Market participants

Exchange Market Tadawul

The Saudi Stock Exchange (Exchange) or Tadawul is the sole entity authorized to carry out trading in securities in the KSA. Securities include:

• Convertible and tradeable shares of companies,
• Tradeable debt instruments issued by companies, the government, public institutions or public organisations, including Sukuk,
• Units by investment funds, including real estate investment fund, close-ended investment traded fund, exchange traded fund, kindly note that investent funds and collective invetment schemes are specially regulated under Chapter 6 of the Capital Market Law,
• Any instruments representing profic participation rights and/or any rights in the distribution of assest.

While securities may be listed or traded on a regulated market outside KSA, they are not subject to the provisions of Capital Market Law, even if orders are transmitted telephonically or electronically from within the KSA, unless otherwise agreed between the CMA and such other exchanges abroad, as per article 26 of Capital Market Law.

In addition, upon obtaining approval from the Committee for the Resolution of Securities Disputes (Committee), Tadawul may conduct investigations and inspections related to any of its member, as stated in article 35 of Capital Market Law.

Depository Centre Edaa

The Depository Center, Securities Depository Center Company (Edaa), registers ownership of securities traded on the Exchange. Edaa manages the Depository and Settlement System (DSS) and offers services such as remote voting for issuers’ General Meetings.

Ownership registration is effective once documents are verified. Affected parties can submit corrections in writing, but changes require notification to the owner, per Article 27 of Capital Market Law. Disputes can be filed with the Committee, and Edaa is liable for damages due to its employee negligence.

Clearing Centre Muqassa

Securities Clearing Center Company “Muqassa” was established in 2018 and commenced operating in 2020.

Before the introduction of Muqassa, securities trading, settlement, and partial clearing functions were shared between Tadawul and Edaa, while cash settlement was managed by SAMA. With the establishment of Muqassa, Tadawul is now responsible for regulating securities listing and trading activities. Muqassa provides centralized counterparty services, clearing, risk and collateral management, and default handling to mitigate post-trade risks. Edaa continues to handle ownership registration and securities settlement, while cash settlement remains regulated by SAMA.

Brokers and Market members

Listed securities must be traded through licensed brokers, each acting on behalf of their client, with all transactions documented in the Exchange records, as per article 21 of Capital Market Law.

Brokerage business is restricted to entities or individuals holding a brokerage license, such as brokers and portfolio managers as per article 31 of Capital Market Law. Broker is a joint stock company that acts as an intermediary in the trading securities, facilitating transactions between buyers and sellers. Broker may carry out the following activities:

• acting as an intermediary for trading securities;
• opening accounts for clients to trade securities;
• executing transactions for their own profit from market differences;
• acquiring or offering securities on behalf of issuers;
• engaging in activities like currency or securities swaps.

Portfolio manager manages securities or investment funds on behalf of clients on the basis of a contractual arrangement.

Brokers or broker’s agents shall submit specific reports to the CMA and the Exchange as required by the regulations set forth by the forementioned entities, as per article 37 of Capital Market Law. Portfolio managers shall submit performance reports and the calculation of asset values and unit prices and advertisement, financial and periodic reporting requirements of funds, as per 39(c) of Capital Market Law .

Issuers’ continuous disclosure

The CMA imposes on listing companies, in addition to the prospectus, a continuous disclosure requirement that should be fulfilled as long as the companies continue to have their securities listed on the Exchange. Any violations of such disclosure requirements might trigger penalties that range from temporary suspension of trading, paying fines, to cancellation of the full listing. Disclosure will include the following elements.

Disclosure of important developments

Any significant developments that might affect the listed security’s price must be disclosed to the CMA and the public without any delay. This includes increase or decrease in the net assets of the company, changes in the members of the board or senior management, lawsuits against the company, substantial acquisitions, mergers and corporate restructurings, and so on.

The CMA or the Exchange may request further information from the issuer, including publishing such information on their website at the expense of the issuer, as per article 46(c) of Capital Market Law. In addition, the public has the right to obtain copies of the prospectus, periodical reports, and all publicly filed information with the CMA, in accordance with article 47 of Capital Market Law.

Disclosure of financial information

The issuer in Main Market shall publish, through the Tadawul website, its quarterly and annually financial statements, while companies listed in the Parallel Market shall submit to CMA the semi-annual interim and annual financial statements, as stated in article 45 of Capital Market Law and article 107 of the Rules on The Offer of Securities and Continuing Obligations.

Article 45(a) of the Capital Market Law outlines the important information that shall be disclosed. Any information contained in the annual report shall remain confidential until it has been audited and disclosed to the CMA. Annual financial statements shall be disclosed within 3 months of the end of the annual financial period, and not less than 21 calendar days before the issuer’s annual general assembly.

The Board of Directors’ report

Article 82 of the Rules on the Offer of Securities and Continuing Obligations require the issuer to attach a report from the Board of Directors on the financial statements that includes a review of the operations of the issuer during the last financial year and of all relevant factors affecting the issuer’s business which an investor requires to assess the assets, liabilities and financial position of the issuer. Such report must be submitted to the CMA, and be disclosed to the shareholders, within three months from the end of the financial year.

Illegal practices

Market manipulation

Market manipulation refers to any intentional act or practice that involves manipulation, deceit, fraud and misleading information when trading in securities, with the intention of changing the price of the security in favor for some person by manipulating others, as per article 49(a) of Capital Market Law. Buying by prices that are artificially high or selling by prices that are artificially low leads investors to lose faith in the capital market. Hence, market manipulation is forbidden.

According to article 49(c) of Capital Market Law, examples of market manipulation include:

• Wash sales, namely creating illusion of trading activity for a given stock, including no change in beneficial ownership, or matching purchases and sale transactions. For example, a person sells a security to one’s family members and then buys back the security on the same day at a higher or lower price, or trades through separate accounts which are ultimately owned by him;
• Affecting the price of securities by executing a series of transactions creating actual or apparent active trading or escalating or diminishing the price of such securities. For example, a person places a lot of selling and buying orders on a security without having the intention to fulfill them, to manipulate prices by creating a misleading impression that there is active or weak demand on the security;
• Undertaking transactions to stabilize the price of a security. For example, the issuer may fix the security price to maintain stability by buying large quantities during a sudden price drop, giving investors the impression of real demand.

Insider trading

Insider trading occurs when an individual uses non-public, price-sensitive information to trade. An insider is someone who obtains this information through family, business, or contractual relationships, such as senior executives and Investor Relations team members. Insider trading is prohibited. Hence, insiders may not trade directly or indirectly in related securities or disclose such information to others expecting them to trade

Direct trading includes executing a trade for any account in which the person has an interest, and the person making a bid or offer for the security on the Tadawul. Indirect trading includes any one of three situations (article 4(4) of the Market Conduct Regulations):

 executing the trade as agent for another;

 arranging a trade to which a relative or person with whom they have a business or contractual relationship is a party; or

 arranging for an agent, or any other person acting on their behalf or direction, to trade in the relevant security.

For example, Mansour Farraj Mansour Abothnain was found guilty of insider trading since he traded shares of Astra Industrial Group before the Group announced that its affiliate had signed an exclusive agreement with Moderna for distributing COVID-19 vaccines in KSA. He was fined SAR 300 thousand and required to repay SAR 163 thousand in illegal gains.

To avoid penalties, best practices suggest an insider list, which clearly identity each person with access to inside information, the reason why and the date the list was created or updated. If the insiders are external parties, it is necessary to sign a confidentiality agreement before any disclosure of inside information. The company shall announce the inside information as soon as possible in the proper way through a disclosure on Tadawul website.

Untrue statements (rumors)

Given that the price of a security is influence by public perception about the company, making or spreading false information would affect the company’s market value and investors decisions. Hence, Market Conduct Regulations prohibits any person to make or circulate any untrue statement about some company that might have an effect on the price of its security.

It is noteworthy that CMA’s Instruction for Companies Announcements stipulate that if a rumor involves a material development, the company shall decide whether to respond to it on the Tadawul website. If a rumor is largely accurate and based on inside information, the company shall disclose the inside information promptly. If the rumor is mostly false, the company shall consider whether the rebuttal is necessary to prevent misleading beliefs. Best practice suggests initially stating that the company does not comment on rumors before deciding on a substantive response.

Committee for the Resolution of Securities Disputes

The Committee is a semi-judicial body assigned to entertain complaints filed against decisions made by the Exchange, Depository Center and Clearing Centre, disputes between the market members, and violations that are committed in breach of Capital Market Law and its Regulations, including those of the aforementioned entities.

Complaint initiation process

To initiate a complaint, it shall be filed with CMA. If no satisfactory settlement, CMA would raise the issue to the Committee. A complaint cannot be submitted with the Committee until 90 days has passed since filing with CMA, unless permission is granted for an earlier submission. The Committee shall commence considering a claim within 14 days of its filing.

Appeal process

Decisions made by the Committee may be appealed before the Appeal Committee within 30 days of notification, as per article 30(h) of Capital Market Law. The decisions of the Appeal Committee will be final and binding, in accordance with article 30(i) of Capital Market Law and will be enforced through the relevant government agency. However, compensation decisions will follow the enforcement procedure of civil judicial judgments, as per article 30(j) of Capital Market Law.

Importance of evidence

Evidence and documents are crucial for the Committee and Appeal Committee. Hence, complainants should support their claims with all the relevant evidence and documents including computer data, phone records, emails and faxes.

Penalties and sanctions

The penalties can be classified into general penalties for any violation to the Capital Market Law or its Regulations and special penalties on specific violations in the Capital Market Law.

General penalties

The Committee would sentence those in violation of Capital Market Law or its Regulations in one or more of the following general penalties:

 warning;

 order the violator to:

 cease or refrain from carrying on the violation;

  take steps to avert the violation or to take corrective steps to address the results of the violation;

 indemnify the aggrieved persons; or

 pay the gains derived from the violation into the CMA’s account;

 suspend trading on securities;

 bar the broker, portfolio manager or investment advisor for the period it deems necessary for the safety of the market and the protection of investors;

 seize property;

 issue a travel ban;

  bar the violator from working with companies whose securities are traded on the Tadawul;

 impose a monetary fine of between SAR 5,000,000 and SAR 25,000,000, as per Article 59(b) of Capital Market Law;

Specific penalties

• Jail: not exceeding 5 years, for those in violation of the provisions of market manipulation and insider trading
• Imprisonment: not exceeding 9 months, for brokers or claimed to be one without a license from CMA.

Conclusion

The Capital Market has witnessed a remarkable evolution since its genesis in the 1950s, culminated in the enactment of Capital Market Law in 2003, announcing the establishment of its regulator, the Capital Market Authority, and as the legislator of the Capital Market regulations, the Exchange, Depository Centre, and Clearing Centre.

By understanding the key regulations and taking proactive steps, both investors and companies can navigate the capital market effectively. As the market continues to evolve, staying informed and compliant will be crucial for success in this dynamic environment.