CMA says pre-listing valuation regulations reviewed, developed periodically

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Several questions are raised about how companies are valuated before offering their shares in the Saudi market. This issue is still a matter of debate, especially as some companies were deemed overpriced by some shareholders.

The Capital Market Authority (CMA) clarified to Argaam the pre-listing valuation mechanism, especially as debate increases when the market declines and stocks fall below the initial public offering (IPO) prices.

The CMA indicated that the valuation process is conducted in accordance with a mechanism regulating the relationship between two main parties who have sufficient experience in this regard. The market regulator, through its supervisory role, organizes this process between such parties.

The authority confirmed that it periodically reviews and develops the relevant executive regulations.

1- Before listing on Tadawul

The CMA indicated that it is working to ensure that the issuer fully discloses its financial position before listing. Thus, the company wishing to register and offer its securities is required to submit an application to the authority, including all relevant important information.

The relevant documents to be submitted to the CMA include letters on the appointment of a financial and legal advisor, authorization or power of attorney for the company’s representatives, as well as the board of directors and their relatives and approvals of various government agencies.

They also include the company’s articles of association, annual audited financial statements, reports on due diligence from the legal and financial advisor, as well as several other requirements as stated in Article 28 of the Rules on the Offer of Securities and Continuing Obligations.

It is important for the company or issuer to prepare the prospectus, including all necessary information that helps the investor to evaluate the company's or issuer's activity. It should also disclose assets and liabilities, financial position, management, expected opportunities, profits and losses, in addition to other several requirements in accordance with Article 29 of the same rules.

2- After the CMA’s approval on the offering

The CMA indicated that after obtaining its approval on the IPO, the issuer's financial advisor is allowed to offer the shares to the participating entities during the book-building period.

This is the most applied method in pricing and selling shares in the public offerings in global markets.

The method depends mainly on several different parties, namely the financial advisor and/or underwriter and the categories that are entitled to participate in the book building, such as funds, authorized persons and their clients.

It also varies based on the company offered for subscription. This is conducted in accordance with the CMA’s instructions on book building and allocation of shares in the IPO.

As per the instructions, the price range is announced by the company’s financial advisor, before the start of the book-building process. Institutional investors can participate in the book-building process based on the announced price range. Then, the offering price is determined based on supply and demand.

3- Balance in valuation mechanism

The authority stated that the valuation of offered shares is carried out in accordance with a mechanism regulating the relationship between two main parties who have sufficient experience in this regard, namely the financial advisor and qualified investors. The CMA, through its supervisory role, organizes this process between the two parties.

In addition, the market regulator specifies, as per the Capital Market Institutions Regulations, the principles that licensed financial advisors should comply with when carrying out such valuations.

The financial advisors should ensure that prices are fair in order to preserve their professional reputation and to not violate the laws regulating their work, which are determined by the authority.

4- Continuing obligations for listed companies and securities issuers

According to Article No. 18 of the Rules on the Offer of Securities and Continuing Obligations, the market regulator said the issuer (who seeks to offer securities to the public) is required to appoint two representatives before the CMA for all relevant purposes relating to the Capital Market Law and its relevant executive regulations.

The issuer must provide, without delay, all information and clarifications, books, records and forms required by the CMA to apply the Capital Market Law and Companies Law and their executive regulations, as well as other related laws. This is in addition to the rules of the offer of securities, which should be complete, clear, correct and not misleading.

The CMA affirmed that it periodically reviews and updates the relevant executive regulations. Recently, the CMA invited public opinion on the draft amendments to the Rules on the Offer of Securities and Continuing Obligations.

The market regulator also published draft amendments to the instructions for book-building process and allocation method in IPOs for public consultation. The amendments included many updates to the rules governing participating categories and defined certain duties for financial advisors during the book-building process.

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