The latest proposal by Saudi Arabia’s Capital Market Authority (CMA) to lift certain restrictions applied on public investment funds – for subscriptions to debt instruments – is seen as an evolution that is in line with the nation’s strategic objectives to develop the domestic capital market.
Law firm Simmons & Simmons Middle East Managing Associate Sami Ben Dechiche shared with IFN Investor the CMA proposal is “not necessarily a revolution,” since the aim is to unlock some financing cashflow options for businesses within Kingdom – for both Shariah and conventional entities.
Specifically, the CMA has outlined several amendments to the Capital Market Law issued by Royal Decree No M/30 dated 02/06/1424H. The draft amendments of Investment Funds Regulations are open for public consultation till the 12th July 2024.
The three main changes proposed are:
- Removing the conditions imposed on the subscription of public investment funds in privately placed debt instruments, as stipulated in Article 37 of the Investment Funds Regulations, provided that the debt instruments subscribed to are issued by issuers in the Kingdom;
- Obligating managers of money market funds and capital protected funds to not invest more than 10% of the fund’s net asset value in debt instruments issued by a single issuer; and
- Obligating managers of public investment funds that invest in debt instruments to disclose the credit rating of the invested debt instruments in the fund’s quarterly statement.
For the first amendment, CMA recommended removing the condition that public funds can subscribe only if the debt instruments are issued by an exchange-listed company and also government-guaranteed, apart from being rated ‘Investment Grade’.
The CMA further proposed a revision that “a public fund may subscribe to debt instruments issued by an issuer in the Kingdom by way of private placement”.
In relation to the second amendment, which touches on the current cap set to 25% of the fund’s net assets, the CMA proposed: “The value of money market fund investments in debt instruments issued by a single issuer must not exceed 10% of the fund’s net asset value, and in all cases, the investments of a money market fund with or in a single counterparty may not exceed 25% of the fund’s net asset value.”
Sami noted the second set of changes will bring the Saudi Arabian investment guidelines closer to the EU undertakings for the collective investment in transferable securities (UCITS) regime – of a 5% limit of placement in transferable securities or money market instruments issued by the same body.
For credit ratings, the CMA proposes disclosure of dated credit ratings on the debt instrument and issuer, plus the ratings outfit, and if there are no ratings issued for either the instrument, or the issuer or both.
Sami said this proposed change could trigger increased risk from a liquidity management perspective, which is key in a public fund. Managing this extra risk could also have an impact on operational costs and payouts.
On the converse, public funds could become more open to investing in smaller amounts of US$10 million or lower to limit risks for the expanded category of debt instruments. This could unleash much-needed cashflow into business loans, especially those conducted via crowdfunding services by a rising number of fintech companies in the Kingdom.
According to the IFN Investor Fund Database, there are 748 Islamic funds operating in Saudi Arabia – which is top-ranked globally for Islamic funds with over SAR130.93 billion (US$34.9 billion) of assets under management.
