Initial Public Offerings in Saudi Arabia

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Table of Contents

Introduction
Short History of the Law of IPO in Saudi Arabia
The Law of IPO
Works Cited

Introduction

Initial Public Offerings (IPOs) have characterized the global business environment for more than five decades. Ernst (245) defines an IPO as the first time that a company sells its shares to the public. This is also the first time that a company sells its shares (as equity) in the stock market. Several regional and multinational companies have participated in IPOs. The biggest global IPOs involved Facebook, Agricultural Bank of China, and American International Assurance (Muljadi 67). Cumulatively, these IPOs raised about $58 billion (Muljadi 67). Other companies that have raised similar amounts of money include Industrial and Commercial Bank of China, Visa Inc. and General Motors, which made $21.9 billion, $19.7 billion, and $18.1 billion respectively (from IPOs) (Muljadi 67). Globally, many economies have experienced positive and negative outcomes from IPOs. Preliminary research shows that many researchers have researched on this topic and found that global market expansions have occurred on the backdrop of IPO activity (Alkhadhari 10). The same studies have revealed that most investors expose themselves to a considerable amount of risk and uncertainty by participating in IPOs (Alkhadhari 10). However, few researchers dispute the steady flow of money/capital that IPOs offer to local and foreign companies.

Different companies operate using different rules for IPO participation. However, private companies that want to participate in this process need to involve their stakeholders by explaining the company’s vision and what they intend to achieve through the IPOs. Therefore, companies have to undergo several processes before they participate in such processes. Country-specific rules apply. For example, Saudi Arabia has unique rules that guide the IPO process. This paper focuses on the kingdom by exploring its rules, processes, and outcomes. It contains two sections. The first section is in five parts. It explores the history of Saudi Arabia IPO laws, the problems facing non-stock corporations, advantages of IPOs, types of IPOs, and the effects of the transactions in the Saudi Arabian market. The second section of the paper explores the legal framework of IPO processes in the kingdom. This section is in four parts. It explores the law of IPOs, company requirements and duties, IPO research and due diligence, and the role of the CMA in the Saudi stock exchange market.

Short History of the Law of IPO in Saudi Arabia

IPOs are common in Saudi Arabia. Before 1984, few companies traded in the stock market. However, a government decree (introduced in the same year) changed this trend by allowing Saudi banks to trade the shares of local companies in the stock market. The government introduced a ministerial committee to oversee this process. In 1985, the Saudi Monetary Agency (SMA) took over the activities of this ministerial committee (Alkhadhari 12). The stock market has operated efficiently since then. However, in 1995, the government digitized trade at the market (Alkhadhari 12). One development that occurred in this period was the introduction of the Tadawul system. This change created new rules and regulations for guiding future developments of the stock market. These developments later birthed the Capital Market Authority (CMA), in 2003 (Alkhadhari 13). Similar to the contributions of the SMA, the CMA also increased the efficiency of the market. However, the oil industry greatly informs the success of the Saudi financial market.

Before a company enlists in the Saudi stock market, the country’s law requires that it should meet specific criteria for participating in this market (MCI 1). First, the law requires that the prospective companies assume legally recognizable identities such as joint stock companies, limited liability companies, general partnerships, or limited partnerships. Many companies in the kingdom assume the above identities (joint ventures and partnerships, which have share limitations, are the least common types). Limited liability companies are important drivers of foreign direct investments in Saudi Arabia. Many foreign investors prefer this investment framework because their liabilities are only limited to their levels of financial contributions to the company. The Saudi Arabian law allows the Sharia law to define the identity of other types of businesses (besides limited companies). However, these businesses are not important in the context of this study because foreign investors cannot take part in their operations (no trading can occur). In fact, many foreign investors prefer to establish limited liability companies (joint stock companies and partnerships are seldom established). Based on the nature of these companies, the Saudi law outlines different types of rules for each type of company, before they participate in the stock market. This paper explores some of these rules in subsequent sections of this paper. However, to understand them well, it is crucial to understand the problems facing non-stock companies.

Problems with Non-stock Corporations

The main distinction between stock and non-stock companies is their association with the public. While stock companies offer their shares to the public, non-stock corporations do not (many Saudi companies are non-stock companies). Such companies allow almost all shareholders to take part in the company management process. However, compared to stock companies, they have unique challenges as shown below.

Mismanagement

In many countries around the world, the law does not require non-stock companies to disclose their financial statements (Alkhadhari 12). Comparatively, public companies have to publish their financial statements. This difference has a significant implication on the transparency of these companies. While public corporations have transparent financial management structures, private companies are somewhat secretive. Their secrecy may create room for mismanagement because such companies have fewer accountability requirements, compared to stock companies. For example, since the company founder and a group of well-known people closely manage private companies, they may conspire to hide important information about the company’s financial information. They may also “whitewash” some of their managerial weaknesses and create a false impression that the company is doing well, when it is not (Alkhadhari 12).

Limited Capital

Capital is an important requirement for any company. Particularly, organizations that want to expand their operations beyond national borders require a lot of capital to do so. Private companies have limited access to capital. Their abilities to finance their operations mainly depend on the contributions of a limited group of members. However, public companies have a greater access to money because they source it from the public. Through such subscriptions, they can get more capital for financing their operations (Alkhadhari 16).

Limited Shareholders

Some jurisdictions limit the number of shareholders that a private company can have. For example, US laws limit the number of shareholders in non-stock companies to fewer than 2000 entities (Alkhadhari 19). Australian laws also limit the number of shareholders to fewer than 50 people (non-employees) (Alkhadhari 20). Stock companies do not have this limitation.

Unlimited liability

The main problem of non-stock companies is the unlimited liability that company owners experience when doing business with the company. In public organizations, liability is only limited to the contributions that the members make. However, in non-stock corporations, creditors may pursue the personal assets of company owners to offset company debts. Unlimited liability is unattractive to most investors.

Lack of Perpetual Existence

Perpetual existence refers to a company’s ability to operate without the owner’s contribution. This provision allows a company to operate as a separate legal identity from its owners. Many non-stock corporations do not share this advantage. Therefore, they may become insolvent when the main investors withdraw their capital, or die (Alkhadhari 21). This is an unattractive feature for such companies because investors who intend to do business with such companies are vulnerable to the company owners.

Share Transfers

Public companies have made it easier for people to transfer company shares through the stock exchange market. The law also allows such transfers to occur without significant problems. However, it is very difficult for stockholders in private companies to transfer their shares. Indeed, no framework supports such processes.

Advantages of IPOs

IPOs change the structures of different companies by offering unique advantages to such organizations. This section of the report outlines such advantages below.

Growth

Experts say the greatest motivation for companies to go public is raising capital (Alkhadhari 21). To affirm this fact, a UK researcher, Ramsley (cited in Al-Barrak 3), explored why several unlisted security companies in the UK had an IPO. He found out that 44% of these companies identified capital financing as the greatest motivation for having an IPO (Al-Barrak 3). Jain and Kini (cited in Al-Barrak 3) did a similar study and found out that most companies that have IPOs use the funds they get from the process to finance expansionary activities. Researchers have affirmed the same findings in Sweden. For example, two Swedish researchers (Hogholm and Rydqvist) sampled 166 Swedish firms and found out that about 127 of them used their IPO funds to finance growth (Al-Barrak 4). Comprehensively, these studies show that IPOs help companies to finance growth. Indeed, when companies sell their shares to the public, they get a new access to capital, which they could not have otherwise got through internal means. This capital-financing tool raises a company’s equity and helps it to achieve a desirable capital structure. Based on this advantage, Al-Barrak (4) says, depending on a company’s laws, if a company trades in the stock market, for a long time, it can gain access to an equity capital market.

Diversifying Portfolios and Improving Liquidity

IPOs benefit companies and their shareholders through diversified portfolios and improved liquidity (Alkhadhari 21). However, the level of liquidity that a company gets from an IPO depends on how it structures the process. For example, a company can structure its IPO to allow its directors to leave the company when they complete the process (the IPO allows them to cash-in their shares and leave). Similarly, the directors could use the IPOs to liquidate their holdings, in a structured way. Relative to this fact, Al-Barrak (148) says, “Private companies’ shares can be traded only by informal searching for a counterpart with considerable cost for the initiating party and with no established price at which to complete the transaction.”

Increased liquidity offers several advantages to publicly traded companies. For example, it allows companies to rebalance their accounts and change the nature of their net investments at very low costs (Alkhadhari 21). This advantage allows investors to diversify their investments and protect themselves from the likelihood of failure. In this regard, Pagano (cited in Al-Barrak 148) believes that it is essential for company owners (who want to have IPOs) to diversify their portfolios because by failing to do so, they would experience borrowing and diversification constraints. Statisticians say this advantage could help investors to diversify their investments by up to 70% (Al-Barrak 148). Diversification through IPOs could benefit both new and original shareholders. For example, such investors can directly benefit from IPOs by selling their investments and buying new stakes in new companies. Similarly, they can benefit indirectly from the diversification process by acquiring majority stakes in other companies.

Many company directors have exploited the above opportunities to increase their cash flows. For example, Jenkinson and Espenlaub (cited in Al-Barrak 148) say that in the 1980s, many British company owners increased their cash reserves by selling up to 40% of their company holdings. Here, it is important to understand the significance of the 40% because it shows a trend where company founders often sell what they consider as the “bare minimum,” during IPOs. They do so to maintain a favorable liquidity level, but still have controlling stakes in the company. However, independent studies show that more than half of company owners do not sell any shares during IPOs (Al-Barrak 148). Nonetheless, their investments increase after the company trades for a while (Alkhadhari 21). Studies conducted in Sweden show that up to 93% of original company owners make such divestments five years after the initial IPO (Al-Barrak 150). Usually, many companies do not sell more than one quarter of their shares during such IPOs. However, within the first seven years, company owners sell about two-thirds of such shares to the public (Al-Barrak 150).

Improved Credit Rating

Companies always strive to improve their credit ratings to increase their negotiation power (especially with suppliers). In line with this understanding, an independent UK researcher, Rajan (cited in Al-Barrak 147), says companies that have a good credit rating could get cheap financing through IPOs because it allows them to negotiate better rates with their suppliers. Indeed, Ransely (cited in Al-Barrak 147) says about 54% of companies that engage in IPOs do so to improve their credit ratings. However, evidences from Spanish studies contradict the above views by showing that improved credit ratings may not always reflect low credit costs. For example, in a 1995 study, a Spanish researcher, Planell (cited in Al-Barrak 147), investigated several listed Spanish companies and found out that although they enjoyed improved credit ratings after going public, they did not experience decreased interest rates after the IPOs. Although these findings show that most companies do not enjoy an improved credit rating after an IPO, many researchers believe that such findings are isolated.

For example, Pagano (cited in Al-Barrak 147) disagrees with Planell’s views by saying many firms experience reduced costs of borrowing when they go public. To affirm his view, he says, companies experience reduced borrowing costs for three reasons. The first reason is that IPOs make people believe that the companies are “safe” borrowers (Al-Barrak 148). Secondly, IPOs make companies open to the public. Therefore, creditors have more information about such organizations. This way, they spend less resources getting information about them. This advantage makes it easier to evaluate their creditworthiness. Thirdly, experts believe that by going public, companies have more borrowing options (Al-Barrak 148). Consequently, banks have a weaker bargaining power. These three reasons show that most IPOs improve the credit ratings of the companies that participate in them.

Monitoring and Motivating Managers and Employees

IPOs improve employee productivity and managerial competencies (Alkhadhari 21). For example, it helps companies to align employee and company interests. Since going public increases the participation of employees, suppliers, and management, IPOs help organizations to achieve stakeholder buy-in. Consequently, these stakeholders work harder to help the company to perform better because they share the organization’s success. Companies have different ways of tying employee, or managerial success, to organizational success. For example, most of them prefer to peg employee bonuses to a company’s success (Alkhadhari 21). Therefore, employees (only) benefit through their company’s success record. Tying managerial wealth to shareholder profitability is also another strategy pursued by many companies. Such structures ensure managers and employees maximize their companies’ values.

Based on the above insights, studies done by Ransley (cited in Al-Barrak 152), in the 1980s, say IPOs greatly improve the morale of both managers and employees. In fact, he says that some companies go public to benefit (solely) from this advantage (Al-Barrak 152). Relative to the above assertion, while it may be a natural response for a company that wants to expand to participate in an IPO, many of them go public to retain and motivate their employees by introducing share participation schemes. To understand this advantage, it is crucial to compare private companies with public companies. Private companies cannot enjoy the same level of employee motivation that public companies do because their employees do not often wish to be vulnerable to the company owners (as is the case in private companies). Therefore, they are likely to be more motivated to perform better in companies that consider them as part of their management team (public companies).

Research also proves that since managers and employees may participate in IPOs, public companies could experience reduced agency costs (Al-Barrak 152). This happens because IPOs demand a lot of discipline from managers. Indeed, by going public, managers have new pressures, such as hostile takeover fears and performance pressures from company shareholders. Although improved managerial discipline is a positive addition to a company’s management framework, researchers such as Pagano and Roell (cited in Al-Barrak 152) say companies that have very few shareholders could suffer from over-monitoring. Such ownership structures may demoralize some managers, thereby undermining their performance. The researchers also say that increased expansion activities (financed through IPOs) may have a greater over-monitoring cost and a similarly greater organizational performance cost (Alkhadhari 21). This cost is especially common for private companies that want to undertake large and expensive expansions. In such circumstances, experts often advise such companies to go public (Al-Barrak 152). Overall, IPOs help to improve employee performance.

Types of IPO

Different companies participate in different types of IPO. The intended ownership structures and the management plans of the companies often influence their IPO choices. The Pennsylvania State University (540) says there are four main types of IPO – plain vanilla IPO, venture capital-backed IPO, reverse leveraged buyout, and a spin-off IPO.

Plain Vanilla IPO

A plain vanilla IPO includes basic financial instruments such as bonds, futures, and swipes, which have a fixed expiry date, or strike price (Pennsylvania State University 540). Some companies include an exotic option to such stocks by adding a knock-in option. Often, they do so to “activate” the stock when it reaches a targeted price. Mainly, private companies prefer this type of IPO because it allows them to know the value of the company in the stock market. This way, they also know how much money they can get from the market (through IPOs).

Venture Capital IPO

A venture capital IPO involves selling the shares of a private organization (financed by venture capitalists) to the public. The acquisition of majority shares by a new entity is a common outcome for such IPOs. Usually, investors who want to cash-in on their investments pursue this type of IPO. Often, a country’s rate of economic development determines the success of such IPOs. For example, in periods of economic boom, investor confidence is usually high and the number of venture capitalists is equally high. The opposite is also true because when economic performance is low, investor confidence is equally low and there are few venture capitalists in this regard. For example, during the 2008/2009 economic crisis, there were very few venture capitalists in the global financial market because economic conditions were unfavorable for investments. Therefore, proper timing is an important characteristic of successful venture capital IPOs. For example, many companies, which want to offer such IPOs, wait for a time when there are favorable stock market conditions. Nonetheless, many companies have benefitted from venture-backed IPOs, regardless of timing factors. For example, Tesla Motors and Open Table Company have had successful IPOs through this method (Pennsylvania State University 540). The Pennsylvania State University (540) also says such types of IPOs are often common for investors who have built companies (from the ground-up) and wish to exit when they are financially stable.

Reversed Leverage Buyout

A leveraged buyout (LBO) occurs when a buyer borrows heavily to purchase a company’s stock and later uses the acquired assets to pay for the borrowed money. Such transactions are common in the modern business environment. The Pennsylvania State University (540) says such IPOs are common when businesses intend to acquire, or merge, with other companies. Although such kinds of transactions occur when a buyer borrows the entire cost of company shares, many IPOs are often funded by borrowed funds (at least partially), thereby making them leveraged buyouts too. Different circumstances dictate the viability of such types of IPOs. The Pennsylvania State University (540) says they are more common when companies intend to restructure, or become insolvent. They can also occur in different forms. However, the most common types of LBOs are “management buyouts (MBO), management buy-ins (MBI), secondary buyouts, and tertiary buyouts” (Pennsylvania State University 540).

Such IPOs can also occur across public and private companies, depending on the intentions of the company managers. Since many investors often want to maximize their financial outputs through such IPOs, they may borrow a lot of money to buy company stocks. Such cases have created undesirable situations where companies are “over-leveraged.” They occur when the investment return is lower than the cost of borrowing. In such circumstances, two outcomes are probable. The first outcome involves debt-to-equity swaps, where the owner of the debt becomes the majority owner (shareholder) in the newly acquired company. The second outcome includes insolvency (where creditors sell a company’s assets to pay the money borrowed) (Pennsylvania State University 540). Nonetheless, different companies have participated in leveraged buyouts. Pan-Atlantic Steamship Company was among the first victims of a leveraged buyout. In the transaction, the buyer, McLean Limited, borrowed about $42 million and raised an extra $7 million by selling preferred shares to finance the acquisition (Pennsylvania State University 540). Such IPOs have been largely successful over the years.

Spin-off IPO

A Spin-off IPO occurs when a company subdivides its business into different sections, and sells them as independent entities. The subdivided sections often grow to become independent businesses with new sets of employees, technology, intellectual property and other types of assets. Usually, when the parent company sells a business subsidiary, it receives equivalent shares for the sale (Pennsylvania State University 540). This money compensates them for the loss of the business subsidiary. Many investors choose this IPO because it gives them an opportunity to invest in the most profitable business subsidiaries (Pennsylvania State University 540). Although many researchers affirm this benefit, they also say that dividing a business into different subsidiaries may disrupt relations between different business segments (Pennsylvania State University 540). Nonetheless, different companies have emerged from this type of IPO. For example, Hewlett Packard (HP) birthed Agilent Technologies through a 1999 IPO spin-off (Pennsylvania State University 540). Usually, companies that take part in such IPOs do so because they want a more reasonable buyer (frustrated by the lack of a “worthy” buyer) (Pennsylvania State University 540).

Effects of IPOs in the Saudi Market

Few studies have explored the link between economic development and IPO performance. Nonetheless, Huybens and Smith (cited in Al-Barrak 173) have investigated the effects of inflation on stock market performance and found out that high levels of inflation often produce smaller, dormant, and less efficient financial markets. This finding shows that inflation has a negative correlation with stock market performance. However, Gross Domestic Product (GDP) increased stock market returns and research and development (R&D) expenditures to have a positive correlation with IPO performance. These correlations are true for the Saudi financial market and other economies around the world. For example, researchers from central and Eastern Europe affirm the above relationships in their countries (Al-Barrak 170). Al-Barrak (170) also says improved economic performance has increased IPO investments in both regions.

Many researchers have also studied the relationship between stock market performance and economic growth. They have shown that more than 40 countries affirm a positive relationship between the two variables. Levine and Zcrvos (cited in Al-Barrak 170) went a step further and broadened their research to include the effects of IPOs on “world capital markets, current and future rates of economic growth, capital accumulation, productivity improvements, and the saving rate.” They found that the stock market had a positive correlation with these indices as well. They affirmed these positive correlations by sampling the effects of IPOs on 47 countries. Two researchers, Levine and Zervos (cited in Al-Barrak 171) also affirmed the above correlations by saying that, stock market performances had a positive correlation with current and future economic performances. Similarly, they also established that the market size and international business operations expanded with increased IPO investments. Although these studies show a positive correlation between stock market performance and economic growth, this section of the report shows that Saudi Arabia has experienced mixed outcomes from IPOs.

The main reason for analyzing the effect of IPOs on the Saudi economy is the dominant position of the oil-producing giant in the Middle East region. Therefore, by understanding how IPOs affect this economy, it could similarly be easy to understand how IPOs affect the entire Middle East economy. Furthermore, the number of listed companies in the Saudi economy has increased in the last few years (increased stock market activity) (Al-Barrak 152). After considering the significant impact of the financial market on the Saudi economy, safely, we can say the country’s IPOs are having a growing influence on the region. This section of the paper shows that IPOs influence different aspects of the Saudi economy through resource mobilization and changing firm performance.

Effective Resource Mobilization

For a long time, Saudi IPOs have mobilized savings (both locally and internationally) and channeled them through the country’s financial markets (Al-Barrak 152). This way, they have offered investors the opportunity to invest in several local companies. These advantages have improved the efficiency of financial market investments by providing Saudi companies a steady stream of finances from local and international investors. These IPOs also offer investors a guarantee that these markets would provide them with financial services, at a reasonable cost. This advantage supports the primary goal of improving national economic performance and people’s standard of living in Saudi Arabia.

Rousseau and Wachtel (cited in Al-Barrak 170) have also explored how stock markets affect the Saudi economy and established that they have four main influences. The first way is providing venture capitalists with an exit strategy to invest their money. The second way is increasing investors’ liquidity to allow them to invest their money in different financial options, both locally and internationally. Thirdly, they say IPOs provide Saudi companies with a large pool of capital, which they can use to expand, or finance, their operations (Al-Barrak 170). Lastly, the two researchers believe that IPOs provide investors with information that they can use to make informed decisions about their potential investments. Using these four contributions of IPOs to Saudi financial market operations, Al-Barrak (170) says IPOs affect the country’s macroeconomic indicators, such as standards of living, balance of trade, and inflation.

Firm Performance

To understand how IPOs affect the Saudi Arabian economy, it is important to understand how IPOs affect Saudi firms because these companies strongly support the economy. Alanazi (146) says that IPOs negatively affect Saudi Arabian economies. As a case study analysis of Saudi firms, he said IPOs often decrease firm performance (Alanazi 146). Decreases in Return on Assets (ROA) and Return on Equity (ROE) among other financial indices affirm this trend. However, these financial outcomes are not unique to Saudi Arabian firms (only) because American and European firms have also had trouble reaching their pre-IPO performance. For example, Alanazi (146) studied 682 firms in the US and found out that they posted decreased cash flows and ROA figures after IPOs. In many of these companies, such declines did not occur immediately after the IPOs; they occurred a year before the IPO and continued for about five years after the stock market debut (Alanazi 146).

Reasons for the dismal performance of Saudi firms after the IPO are many. However, Alanazi (146) narrows them down to conflicts of interest, which arise when new company owners differ with their managers. The “alignment of interest” hypothesis mainly explains this fact because it shows the relationship between poor firm performance and post-ownership management structures. This relationship shows that the greater the share of ownership that the original owners have (after the IPO), the greater the firm performance (Alanazi 146). For example, Alanazi (146) quotes the findings of an American study, which showed that American firms performed well when the original owners maintained their control of the companies. A contradicting hypothesis exists. It says that if original company owners strongly maintain their control of a company, firm performance would decrease (Alanazi 146). This view stems from an assumption, which suggests that when original owners maintain their ownership of the company, after an IPO, they will be more willing to stamp their authority in the company, thereby decreasing a firm’s performance.

Besides the ownership structure, the window for opportunity theory also explains the poor post-IPO firm performance of Saudi firms. It suggests that the dismal performances of these firms stem from greed and unfounded desires for company owners to exploit the stock market (especially when it is bullish). This theory stems from about 336 studies, which surveyed the views of chief financial officers in different companies who said that company owners are usually opportunists (Alanazi 146). They also said that most company owners view IPOs as good opportunities for cashing out their investments. Besides this explanation, Alanazi (146) has also voiced the “window dressing accounting data” explanation, which suggests that company owners (and their accountants) exaggerate financial information to attract investors during IPOs (they are unable to justify the impressive financial figures after the IPOs). Other explanations that explain the poor post-IPO performance of Saudi firms are the age and size of the firms (during IPOs). For example, large companies post a better post-IPO performance, while younger and newer companies are unable to sustain pre-IPO sales (Alanazi 146).

The Law of IPO

IPO procedures are often similar for many companies around the world. However, Saudi Arabia has a defined set of rules that outline the procedures for incorporation and public participation. Articles 48 to Article 65 of these laws provide the framework for IPO procedures in the kingdom. This section of the report explains them.

Article 48: Article 48 of the Saudi law stipulates that before IPOs happen, joint stock companies should divide their shares into equal and negotiable units, where each member is responsible for their shares. The number of shares for each partner should be more than five (MCI 48).
Article 49: This section of the Saudi law stipulates that all joint stock companies that want to participate in IPOs should have a capital of more than SR 10million. Each share offered should also have a value of more than SR 50 (MCI 48). In other cases (besides IPOs), the same law requires that the capital for such companies should not be less than SR 2million.
Article 50: This law prohibits companies from using the names of natural persons for registering joint stock companies. The only exception to this rule is if the company expects to use the same name as a patent for its business, or if the joint stock company is part of a larger commercial entity that uses the name of a natural person.
Article 51: This law stipulates that the decisions made by the Saudi government (about IPO procedures) should emerge from the framework provided by the joint-stock corporation bylaws. Article 51 gives the minister some special powers to use his discretion, to override these laws, or use them to issue a decision regarding a joint stock company (MCI 21).
Article 52: Article 52 of the Saudi law gives the Council of Ministers and the Ministry of Commerce special powers to approve the joint stock status of specific companies. Such corporations include chartered companies, companies that manage public goods and services, companies that use government subsidies, companies that require government involvement, and companies that offer banking services (MCI 21). Organizations that do not fall within the above criteria can only get the “joint-stock status” when the Minister of Commerce approves their requests. However, before issuing such approvals, the minister would review a company’s objectives, its economic feasibility, and other legal requirements provided in the Saudi law. If he is satisfied with the company’s business model, the law allows him to gazette the organization as a joint stock company. Five members of the company (wishing to enlist) should sign the application form for ministerial approval. Their applications should show different details regarding the number of shares owed to each partner and company owners. Therefore, before seeking ministerial approval for joint stock listing, the company owners should sign a contract that explains all the above details. This document will form part of the government’s record (MCI 21).
Article 53: Subject to the guidelines for forming a joint stock company, article 53 of the Saudi law requires that the owner of the prospective company should be someone that has signed the contract of incorporation. Similarly, in this process, the law recognizes all people that have contributed to the formation of the company, or any party that has participated in the process.
Article 54: Article 54 of the Saudi law for incorporating companies stipulates that company founders should avail stocks that they do not reserve for themselves to the public. They must do so within a 30-day framework, after they have received the certificate of incorporation (MCI 21). Again, article 54 gives power to the Minister of Commerce to use his discretion and extend the number of days for this requirement.
Article 55: This article explains IPO modalities in Saudi Arabia. It stipulates that Saudi companies need to conduct their IPO processes through specific banks, which the Minister of Commerce chooses. The company owners need to furnish the chosen banks with specific documents, such as the company bylaws, as requirements for the IPO process. Thereafter, the banks should provide a prospectus that invites investors to take part in the IPO. This prospectus contains different kinds of information, including details of the company founders, information regarding the company’s contacts and location, the nature of stocks offered in the IPO, the rights of each shareholder and the privileges given to company founders (MCI 23). Profit distribution modalities, dates for opening and closing subscriptions, detailed incorporation expenses, modalities for distributing shares to investors (when stocks are oversubscribed), and the incorporation date for the company are other types of information that may exist in the same document (MCI 22). The banks are required to make sure that all the above pieces of information (provided in the particulars) are factual. Thereafter, the bank should publish the company’s prospectus, five days before the IPO (MCI 22).
Article 56: This article stipulates the duration, which an IPO should be active. It says that the IPO should be open to the public for not less than ten days. However, companies should not allow such processes to go on for more than 90 days (MCI 22). Within this time, the company should have sold all its shares. If it fails to do so, the Minister of Commerce will not incorporate it as a public company. However, if the listing company fails to sell all its shares within the prescribed time, again, the Minister of Commerce has the discretion of extending the IPO period, as he deems fit.
Article 57: Article 57 outlines the terms and conditions for IPO subscription. Here, the law requires new shareholders to sign a document that shows they accept the terms and conditions of the share offer. Although subscribers can appoint a representative to sign this document on their behalf, the terms and conditions outlined in it are final (MCI 22).
Article 58: Article 58 emphasizes the need to use a share’s par value to determine the share prices for IPO processes. It outlines that this value should be more than 0.25 of the par value (MCI 22). This law also requires a company to make a notation for every share subscribed (MCI 23). The company should credit the money that comes from the process under the name of the listed bank. Later, this ministerial-appointed bank shall only submit the money it gets from such transactions to the board of directors of the listed company, when the company is incorporated. This process should happen according to the rules stipulated in article 63 (MCI 22).
Article 59: This article stipulates how Saudi companies should manage oversubscribed shares during IPOs. To promote equity, the law stipulates that Saudi companies should distribute oversubscribed shares, according to the contribution levels of the owners. This process should occur after considering all decisions made by the Minister of Commerce (particularly, after considering the interests of “minor” subscribers) (MCI 22).
Article 60: Article 60 outlines the special privileges that company owners get after an IPO. The Company General Department has the duty of appointing a special group of people to investigate the accuracy of information about the privileges and the special status accorded to the company owners. The law also requires that Saudi companies should provide a report, which outlines the outcome of this investigation, to the Company General Department, within one month. However, if the investigators are unable to complete their work within this time, they may receive an extension of not more than 30 days. After the investigators submit the final report, the company owners and the new subscribers have a right to view it (MCI 23). Thereafter, they could deliberate on its contents during a constituent assembly that should happen 15 days after receiving the report. In such deliberations, the shareholders have a right to increase, or omit, certain privileges. However, their actions are only enforceable when the company founders approve them as well. Failure to approve the changes would nullify the memorandum of association (MOA). Although the beneficiaries of the privileges need to receive stocks that give them such privileges, on time, article 60 outlines that such processes should occur (only) after the company has received the title of such contributions (MCI 24).
Article 61: Article 61 of the Saudi law requires companies to call all shareholders for a general meeting. They should notify the shareholders 15 (or more days) before the scheduled meeting (the company should make such notifications according to their bylaws). If there are any contributions (in kind, or as privileges), such meetings should not occur if 15 days have not lapsed, after the company files an internal report (according to article 62). The law does not discriminate on any shareholder because it allows all of them to attend such meetings. Any outcomes that result from their deliberations should include the majority view. Therefore, the law requires that (at least) members who represent half the capital in the company should be in the meeting. If the company fails to achieve a consensus, the board has a right to issue new summons to shareholders. The second meeting should occur at least 15 days after the summons. Any outcomes that result from this second meeting will be valid, regardless of the number of shareholders who attend. However, the company should adopt the “majority resolution” that emerges from such meetings. Resolutions for altering privileges or contributions in kind need to have the approval of most shareholders who have preferential shares (the law excludes the votes of company shareholders who benefit from such privileges). Any resolutions that come from such meetings should have the approval of different company representatives. Particularly, the chairperson of the meeting, the treasurer, and the teller should sign the document, which approves the minutes of the meeting. Thereafter, the company owners have a duty to send the same document to the General Department of Companies (MCI 26).
Article 62: Subject to the rules outlined in article 60, the above shareholder meeting should ascertain four issues relating to the company. The first issue is affirming that the capital owed to the company is fully paid and that all the shareholders have their amounts allocated to them. The second issue is approving the company’s bylaws. Often, many Saudi companies do not make many changes to their laws. Therefore, the set of laws given during the listing period is active. Thirdly, the shareholders should appoint a board of directors that manage the company for not more than five years. Such appointments often occur when the memorandum of association does not outline the mentioned individuals. Lastly, the shareholders should discuss the reports of the company owners and the effects of listing costs on the company (MCI 26).
Article 63: After considering the minutes of the annual general meeting, article 63 allows company owners to request the Minister of Commerce and Industry to incorporate their companies. The company owners should make this request at least 15 days after a meeting. The same individuals should also accompany this request with several documents, such as a statement showing the full payment of the amount subscribed during the IPO, signed minutes of the annual general meeting, and a set of the company bylaws, as approved by the management and shareholders. The same application document should include the raft of recommendations adopted by the shareholders, the list of appointed position holders, and the company’s MOA.
Article 64: According to the general provisions for joint stock corporations, article 64 says an incorporated company should acquire this status when the Minister of Commerce announces it as so. Any subsequent objection to prevent its incorporation is invalid. Based on this decision, the law deems a company liable for any action that its owners make. However, if the company fails to observe any of the above-mentioned articles of incorporation, the shareholders are entitled to compensation through refunds. The person responsible for the flawed incorporation process is also liable for any damages that may arise from his acts (MCI 27).
Article 65: Article 65 says that the Saudi Minister of Commerce should gazette incorporated companies at the expense of the applicants. After incorporation, the company owners should also request to be registered as so. This process should happen 15 days after incorporation (MCI 27). The law requires that the company should provide different documents for registration. Such documents should include details of the company, details of the company founders, the number, types, and ownership of company shares, the formula used by the company to distribute profits, and details concerning shareholder rights and any privileges associated with them. Besides these pieces of information, article 65 requires that the application should include the date, which the company got an approval by the government to trade in the stock exchange market (MCI 27).

Requirements and Duties

As shown in this paper, Saudi Arabian companies need to transform to joint stock companies if they want to transact on the Saudi stock exchange. In Saudi Arabia, this process is elaborate. The success of the transformation process mainly hinges on companies providing the right information for investors and the Ministry of Commerce to rely on when approving the request for incorporation. This should happen with the goal of transforming the enterprise to benefit the company owners and the national economy. In line with this transformation objective, the Ministry of Commerce and Industry Saudi Arabia (1) says,

“These rules are designed to clarify the instructions governing the transformation process, including the conditions found in the company seeking transformation, and to identify the information and data that shall be disclosed, and to identify the relationships and responsibilities for all parties involved in the process.”

The goals of enforcing the transformation rules are diverse. They include enabling government officials to approve the transformation process, giving current and prospective owners the right information for investing in the impending IPOs, and clarifying the transformation procedures. Understanding the information needed for the transformation process and identifying the parties that take part in the same process are other objectives of the same process.

Company Duties before Listing

The Saudi Arabian law requires local companies to meet different financial and legal criteria before requesting to have an IPO. One precondition is that such companies need to have expansive and profitable operations (Ministry of Commerce and Industry Saudi Arabia 1). Particularly, the law outlines that such companies need to have accumulated net assets that are worth more than SR 50million (Ministry of Commerce and Industry Saudi Arabia 1). Similarly, the revenue created from the shareholders’ rights need to be more than 7% of the total amount received by the company, as revenue. This requirement refers to financial figures posted by the company, three years before the listing request. Similarly, the company should make sure that the feasibility study of the company’s revenue (after the transformation) should be more than 7%. The law also requires that such companies should have existed for more than five years, before the listing request (Ministry of Commerce and Industry Saudi Arabia 2). The same law also requires that the company intending to list on the stock market should issue at least 40% of their shares to the public (Ministry of Commerce and Industry Saudi Arabia 2). To have a seamless transformation process, the law says that the issuing company should hire competent staff that can manage the duties and responsibilities required of public companies in Saudi Arabia. Similarly, the company should have efficient internal supervision strategies for protecting its assets and competing in the stock market.

Transformation Procedures

After companies meet the above criteria, they are supposed to furnish the General Administration of Companies, in the Ministry of Commerce, with documents that show its compliance record (Alkhadhari 21). The law also requires such companies to provide several documents. For example, they should provide the name and address of the company, the company’s pay structure, a summary of the company’s financial records, and a description of the company’s legal record (pending cases, or past cases). Other documents that the companies may provide include a financial plan, which explains how the company would use funds from the transformation process and a description of how the company arrived at the stipulated share price (Ministry of Commerce and Industry Saudi Arabia 3). Saudi companies also need to furnish the capital market authority with documents that outline the nature of the shareholder contract and a letter that affirms the approval of company owners for the IPO. Similarly, the companies need to show audited reports that verify the company’s financial accounts before the IPO (Alkhadhari 21). Usually, these documents should show the company’s performance, three years before applying for the IPO. Companies that seek incorporation should also furnish the government with an economic feasibility report that a reputable Saudi firm has prepared. The document should project the company’s future financial flow and show the basis for calculating its share prices. After completing these processes, other phases of evaluation should go on (Ministry of Commerce and Industry Saudi Arabia 4).

The registrar of companies should review all the application processes, subject to the provisions outlined in the above paragraph. The department may also request the company to provide any information that it deems necessary, or left out, in the application process. When all the information is available, the department reserves the right to approve the application, or save it for a later evaluation. Either way, any decision made by the department should be justifiable. However, before any evaluation process starts, the registrar of companies requires Saudi companies to provide some documents during the preliminary evaluation. They include a document showing that all the partners approve the transformation process, according to the bylaws of the company and a company statute that complies with the provisions provided by the Minister of Commerce (Ministry of Commerce and Industry Saudi Arabia 3).

Within the same legal framework, the company needs to provide modalities for transforming the partner’s contributions into legally recognizable shares. This process should occur two years before the company prepares the balance sheet, or the profit and loss accounts. After this transformation, the company should outline the maximum voting power that the shareholders would have. The law stipulates that no shareholder should control more than a quarter of the votes. However, this requirement depends on the company’s nature of transformation and the rules outlined in article 34 (Ministry of Commerce and Industry Saudi Arabia 3). To ascertain the information provided by the company, with respect to share subdivision, the registrar of companies shall (independently) appoint an expert who would determine the fair value of the company’s shares. This expert should conduct his activities within the framework of articles 60 and 61 of the company laws (Ministry of Commerce and Industry Saudi Arabia 3).

After verifying all the information provided by the company (seeking incorporation), the Ministry of Commerce should use its discretion to incorporate the company. However, this decision is subject to all rules outlined in the company’s regulatory framework. Subject to this requirement, the Ministry of Commerce and Industry Saudi Arabia (4) says, “The underwriting prospectus shall include an adequate summary of the information and data contained in the transformation application and it shall be made available to all the investors to see the transformation application and its annexes.”

IPO Research and Due Diligence

The Saudi stock market is arguably the most vibrant stock market in the Middle East. It accounts for about half of all capital inflows in the region (Alkhadhari 7). IPOs have played a big role in supporting the vibrancy of this market. Incidentally, stock market indices have posted impressive performances in the last few years. For example, the all-share index in Tadawul doubled in 2004 (Owels 1). Although the stock market has experienced several challenges, since 2005, the government has always strived to improve its efficiency. For example, it has addressed some common challenges, such as the lack of transparency, illiteracy about stock market operations, and the lack of enough IPOs in the kingdom. These challenges have created problems not only for the Saudi economy, but for the Saudi citizens as well.

For example, Alkhadhari (7) says high levels of illiteracy have caused significant financial losses for individual investors who are attracted by the lure of high profits during IPOs. They do not understand that the stock market is equally volatile and they may make significant losses. Some people misadvise other investors to sell their stocks too early. Therefore, they lose potential revenue in this regard. The same misfortune follows them when they hold on to “bad” stocks. Therefore, Alkhadhari (7) says it is important for investors to understand how the stock market works because they are key drivers of its performance. In line with this assertion, he also says individual Saudi investors often account for more than 90% of all IPOs (other investors come from other Gulf countries or institutional investors in the kingdom) (Alkhadhari 8). This statistic shows that foreign and institutional investors are fewer than individual investors are. Here, it is important to point out that unlike other stock markets; the Saudi financial market has a relatively low participation of foreign investors.

Alkhadhari (8) says the main problem with the Saudi stock market is its arbitrary IPOs. Such IPOs “breed” unhealthy practices because investors are ill prepared to invest efficiently in the IPOs. For example, they do not understand how to suspend price manipulators. However, this problem is not exclusive to the authorities that manage the stock exchange market because brokers also play a role in creating these inefficient market systems. For example, they have a stronger profit-making focus, as opposed to having a drive to exploit market conditions effectively (for the benefit of their clients). Similarly, banks play a significant role in exacerbating this problem because they create the dilemma between market optimization and profit maximization goals for the stockbrokers. Alkhadhari (8) further says that investor overconfidence compounds this problem. They often believe that they would make a lot of profit from their investments (disposition hypothesis). However, this is not true because they fail to consider how other variables affect their investments. Often, the strong appetite for making a lot of profit makes them sell their shares prematurely, thereby failing to maximize their investments. Based on these dynamics, it is important for people to understand how irrationality affects the behaviors of Saudi investors during IPOs. Solving this problem depends on due diligence and proper education on how IPOs work.

Due Diligence

Alkhadhari (9) says due diligence is among the most important processes for any successful IPO. The due diligence process mainly refers to the verification of information that exists in the company prospectus. It improves the probability of success for a company because, from organizational and investor perspectives, it improves an organizational credibility. Therefore, investors need to do different kinds of due diligence processes before an IPO. Among the most common due diligence processes are the financial due diligence, intellectual capital diligence, and legal due diligence. These processes demystify a company and inform the shareholders about the different types of risks that they face by doing business with them. However, due diligence is important for investors and companies alike. For example, companies need to undertake due diligence before going public. The main aim of this process is to ensure all the details provided are factual

Due Diligence for Companies

The most important due diligence process is company evaluation. This process aims to set the share price of a company. This way, a company that wants to participate in an IPO can compare its value with other peers in the market. Similarly, from the same process, investors would understand the highest and lowest values that they can pay to buy a company’s share. To come up with these values, a company needs to have a skillful team of experts that would effectively undertake these processes. For example, Alkhadhari (10) says companies that want to participate in IPOs need to employ the services of accountants and underwriters. They also need a team of effective managers that would steer the company’s transition from a private entity to a public one. Companies also need to employ the services of bankers and brokers who, after setting the share price, submit the company’s information to the listing authority for approval. After completing this process, the listing authority allows the company to sell its shares during the underwriting period. Often, these processes are very costly and time-consuming for companies. However, the investments are worth the benefits that they get from the process. Nonetheless, to understand the duties of different participants in the IPO process, it is important to explore each participant in isolation. Relative to this need, Owels (4) says the main participants in the IPO process include the CMA, pre-IPO stockholders, the company’s management, board of directors, counsel, independent accountants, managing underwriters, research analysts, and an underwriter’s counsel. The following section outlines their duties.

Company Management

Owels (4) says a company management is perhaps the most important participant in the IPO process. A management team mainly includes the Chief Financial Officer (CFO) and the Chief Executive Officer (CEO). They act as the main connection between the company’s board and the working group. Their decisions are pivotal to the success of the IPO because they choose the underwriters; inform the board of directors about the feasibility of going public (among other important functions). To explain the important functions played by a company’s management, Owels (4) says,

“Working with Company Counsel, the CEOs and CFOs lead the company’s IPO preparations in the areas of corporate governance, executive compensation, and public company education. The CFO supervises the development of the company’s internal controls and coordinates accounting preparation processes with the independent accountants.”

Board of Directors

The Board of Directors often makes the important decision of going public. Its roles also include making sure that the company follows the rules, policies, and controls that define the IPO process. Besides these duties, the Board of Directors also plays integral roles during the IPO process.

Company Counsel

The main duty of the company counsel is to coordinate the duties of the working group and the company. A person who is most knowledgeable about the laws and procedures of IPOs often stands a better chance of being part of the company counsel. The company counsel is important because it guides companies that seek incorporation through the complex legal procedures that precede the process. Similarly, the company counsel helps such companies to understand how CMA interpretations of company laws affect their incorporation request (Owels 4). Competent professionals can easily help their clients to eliminate any knowledge gaps and experiences that may reduce their chances of participating in the stock market. However, inexperienced professionals magnify these knowledge gaps and further reduce the chances of their clients having a successful IPO. Overall, the company counsel helps companies to undertake effective corporate housekeeping to improve their preparedness for an IPO (Owels 4).

Independent Accountant

Besides auditing a company’s financial statements, independent accountants are useful in providing valuable accounting information for a company’s IPO planning process. Mainly, such professionals provide advice on appropriate accounting principles that would enhance the competence of the above process. Such advices often help companies to address potential accounting issues and improve the internal accounting controls that would boost an organization’s response to IPO issues (especially concerning financial matters – CMA accounting procedures) (Owels 4).

Pre-IPO Stockholders

Pre-IPO stockholders are people who own a company before it goes public. Therefore, companies need their consent to have an IPO. Often, the company owners and their affiliated groups control enough voting power within the company to prevent such an attempt, or force other stakeholders to support their decisions. Therefore, large stockholders have a duty to fill the submission forms required by the CMA and any lockup agreements that the company may need for the IPO process. These stockholders also get involved in the underwriting process, especially if they have to sell their shares in the IPO (Owels 6).

Managing Underwriter

Managing underwriters often play an important role during the IPO process. Besides being intermediaries between the company and its investors, they also advise the prospective companies about the optimum time for having an IPO. To do so, they conduct due diligence for their clients and ascertain how the prevailing market conditions would affect the IPO process. Based on their experience about the market, the underwriters help their clients to crystallize their positions when making their submissions. Considering the above statement, it is important to understand that different institutions qualify as underwriters, but most companies that want to enlist in the stock market often choose banks as the preferred underwriter (it may be one bank or a syndicate of banks). If a company chooses to seek the services of many financial institutions, they distribute the risk involved, to all the banks. Since there are different types of underwriters, a company needs to choose the right type of underwriting process. Here, Alkhadhari (10) suggests that most companies should choose the best effort underwriting process because it creates an agency relationship where the underwriter sells the maximum number of shares. Comparatively, an all-or-one underwriting process allows the company to withdraw security when the underwriter is unable to sell all the shares. However, in a negotiated underwriting process, the company may negotiate with the underwriter about the price, size, and volume of shares that the latter needs to sell in the IPO (plus terms and conditions of the same).

The last type of underwriting is the standby underwriting process, which allows stockholders to have the first chance to buy a company’s shares. If they do not buy all the shares, the company sells the remainder to the public. This type of arrangement differs with the firm’s commitment arrangement, which allows stockholders to buy all the shares of a company and later sell them to the public for a profit. Here, people should make the distinction between this type of shareholding and private placement method because the latter allows companies to sell shares privately, avoiding IPOs. This way, they can avoid registration fees as well (Alkhadhari 11).

Sequence and Timing of Events in the IPO Process

Similar to other developed financial markets around the world, the IPO process in Saudi Arabia is not rushed. Ideally, Alkhadhari (10) says many companies take between six to 12 months preparing for an IPO. Companies mainly provide the submission form for the IPO, about two months after this period. It takes another three or four months to complete the offering. Therefore, after adding the preparation time, it may take companies up to 18 months to complete the IPO process. However, this timing may vary widely, depending on the nature of business and other external factors that are beyond its control. Alkhadhari (10) says it is unusual for Saudi companies to complete an IPO four months, or less, after making its submission. It is similarly unusual for a company to spend less than three months preparing for an IPO. The success of the IPO process is a 50/50 relationship where the company controls half the success, while the market controls the other half. For example, to achieve maximum success from the IPO process, the company needs to prepare for the market and, likewise, the market needs to “accept” the company. However, either way, the success of the IPO is uncertain.

Capital Markets Authority (CMA)

The Saudi Arabian stock market is a relatively new financial market, compared to other markets around the world. In the 1980s, the number of listed companies in the country’s financial market was about 48 (Owels 9). However, in the mid 1990s the number of listed companies increased to about 96. Incidentally, this same number decreased to about 87 in the early 2000 (because of decreased stock market activity) (Owels 8). Presently, the number of joint stock companies is about 140 (Owels 9). These corporations span across different economic sectors including “Banking and services, petrochemical industries, cement, retail, energy and utilities, agriculture and food industries, telecommunication and information technology, insurance, multi-investment, industrial investment, building and construction, real estate development, transport, media and publishing and hotel and tourism” (Owels 8).

Owels (8) says that the government assumed the ownership of the Saudi stock market in 1984. This period marked the start of detailed government control over the financial markets. During this time, the government established the Saudi Shares Registration Company. The Saudi Arabian Monetary Agency (SAMA) later introduced electronic systems for financial trading. Almost at the same time, the government established Tadawul to carry out the same functions. Since then, it has introduced many other measures to streamline stock market activities. Although observers say the Saudi government mainly introduced western economic knowledge of capital market operations to Saudi Arabia, the most important legal addition to the operations of the stock market was the capital market law (Owels 9). Introduced in 2003, the law aimed to improve the operations of the Saudi stock market to meet international standards. Particularly, the law strived to build the reputation of the Saudi stock market by protecting investors’ rights and improving the credibility, reliability, and trustworthiness of the Saudi financial market. These additions have greatly improved the visibility of the Saudi stock market in the investment field. For example, although observers know the market for its small size and its recent inception, it accounts for more than 70% of all investments made in the kingdom (Owels 9). These improvements have elevated the Saudi stock market to a leadership position in the Middle East. An instrumental institution that has propelled this success is the CMA.

Roles of the CMA

The CMA has different divisions that help it to carry out its functions effectively. These divisions include enforcement, market supervision, corporate finance and issuance, and capital market supervision. The main purpose of the enforcement division is to protect investors from unfair business practices in the marketplace. Such practices may include fraud, deceit, manipulation and other illegal acts that often occur in financial markets, worldwide. The enforcement function closely aligns with the supervisory function because the latter allows the CMA to monitor stock exchange trades and make sure the players in the financial markets do not participate in unlawful practices (Owels 9). However, the main difference between the enforcement function and the supervisory function is that the latter mainly mandates the CMA to make sure that the companies and their boards (that participate in the financial market) comply with the disclosure laws outlined by the corporate governance institution.

The corporate finance and issuance role of the CMA is to make sure that all investors have all the information they need to make informed decisions in the financial market. To do so, the CMA requires all parties that participate in the financial market to comply with disclosure laws. In line with this goal, the CMA also strives to introduce new and innovative policies that would allow new entrants to participate in the financial market. To understand how the CMA does so, it is important to explore (further) its main functions – law enforcement, deposit handling, and stock market supervision.

Law Enforcement

Understanding the Saudi Arabian security law, through the CMA, makes it easy to understand the framework through which IPO processes occur in the kingdom. Broadly, the CMA outlines the laws that govern company registration processes, how to disclose company information, how to disclose reviews, how to prohibit misrepresentations and fraud, and how to enforce consequences for misrepresentations and policy violations (Al-Barrak 14). Comprehensively, these laws prepare companies for the IPO process. Established by the Capital Market Law, the government has mandated the CMA to regulate all financial market activities (Owels 9). The institution works as an independent authority, with independent administrative, legal, and financial functions. Within this independent administrative structure, the CMA serves different functions, including formulating rules, settling disputes, regulating the stock exchange market, and improving the efficiency of the country’s capital market. All these rules strive to create an appropriate investment environment for local and foreign people to invest in Saudi firms. The institution does so by reinforcing transparency and protecting investors from fraud. This way, investors have more confidence in the system. To perform these functions effectively, the CMA uses several subsidiaries, including “Tadawul, the Security depositary center, the committee for the resolution of disputes, and the appeal panel” (Owels 9).

Stock Market Supervision

Besides providing a “safe” environment for investments, the CMA also oversees the activities of other institutions, such as Tadawul, in the financial market. For stock exchange functions, the Saudi law created the Saudi stock exchange as the only joint stock company with the power to regulate stock market activities in the country (Owels 9). The Saudi stock exchange (Tadawul) aims to provide comprehensive and diverse financial services that would elevate the country’s market competitiveness to international standards. Consistent with its goal of improving the financial standards of the Saudi stock exchange, Tadawul is now a very valuable asset for beneficiaries and participants in the country’s stock exchange.

Handling Deposits

Another key function of the CMA is deposit handling. The security deposit center is the main body mandated to carry out this function (Owels 9). Its roles include overseeing “deposits, transfers, settlements, clearing and registering ownership of securities” in the stock exchange market. Tadawul oversees many functions of this institution. Overall, the Saudi government entrusts the capital market authority to promote fairness and good business practices in the country’s financial market by providing it with financial, regulatory, and supervisory functions. Therefore, the CMA is an important regulator of IPO operations in Saudi Arabia.

Works Cited

Alanazi, Ahmed. “The financial performance of Saudi Arabian IPOs.” International Journal of Islamic and Middle Eastern Finance and Management 4.2 (2011): 146 – 157. Print.

Al-Barrak, Abdulrahman. Initial Public Offerings In Saudi Arabia: Motivations, Barriers, And Effects, New Castle, UK: University of Newcastle, 2005. Print.

Alkhadhari, Abdul-Wahab. Initial Public Offerings; Compare between the Saudi And The London Stock Exchange; Through Regulation. 2010. Web.

Ernst, Dietmar. Applied International Corporate Finance, New York, NY: Vahlen, 2012. Print.

MCI. Law of Companies. 2013. Web.

Ministry of Commerce and Industry Saudi Arabia. The Modified Regulating Rules Of Transforming Companies into a Joint Stock Company. 2013. Web.

Muljadi, Paul. Entrepreneurship, New York, NY: Paul Muljadi, 2014. Print.

Owels, Cecil. Kingdom of Saudi Arabia: The IPO Process. 2013. Web.

Pennsylvania State University. QFinance: The Ultimate Resource, New York, NY: Bloomsbury USA, 2009. Print.

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