RIYADH (Reuters) – Saudi Arabia’s plan to name investors with strategic stakes in listed firms will help curb speculation but falls short of the corporate governance overhaul badly needed by the kingdom to attract institutional investors.
Tadawul, the Saudi stock exchange, announced plans last week to publish the names of investors with stakes of 5 percent or more in the 124 listed firms on a daily basis from August 16.
While the measure moves Saudi Arabia closer to the transparency standards of Western markets, it sent Saudi shares sharply lower. Some speculative funds left the market as investors feared their holdings may become public information.
“The regulatory environment is still poor,” said Abdulhamid al-Amri, a member of the Saudi Economic Association think tank.
Experts say Saudi Arabia’s struggling investment framework, where many corporate governance guidelines for listed firms remain voluntary, has loopholes that enable those determined to operate out of sight to continue to do so.
The country boasts the largest equity market in the Arab world but it remains mostly closed to foreign investors.
It has encouraged a culture of retail-investor speculation that has left serious, long-term investors sidelined for lack of information or confidence.
The Saudi exchange is struggling to shed an opaque image and has been tainted by allegations of insider trading and manipulation. Stock prices react more to rumors than to the performance of listed firms.
These practices have been widely blamed for contributing to a crash in 2006 that hurt hundreds of thousands of Saudis many of whom blamed the government for not protecting them from the clout of big players.
The exchange has never managed to recover its poise from the crash. It has lost about 60 percent of its value since 2006 and is the worst performer in the Gulf Arab region this year.
Walid Bin Ghaith, chief executive of The Investor for Securities brokerage and asset management firm, praised Tadawul’s efforts but said more needed to be done.
“It’s a very important step … But it will not deter fraudsters. It will make their job harder,” he said.
A key loophole in the measure is that any Saudi investor can manage several dummy investment accounts under the names of relatives or companies.
There are no official figures on the size of such dummy accounts, but Bin Ghaith described it as significant.
Amri estimates the value of dummy accounts at 40 percent of the total value of the market, the same relationship as that of the grey economy in the kingdom to official measures of gross domestic product.
“It is significant … Tadawul’s measure will not be complete without tighter controls on the ownership of investment portfolios,” Amri said.
Saudi Arabia, an absolute monarchy that is also the world’s largest oil exporter, has sought to make the stock exchange a platform for wealth distribution through a raft of initial public offerings, often at discounted prices.
But the combination of poor regulations and the herd mentality that prevails among a majority of the 3-4 million retail investors have turned the market into a popular casino for quick profit.
“We need to build a market where investors rely on company earnings, not on income from speculation,” columnist Abdul-Hafid Mahbbob wrote on the Monday edition of al-Eqtisadiah newspaper.
Major speculators in the country of millionaires and billionaires, who have both cash and privileged access to strategic information, are often accused by Saudi media of exploiting small investors to steer the market in their own interests.
Efforts by the Capital Market Authority (CMA) watchdog to clean up the market after the 2006 crash, such as licensing independent brokerage firms and introducing a state of the art trading system, have failed to change this perception.
A CMA spokesman declined to comment.
Typifying the problem, rumors of the new Tadawul regulation circulated in the market for at least a month before it was announced, according to both Amri and Turki Fadak, head of the Arab Financial Consultancy Centre.
Institutional investors from rich Gulf Arab neighbors have also stayed on the sidelines despite a Saudi government decision last year allowing them to invest in the Saudi market, which has one of the lowest valuation ratios in the region.
Tadawul data showed Saudi-based retail investors accounted for 98 percent of July transactions. The remainder were by Saudi-based institutions and both retail and institutional investors from the Gulf Arab countries, which are the only foreigners allowed to trade in the Saudi bourse.