New listings now come with forecasts and cash-backed orders. (Illustration: CapitalSA)
Banks that bring Saudi companies to the stock market now carry the risk if investors don't turn up.
From Monday, underwriters must sign a binding promise to buy every share on offer before they start taking orders, the Capital Market Authority said in a statement. Until now, they signed only at the end, once they knew how much demand there was.
Najla Al-Gadi, a capital markets partner at US law firm Gibson Dunn, called the rules "among the most significant changes to the Saudi IPO process in recent years," in a post on LinkedIn.
Why the regulator stepped in: it wants the order book to show real demand. Many recent listings were heavily oversubscribed on paper, but the headline numbers didn't always match what investors could actually pay for, Gibson Dunn said in a client note.
Change one, the banks: the underwriting deal must be signed before bookbuilding opens. If orders fall short, the banks buy what's left.
Even if the listing fails: if the banks end up holding so many shares that the company misses the rules for listing, such as the minimum number of public shareholders, the company won't list. The banks still have to buy every share, leaving them owners of a private company.
That's unusual. In most markets, the deal falls away if the listing doesn't happen.
Change two, the investors: bids must be backed by cash or assets that can quickly turn into cash, not credit lines. Once placed, a bid is a binding promise to pay.
Change three, the companies: forecasts go into the prospectus. Companies must publish expected financial performance for the rest of the current year and at least the next one, with the method, key assumptions and risks spelled out.
Those numbers used to go only to analysts and big investors during marketing. Now retail investors see the same guidance, and companies will be judged against it after they list.
The backdrop: Saudi listings slowed sharply this year as the war unsettled markets. Contractor Mutlaq Al-Ghowairi called off what would have been one of the region's biggest IPOs, and share sales across the Middle East and Africa fell 71% to $2.1 billion in the first half, according to LSEG data.
What it means: expect smaller oversubscription headlines, narrower price ranges and higher bank fees. Cornerstone investors, who commit before the book opens, will matter more. Some international banks may struggle to sign on early because of US rules on what they can hold.
What to watch: the first IPO filed under the new rules, and the questions-and-answers guide the regulator has promised. Deals already in progress must comply from Monday.
For more on how the regulator is tightening its grip on listed companies, read Cut Capital, Then What? Saudi Regulator Wants Recovery Plans.
