Saudi regulator proposes tighter IPO book-building, underwriting and forecast rules

Saudi Arabia's Capital Market Authority has proposed changes to initial public offering practices that would require underwriting agreements to be effective before book-building starts, limit proof of an investor's liquidity to cash or cash equivalents, and require prospectuses to carry at least one year of forward-looking financial indicators, according to its announcement of 22 September. The consultation runs for 30 calendar days to 22 October, and the authority said the final provisions would take effect on 2 November.

Underwriters bound from the start of book-building

Under the draft provisions, the underwriting agreement must be signed and effective before the book-building process begins, and the underwriter's commitment to purchase all offered shares takes effect when book-building starts. The draft cites the existing instructions, under which the issuer must sign an underwriting agreement before the beginning of the subscription process. It adds that if the underwriter's ownership of the offered shares would breach the requirements for listing under the Listing Rules, the issuer's shares are not listed and the underwriter purchases all the shares offered.

The authority said the change would strengthen the role and responsibility of the underwriter from the book-building stage, and align the interests of the issuer, financial adviser, underwriter and participating entities, according to its announcement.

Orders tied to cash, forecasts in the prospectus

The draft sets four controls on participation requests during book-building. Requests must be submitted through the official channel set by the issuer's financial adviser and within the timeframe in the prospectus. They must reflect the true value of liquidity available to the investor, and verification of financial solvency is limited to cash or cash equivalents, such as securities convertible into cash during the subscription payment period. A request at a specified price within the offering range is deemed to include all lower prices. Official requests become binding for payment by the final subscription payment deadline at the latest.

Bidders keep the right to revise orders. The draft says any amendment must follow the current instructions, which provide that participating entities may change or cancel their bids at any time during the book-building period, according to the text.

The authority said financial advisers and other institutions that receive participation orders would have to take additional regulatory steps, most notably verifying that orders reflect the liquidity actually available to the investor. It said the aim is to strengthen the link between orders and actual ability to pay, so that the order book is a more reliable basis for setting the offering price, according to the announcement.

The third provision would require the prospectus or registration document to include the issuer's forward-looking statements and expectations, including forward-looking indicators of financial performance covering no less than one financial year, and to make them available among the documents available for inspection, according to the draft. The statements must be clear, not misleading and based on reasonable and measurable grounds, and the financial adviser must exercise the necessary professional care and reach a reasonable opinion on them.

The authority said the disclosure would support price setting on clear information and make the order book more reliable. It said that, if approved, the draft would improve the efficiency of capital allocation in the national economy and the attractiveness of the Saudi capital market, according to the announcement.

One of four consultations in eight days

The IPO draft is one of several the authority opened between 22 and 29 September, each with a 30-day comment period. On 24 September it proposed capping algorithmic trading orders at 20 per executed trade in a security in a single trading day for Main Market securities outside the Very High Liquidity category, with comments due on 24 October and the rules effective from 1 November, according to its announcement.

On 27 September it opened a consultation on dealing in financial markets outside the Kingdom, including a requirement that clients pay a margin of at least 50 per cent of the transaction value on margin transactions in external securities, with comments due on 27 October, according to the announcement. On 29 September it proposed that all Main Market companies hold earnings calls twice a year, within five business days of announcing results and after the market closes, with comments due on 29 October, according to the announcement. The authority said comments on each draft will be taken into full consideration before final versions are approved.