The Kingdom of Saudi Arabia has historically been characterized by a booming and stable economy that is primarily driven by abundant oil reserves and related hydrocarbon industries. Saudi Arabia is the largest economy in the Middle East. While Saudi Arabia has been working toward diversifying its economy, the recent slump in oil prices along with a war in neighboring Yemen have caused some stress on government finances. In response to the predicted deficit, in mid-2015, Saudi Arabia issued its first sovereign bond in eight years, selling approximately SAR15 billion (US$4 billion) of bonds to local banks.
Saudi Arabia is home to the largest number of investment funds domiciled in the GCC. With the support of the Capital Market Authority (CMA) and other Saudi government institutions such as Takamol, funds and asset managers have diversified from real estate into other parts of the economy, with a particular focus on listed equities, and now with financial assistance from a Ministry of Labor initiative, into venture capital and SME private equity investments. Additionally, managers are being encouraged to reinvest capital and proceeds into Saudi Arabia rather than deploying funds into foreign investments.
Review of 2015
Some of the legal updates include the following:
On the 9th November 2015, the Council of Ministers approved the new Saudi Arabian Companies Law which will be put into force 150 days after it is issued in the Official Gazette.
The new law introduces numerous positive amendments, such as allowing a single shareholder to establish a limited liability company; the reduction of the minimum number of shareholders in a joint stock company from five to two; the ability of a company to buy or mortgage its own shares; and other amendments in relation to the ability of joint stock companies to issue debt instruments as well as overall enhanced corporate governance.
The Ministry of Labor announced a comprehensive set of amendments to the Labor and Workmen’s Law (Labor Law) with a total of 38 amendments.
The amendments provide for a potentially longer probationary period and ability to agree on a set amount in the event of a disputed termination of an employee, among other revisions. The fundamental aim of the amendments is to make it easier for employers to employ Saudi nationals by making it easier to terminate non-performing employees.
The amendments took effect on the 25th October 2015, six months after the amendments were published.
A policy paper titled the ‘General Policies of Bankruptcy’ was issued by the Ministry of Commerce and Industry (MOCI) for public comment in preparation for a proposed new insolvency law.
Liberalization of Tadawul
On the 21st August 2014, the CMA issued draft rules and announcements related to the liberalization of foreign investment in listed shares on Saudi Arabia’s sole stock exchange, Tadawul, for certain foreign investors.
On the 6th May 2015, the CMA issued the final rules for Qualified Foreign Investors to invest in listed shares on Tadawul. The final rules came into effect on the 15th June 2015.
Disposal of finance assets
The Saudi Arabian Monetary Agency has now issued rules governing the disposal of finance assets and their contractual rights (the Rules).
The Rules provide that a disposal can be effected by way of a sale, factoring, pledging or assignment and can be with recourse, without recourse or with partial recourse to the disposing finance company. The Rules contemplate disposals of real estate and non-real estate assets but stipulate certain requirements as to the length of time that such assets have been in existence depending on the type and tenor of the relevant assets.
The introduction of the Rules is a positive development and can be seen as the next step in facilitating securitization and structured finance transactions in the Kingdom.
The MOCI published a circular advising commercial agents and distributors to comply with the requirement of registering their agency or distributorship in the agents and distributors record at the MOCI. Failure to comply within a period of six months starting from the 21st March 2015 renders the possibility of the MOCI writing off any unregistered agency or distributorship administratively.
The Off-plan Sales Program related to the MOCI has approved the standard contract of off-plan property sales in Saudi Arabia. The MOCI has previously announced launching the standard contract publicly in order to get people’s comments and suggestions.
The standard off-plan sales contract guarantees developers’ and customers’ commitments and rights including the needed guarantees on concrete works, electricity and drainage, in addition to maintenance and restoration works. The contract also considers the defined time periods between all contract parties and overdue commitments in cases where time schedules are breached.
Preview of 2016
Saudi Arabia has the largest economy in the Middle East, and despite the significant slump in the price of oil, the Saudi Arabian government is maintaining aggressive plans to grow and diversify its economy. Additionally, the funds industry in Saudi Arabia has been a success story compared with the rest of the GCC, and locally domiciled funds have flourished. It is widely speculated, however, that the government will also tap into international debt markets for a US dollar bond to cover the deficit and to avoid further deterioration of its reserves. We note a number of companies are also issuing Sukuk to shore up their finances.
The government has empowered forward-thinking regulators that have implemented relatively clear, stable and predictable funds and capital markets regimes. As a result, it is widely expected that MSCI will add Saudi Arabia to its indices within two years, in particular to the emerging market index, a move that would potentially foster more growth and lead to a greater influx of capital into the country’s markets. In terms of diversification, we expect the Saudi government to further focus on public-private partnerships to meet the demand for middle-income housing, utilities, schools and healthcare centers in the Kingdom.
A new land tax on vacant land is widely expected to come into law in early 2016. The nervousness in the market has also spurred otherwise reluctant sellers to create opportunities for private equity groups, Shariah compliant funds and others interested in investing in companies in real estate in Saudi Arabia at reasonable valuations. As such, it is expected that Saudi Arabian markets will continue to expand in the coming year.
Nabil A Issa is a partner in the affiliated Riyadh and Dubai offices of King & Spalding. Faris Al Louzi is an associate in the affiliated Riyadh office of King & Spalding (the Law Office of Mohammad Al-Ammar). They can be contacted at [email protected] and [email protected] respectively.