in developing positive relationships with Donald Trump, and Saudi Aramco is viewed as one of the largest crude suppliers in the United States.¹¹³ From this perspective, it is possible to note that the stock market of this country is discussed by the Saudi authorities as an attractive option.

However, listing on the New York Stock Exchange can also have some disadvantages for Saudi Aramco. There are certain listing fees that equal about $0.0019 per share for more than 300 million shares. Furthermore, there are also fees related to the initial listing for ordinary shares, and the one-time special fee is about $50,000.¹¹⁴ Moreover, there is the necessity of complying with specific Sarbanes-Oxley’s requirements regulating the procedure of the company’s financial disclosure, which is not viewed as appropriate by many companies in this sector.¹¹⁵ Additional regulatory issues are associated with the fact that the US law provides victims of terrorism with opportunities to sue foreign governments if they are associated with terrorist attacks, as it is in the case of Saudi Arabia.

Risks of litigation against Saudi Aramco on New York’s stock market are rather high, and the used mechanisms to protect interests of shareholders in the United States also create barriers for Aramco to list on this stock exchange. In this context, shareholders’ rights are highly protected in the US market, but this regulatory environment does not create opportunities for Saudi Aramco to easily use the profits of listing on the New York Stock Exchange. One more disadvantage is that, in comparison to the Asian markets, the offering on this stock exchange can take more time, up to 24 months in comparison to the period of making the offering for Hong Kong’s market, for instance.¹¹⁶ Therefore, it is important to state that the company needs to evaluate these advantages and disadvantages of listing on the New York Stock Exchange in order to make a reasonable and well-supported decision and select the market.

The London Stock Exchange

The advantages of referring to the London Stock Exchange are in possibilities to enter the largest stock market in Europe that is represented by more than 700 foreign listed companies out of more than 2200 companies listed on this stock exchange. Royal Dutch Shell and BP are also presented as the major players in this market with the total weight of about 15 percent.¹¹⁷ The London Stock Exchange is also attractive for emerging players in the market, such as Rosneft and Gazprom, which issued international depository certificates in association with this market.

It is also important to note that the recent changes in rules provided governments with more opportunities to list specific state-backed entities like Aramco. As a result, the company can potentially join the list of the premium segment companies on the London Stock Exchange while receiving greater access to more investors. Furthermore, Aramco can join the premium segment even when listing less than 25% of shares, as it is required in other markets.¹¹⁸ The company plans to list only 5% of their shares, and this change in rules is attractive to them. Other benefits include the possibility to operate in an appropriate time zone and refer to suitable inclusion fees that are about $580,200.¹¹⁹

Still, there are also some disadvantages associated with listing shares on the London Stock Exchange. The specific proposal for Aramco to be listed on the market only with 5% of shares is not supported by some of the businesses in the United Kingdom because of potential effects on the stock exchange’s reputation in relation to the realized corporate governance policies.¹²⁰ Therefore, the London Stock Exchange still requires the offering of 25% of Aramco’s shares, and the debates regarding the special proposal for the Saudis continue to develop.

One more significant problem that can prevent Aramco from entering the UK market is the country’s exit from the European Union because Brexit potentially leads to positive and negative outcomes for the country’s financial market. Thus, Brexit can result in possibilities for the financial market to fluctuate while affecting the cross-border trade. Moreover, Brexit can lead to decreasing the number of persons who will be interested in purchasing Aramco’s shares because of the status of the London Stock Exchange. From this perspective, the advantages and disadvantages of listing shares on the London Stock Exchange should be taken into account by the authorities of the company in spite of the evident attractiveness of this particular variant for Saudi Aramco.

The Future of the Saudi Stock Market and Aramco’s Shares

One needs to understand what Saudi Arabia wants to do with the cash raised through this IPO in order to comprehend the future of this company, its shares, and post-IPO issues, such as partial privatization (significant government oversight and control of 95%) in the Kingdom. Saudi Aramco IPO is extremely important for the Kingdom because it is a part of the larger national transformation agenda of the country driven by the Vision 2030, which focuses on the diversification of the economy and the reduction of economic reliance on oil and gas. To this end, proceeds would be used to fund public investments under a large Public Investment Fund (PIF).¹²¹

More importantly, all other industries, including financial and oil, support the IPO. However, the future of the shares remains unclear due to transparency, valuation, and strategy issues that still surround the entire IPO. Further, the path of future oil prices is another factor that could influence share prices of the company. At the same time, political risks may affect the value of this state-owned giant. Shares of Russian Rosneft and Brazil’s Petrobras are examples of big state-owned companies that have suffered low share prices due to political and corruption issues.¹²²¹²³¹²⁴¹²⁵ Some studies show a significant decline in performance post-IPOs based on return on assets and return on sales among Saudi listed firms.¹²⁶¹²⁷

Conclusion

Stock markets show that business operations and capital flows are now globalized. Although Saudi Aramco intends to list on the Saudi bourse, the major hurdle it faces now is selecting the most appropriate developed stock markets for its IPO. It, therefore, have to evaluate the pros and cons of every market, as every stock market touts itself as the most qualified for this IPO. More importantly, Saudi Aramco will have to face its transparency issue to list on any of the most advanced stock exchanges.

Regulatory Considerations for Foreign Stock Exchange Listings

This chapter brings together the changes (if any) to Saudi Company Law and Corporate Governance that might be required in order to obtain a listing on either of the foreign stock exchanges. A comparison of the benefits and detriments of each exchange and other issues is provided. Thus, this chapter is about various regulatory regimes and other emerging issues.

The state-owned oil giant is set to launch what is touted as possibly the largest IPO in history, and stock exchanges globally are interested and competing to list its shares. Among the interested markets are New York, London, Hong Kong, Tokyo, and Toronto stock exchanges, and these markets are attracted because of the size of the IPO.¹²⁸¹²⁹ However, the most important question now is where the company shares will be floated. It is already known that Saudi Aramco will engage in cross-listing with some of the shares offered on the Tadawul. The Riyadh Stock Exchange is now undergoing major transformation and modernization to prepare for the IPO and the intended privatization of some state-owned firms, reviewing the settlement cycle rules, changing rules on short selling, and allowing foreigners to buy and sell shares directly.

Corporate Governance Implications of Foreign Stock Exchange Listing

The New York Stock Exchange

The US President Donald Trump characteristically tweeted and publicly made it clear that Saudi Arabia should consider the floatation on the New York Stock Exchange, intervening to at least try to influence the decision of the Kingdom.¹³⁰ History may favor the New York Stock Exchange.¹³¹ Prior to the state acquisition of the company, it was controlled by a group of the US oil giants. Saudi Aramco runs on ExxonMobil governance structures, and majorities of the company executives are educated in the US. The commercial argument is that the US presents a deeper market based on trading volumes, investors, and analyst communities that may help the firm. Under a foreign private issuer, Saudi Aramco may be spared some tedious reporting conditions applicable for US firms (selective disclosure of some information to investors and analysts).

The US accepts international accounting or home country accounting practices with minor adjustments to meet the US standards. The Sarbanes-Oxley Act 2002 will require robust internal control measures. The US also needs a majority of independent board members. Independent reviewers would be required for strict determination of certain and uncertain oil reserves. Politics could influence the outcome. The NYSE may be a difficult exchange. The Justice Against Sponsors of Terrorism Act (JASTA) 2016 allows a US citizen to sue the Saudi government on the grounds that it assisted to plan the 11 September, 2001, attacks on the US (the JASTA problem).¹³² This implies Saudi’s assets may be at risk in the US. Additionally, Saudi Aramco may not be ready for the US Securities and Exchange Commission audit requirements and a high-level of transparency.¹³³

The London Stock Exchange

The LSE is seen as a natural choice because of the ties between the UK and the Kingdom. The Kingdom mainly purchases its wares from the UK, and deep diplomatic ties exist between the two countries. The Financial Conduct Authority is currently consulting and reviewing its practices to allow another type of foreign listing under international category based on less stringent rules perhaps driven by the Brexit and the need to open up the exchange and meet the needs of Saudi Aramco. For premium listing, the LSE needs an independent board and investor protection displayed through ownership rights, voting rights, and pre-emption rights (for the UK shareholders to get future stock during issues or sales of shares).

Saudi Aramco intends to float only 5% of the company’s shares. However, the LSE usually needs a firm to float 50% of their shares to gain access to the indices and 25% to be considered premium listing, a status held by majorities of the listed companies.¹³⁴¹³⁵ This requirement, however, may not be applicable in all cases, and some flexibility is already noted, as the UK agencies may waive this if a firm is sufficiently deep to run smoothly. For instance, under the corporate governance regime, Saudi Aramco may opt for the comply or explain strategy. On the LSE, Saudi Aramco faces a major hurdle on the official position of membership of major stock market indices. That is, for a firm incorporated in another country, a 50% free float is necessary to get membership of the FTSE 100. The question of an appropriate indexation for Saudi Aramco on the LSE is not simple.

For corporate governance issues, Saudi Aramco will have to deal with the issues of transparency, corruption, valuation, and strategy.¹³⁶ Moreover, studies associate corporate governance practices with organizational performance.¹³⁷¹³⁸¹³⁹ It would also be expected to review the rights of shareholders, the specific composition of the board, particular roles and responsibilities of directors, proceedings of the board, the board committee, conflicts of interest, disclosure issues, and transparency.¹⁴⁰¹⁴¹

Conclusion

Any markets hosting Saudi Aramco may expect to improve their fee income from the deal. It however appears that every exchange has its own challenges, which could hinder the cross-listing. While the two leading exchanges could adjust their practices and regulatory regimes, Aramco still faces the issue of corporate governance, which it should address domestically before seeking listing on the international markets.

Conclusion and recommendations

This chapter covers the conclusion and recommendations on what needs to be done in the case of Saudi Aramco’s planned sale of shares outside Saudi Arabia and why. Therefore, the chapter reflects on the prospective benefits that the foreign listing will bring to Saudi companies and any other observations. Factors that are most likely to influence the IPO are also covered. It is important to note that the initial public offering for such Saudi company as Aramco is viewed as a significant event in the international financial market. In spite of potential opportunities for the company to rely on other important stock exchanges in addition to New York and London, these markets are most interested in attracting Aramco, and moreover, the company is focused on listing its shares there. The key challenge is the evaluation of possible advantages and disadvantages of selecting this or that stock market. Apart from the Saudi stock exchange, it is not clear where else the company can and will cross-list efficiently, but positive market reactions are expected from listing on advanced exchanges.

Thus, the above discussions demonstrate fundamental issues surrounding the planned Saudi Aramco’s IPO and the ongoing reforms and changes in the Kingdom to prepare for the listing. From this perspective, any drawbacks in the reforms will significantly affect the IPO and its valuation. Although the government strives to eliminate major technical challenges, some fundamental issues, particularly related to corporate governance and corruption, seem to remain unaddressed. Eventually, the selection of a stock exchange will significantly influence the level of transparency. Saudi Aramco shares little or no information about its reserves, finances, activities, and strategies. Corruption and a lack of disclosure are major issues in this case that can serve as obstacles. Global listing requires enhanced transparency, the publication of much more information, and an independent board. Thus, the New York Stock Exchange and the London Stock Exchange expect more or less of the same code of conduct, an independent board, an audit team, a corporate governance regime, policies on risk management, and standards for financial reporting. Hence, non-compliance issues should be reported. More importantly, Saudi Aramco needs to improve its transparency aspects.

In this context, both the NYSE and the LSE are regarded as the key stock markets to choose from because of perspectives for Aramco to be listed internationally and attract a lot of global investors. Furthermore, these large markets are inclined to propose attractive conditions for such giants in the energy industry as Aramco. In addition, one should state that London and New York have their own interests in attracting Aramco because of outcomes of Brexit and Donald Trump’s policies that directly affect financial markets in the United Kingdom and the United States. However, the nature of the planned IPO requires the company’s executives and the Saudi government to pay more attention to the selection of the most appropriate option. The reason is that the company is oriented to listing only 5% of shares, and not all stock exchanges are interested in such offerings depending on their specific conditions. However, the London Stock Exchange seems to support Aramco in its intention, and this factor can significantly influence the company’s further policies and changes.

Still, it is important to assess all benefits and weaknesses of the choice in relation to the fact that Aramco not only wants to list only 5% of shares, but it also plans to access the biggest and the most influential stock market in the world. From this point of view, New York seems to be more attractive for the company. On the other hand, the NYSE’s standards regarding the disclosure of data related to oil companies can become a significant barrier for Aramco to overcome. This aspect should be viewed in relation to the NYSE’s efforts regarding rules on the percentage of shares to list on this market. If there are no changes in rules and policies regulating the IPO, it is almost impossible to discuss opportunities for Aramco to be listed internationally with the help of their 5% of shares.

In this context, Saudi Aramco can orient to choosing the LSE because of its obvious readiness to change specific policies and regulations regarding the IPO, as well as to address challenges related to Brexit. From this perspective, it is important to state that London needs some guarantees in order to preserve investors and the status of the largest European stock market, therefore, the attraction of Aramco can become an important step toward covering more Asian and Middle Eastern investors in addition to European ones. The comparison of potential outcomes associated with listing the Saudi company on global stock markets indicates that such leaders as Aramco have an opportunity to use the IPO for their benefit because the LSE and the NYSE are inclined to fight for the company’s shares listed on their markets. Nevertheless, it is also important to pay attention to the fact that, to use all benefits of being listed on international stock exchanges, Saudi Aramco needs to revise its certain corporate policies and principles to become more ready to the IPO.

Risks for Aramco’s plans to propose the sale of the company’s shares on the NYSE or the LSE need to be addressed because the status of the company influences its opportunities for being sold publicly. Challenges associated with the intense political interference should be taken into account by both executives of the company and representatives of the largest stock markets. However, it is important to note that ongoing changes demonstrate that the Saudi government is keen on tighter corporate governance controls. As a result, these initiatives would enhance transparency, curtail corruption, and boost investor confidence. However, compliance issues are most likely to arise if the company is listed on the international stock exchange. Overall, Saudi Aramco will have to address many issues rather satisfactorily in order to achieve its strategic goals associated with the planned IPO. These issues include the focus on the rights of shareholders, changes in the composition of the board, changes in roles and responsibilities of directors, proceedings of the board, alterations related to the board committee, as well as issues associated with conflicts of interests, disclosure, and transparency.

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Footnotes

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ibid.
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Josh Lerner, Ann Leamon and Steve Dew, ‘The CMA and the Saudi Stock Market Crash of 2006’ (Capital Market Authority, 2017) Web.
Bader Abdulaziz Alkhald, ‘The Saudi Capital Market: The Crash of 2006 and Lessons to be Learned’ (2015) 8 International Journal of Business, Economics and Law 135.
Florian Kohlbacher, ‘The Use of Qualitative Content Analysis in Case Study Research’ (2006) 7 Forum: Qualitative Social Research 1.
Joanna Smith and Jill Firth, ‘Qualitative Data Analysis: The Framework Approach’ (2011) 18 Researcher 52.
Mary C Lacity and Marius A Janson, ‘Understanding Qualitative Data: A Framework of Text Analysis Methods’ (1994) 11 Journal of Management Information Systems 137.
Roslyn Cameron and Jose F Molina‐Azorin, ‘The Acceptance of Mixed Methods in Business and Management Research’ (2011) 19 International Journal of Organizational Analysis 256.
Aashish Srivastava and S Bruce Thomson, ‘Framework Analysis: A Qualitative Methodology for Applied Policy Research’ (2009) 4 JOAAG 72.
Anastasia Kopaneli, ‘Finance, Marketing, Management and Strategy Planning: A Qualitative Research Method Analysis of Case Studies in Business Hotels in Patras and in Athens’ (2014) 9 Procedia Economics and Finance, 472.
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Chaiporn Vithessonthi, ‘Capital Investment, Internationalization, and Firm Performance: Evidence from Southeast Asian Countries’ (2017) 38 Research in International Business and Finance 393.
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Dewan Muktadir-Al- Mukit, Tarikul Islam, Momtaz Uddin and Zahir Uddin Arif, ‘Stock Market Development and Economic Growth: An Evidence from SAARC Countries’ (2014) 3 International Journal of Management 45.
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ibid.
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ibid.
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ibid.
ibid.
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