January 24, 2018 / 2:12 PM / 7 months ago

Saudi regulator asked to study local market impact of Aramco IPO

KHOBAR, Saudi Arabia/RIYADH (Reuters) - An advisory council to Saudi Arabia’s government has asked the securities regulator to study the impact of listing Saudi Aramco on the local bourse amid concern that a huge initial public offer could damage the market.

Visitors are seen at the Saudi Aramco stand at the Middle East Process Engineering Conference & Exhibition in Manama, Bahrain, October 9, 2016. REUTERS/Hamad I Mohammed/Files

The Shura Council’s fiscal committee has also requested the Capital Market Authority (CMA) makes sure the stock market’s liquidity would not become concentrated in the giant oil company alone, state news agency SPA reported late on Tuesday.

The government has said it plans to sell about 5 percent of Aramco, hoping to raise some $100 billion or more in what would likely be the world’s biggest initial public offer (IPO). The sale is expected in the second half of 2018.

Saudi officials have said they may list Aramco on one or more foreign markets such as New York, London and Hong Kong in addition to Riyadh, which would boost the company’s global profile and reduce the strain on the Saudi market.

But after more than a year of deliberations, a decision on a foreign market has not been announced and some officials have suggested Aramco might list in Riyadh alone, possibly also selling some shares to strategic foreign investors in a private placement.

There is concern in Saudi financial circles that the IPO could be too large for the local market to absorb. The market has a capitalisation of about $470 billion, meaning it could be destabilised by Aramco’s listing if other stocks are sold to raise funds for investment in the oil giant.

The SPA report did not say whether the CMA’s study should look at the impact of listing Aramco in Riyadh alone, or scenarios in which it was listed in Saudi Arabia as well as foreign markets.

The Saudi exchange’s chief executive Khalid al-Hussan told Reuters this month that Riyadh hoped to be the only venue for the Aramco listing and could handle all of the IPO. Liquidity would not be a problem, he said.

The Shura Council and the Capital Market Authority had no immediate comment when contacted by Reuters on Wednesday. Saudi Aramco declined to comment.

MARKET DYNAMICS

At a meeting this week at the Council of Saudi Chambers, a national business association, two businessmen expressed concern about the local impact of the Aramco listing.

“Historically, when a substantial heavyweight company is going into the market, the main concern is if individuals will liquidate their shares to invest in this company, and hence the concern is mainly about market dynamics and activity,” said one.

Mazen al-Sudairi, head of research at Al Rajhi Capital, said listing in Riyadh alone could hurt the Saudi economy by sucking in funds from elsewhere. Listing 1 percent of Aramco locally would absorb more than the government’s entire domestic borrowing last year, which totalled $14.3 billion, he said.

In addition, the correlation of the Saudi stock index to oil prices would rise to almost 100 percent from about 50 percent, making the market a play on volatile oil prices rather than a diversified Saudi economy, he said.

Sudairi said the government was unlikely to go for a local listing alone for both those reasons.

However, analysts say some other factors could lead it to consider that option seriously.

Listing on multiple markets with different regulatory regimes would involve additional paperwork and compliance costs for Aramco and potentially force the company, which acts as an arm of Saudi oil policy, to disclose more about itself.

A lawyer based in the Gulf said the Saudi government might also be concerned by the risk of Aramco becoming more vulnerable to foreign lawsuits because of listings abroad.

The U.S. Justice Against Sponsors of Terrorism Act, passed in 2016, allowed lawsuits to proceed against the Saudi government claiming it had helped to plan the Sept. 11, 2001 attacks on the United States and should pay damages to victims. Riyadh denies the allegations.

A Saudi banker who is following official discussions on Aramco’s listing said, however, that authorities remained unlikely to choose Riyadh as the sole listing venue.

“That won’t happen as $100 billion is too much for the local market to absorb,” he said.

The way Saudi Arabia handles Aramco’s listing could affect a decision due in June by index compiler MSCI on whether to upgrade the kingdom to emerging market status - a step that would attract billions of dollars of new foreign money.

MSCI said earlier this month it was still not clear whether any secondary exchange outside Saudi Arabia would host Aramco, and suggested investors should consider this in their feedback to MSCI on whether to upgrade the market.

Logo of Saudi Aramco is seen at the 20th Middle East Oil & Gas Show and Conference in Manama, Bahrain, March 7, 2017. REUTERS/Hamad I Mohammed/Files

Additional reporting by Tom Arnold and Saeed Azhar in Dubai; editing by Andrew Torchia and David Clarke

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