What Are the Conditions for Qualified Foreign Investors to Invest in Saudi Securities?
The Kingdom of Saudi Arabia has strategically and systematically opened its financial market to foreign investors by implementing regulations that prevent foreign capital from dominating strategic companies. To that end, the Capital Market Authority (CMA) issued the Rules for Qualified Foreign Investors Investment in Listed Securities, which formalized the QFI Program as the principal mechanism for this market liberalization. Under this framework, foreign institutions are permitted to invest in listed securities, subject to specific conditions.
This article by Alsalameh Law Firm outlines the legal requirements for Qualified Foreign Investors to invest in Saudi securities.
Who Is a Qualified Foreign Investor Permitted to Invest in Saudi Securities?
Article One of the Rules defines a Qualified Foreign Investor as a foreign investor who meets the requirements set forth in Chapter Three of the Rules for investing in shares listed on the Main Market.
Conditions to Qualify as a QFI:
According to Article Seven of the Rules, an entity seeking QFI status must meet two fundamental legal conditions:
Legal Personality:
The applicant must be a legal person, such as a company, institution, or fund. This excludes natural persons from directly investing under the QFI program and emphasizes institutional, long-term investment.
Minimum Asset Value:
The applicant (either individually or as part of a group) must own, manage, or have custody of assets valued at no less than SAR 1,875,000,000 (1.875 billion Saudi riyals), or the equivalent in foreign currencies.
What Does “Assets Owned, Managed, or Held in Custody” Mean?
This concept includes three categories of assets to determine the institution’s total qualifying asset base:
- Assets Owned:Directly owned investment assets.
- Assets Under Management (AUM): Assets managed on behalf of clients (e.g., mutual funds or discretionary portfolios).
- Assets Under Custody: Assets held in safekeeping for third parties.
Example:
“Global Asset Managers,” an international asset management firm, applies for QFI status in Saudi Arabia.
- Owned assets: $200 million
- AUM: $350 million
- Custodial assets: $100 million
Total assets = $650 million
At an exchange rate of 3.75, total value in SAR = 650 million × 3.75 = SAR 2.437 billion
This exceeds the SAR 1.875 billion threshold, thus meeting the asset requirement.
Exemptions from the Minimum Asset Requirement
Recognizing the distinct nature of certain global entities, Article 7(b) of the Rules exempts specific categories from the minimum asset threshold, including:
- Pension funds that primarily collect and allocate contributions to compensate participants under a defined mechanism.
- Endowment funds with a principal purpose of making grants for scientific, educational, or cultural purposes, including university endowment funds.
- Market maker clients, subject to verification by the financial institution of the investment account’s purpose.
- Government entities, central banks, and investment funds wholly owned (directly or indirectly) by government entities, including sovereign wealth funds, pension, and endowment funds.
- International organizations in which the Kingdom is a member, and their affiliated institutions.
Investment Channels Available to QFIs:
QFIs may invest through multiple channels, offering flexibility in investment strategies:
- Direct Investment: Buying and selling securities listed on the Main and Parallel Markets.
- Fund Investment: Investing in eligible foreign investment funds, swap agreement funds granting access to the Saudi market, or local investment funds licensed by the CMA.
Example:
A European QFI allocates $1 billion to the Saudi market:
- $700 million (70%) invested directly in blue-chip stocks such as Aramco, SABIC, and Al Rajhi Bank.
- $300 million (30%) allocated to a Saudi fund specializing in SMEs listed on the Nomu market to benefit from local expertise.
Exemptions Granted to QFIs:
Article Eight of the Rules grants several exemptions for QFIs, including:
Engagement with Non-Saudi Service Providers:
QFIs may engage foreign financial institutions, asset managers, custodians, and advisors, and are not limited to Saudi service providers.
Example: “ABC Fund,” a UK-based QFI, may use an asset manager in London, a custodian in New York, or a financial advisor in Tokyo to manage its investment in Aramco shares.Exemption from Licensing for Dealing Activity:
A QFI is exempt from obtaining a dealing license when acting as a principal in listed securities (i.e., buying or selling for its own account).
Exemption from Licensing for Asset Management:
Both the QFI and its foreign portfolio manager are exempt from the licensing requirement for asset management when managing listed securities on behalf of a QFI.
Exemption for Foreign Custodians:
Foreign custodians are exempt from licensing to conduct custody activity when safeguarding listed securities owned by a QFI.
Exemption for Foreign Advisors:
Foreign advisors are exempt from licensing when advising a QFI, provided the advice is exclusively for the QFI.
Before entering the Saudi capital market, foreign investors must understand the applicable regulations, laws, and investment framework. Engaging a specialized legal advisor is essential.
At Alsalameh Law Firm, we offer over a decade of experience in advising foreign investors, with a team of professionals who possess deep legal expertise in Saudi securities law and foreign investment regulations.
