Saudi market reforms could stall IPO recovery

Saudi Arabia's Capital Market Authority (CMA) has embarked on a comprehensive overhaul of its stock market rules, aiming to attract foreign capital and bolster the local market's global standing. However, industry insiders are concerned that the latest regulatory changes may inadvertently impede the market's recovery, as opposed to fostering a revival of the Tadawul, the local stock exchange.

While Saudi stocks have rebounded since the onset of the Iran war, outperforming regional peers, they remain down 3% since February 28, trailing the MSCI Emerging Markets Index's 6% gain over the same period. Falling valuations, exacerbated by the conflict, have dampened sentiment and deterred new listings. Investors had hoped for a recovery following promised adjustments to foreign ownership limits.

Yet, the regulator has shifted its focus toward listing rules, seeking to entice mature, well-managed companies onto the exchange. The proposed changes, under consultation, prioritize quality over quantity, mandating hard underwriting that obligates banks to assume more IPO risk. Critics, wary of potential repercussions, argue that such stringent requirements could delay deals already in the pipeline, particularly for smaller banks.

The CMA faces a dilemma: by excluding listings that are not market-ready, the regulator risks stifling IPO activity and potentially undermining valuations, rather than rekindling investor confidence. As the regulator scrutinizes the performance of recent IPOs and probes the advice provided by investment banks, the market's future remains uncertain.