Capital Markets FAQ: 10 Questions About Tadawul, IPOs, and Sukuk

Frequently Asked Questions About Saudi Capital Markets

Saudi Arabia’s capital markets have undergone a dramatic transformation, growing from a domestic-focused exchange into a globally connected market included in the MSCI and FTSE emerging market indices. These 10 questions cover the essential information investors need to understand about Tadawul, the IPO market, sukuk, and the mechanics of investing in the Kingdom’s capital markets.

1. How large is the Saudi stock market?

The Saudi Exchange (Tadawul) is the largest stock market in the Middle East and one of the most significant in the emerging market universe, with total market capitalization exceeding $2.8 trillion. This makes Tadawul larger than the stock exchanges of most European countries and comparable in size to major Asian exchanges.

The exchange lists over 200 companies on its Main Market and over 80 on the Nomu Parallel Market, spanning all major economic sectors including energy, banking, petrochemicals, telecommunications, real estate, healthcare, consumer goods, and technology. Saudi Aramco, the world’s most valuable publicly traded company, dominates the market capitalization but the exchange hosts a diverse range of companies from mega-caps to small-caps.

Average daily trading volume exceeds $1 billion, providing strong liquidity for international investors. Trading hours are Sunday through Thursday, 10:00 AM to 3:00 PM Saudi Arabia Standard Time, with pre-opening and closing auction sessions.

2. How can foreign investors access the Saudi market?

Foreign investors have three primary channels to access Saudi-listed securities:

Qualified Foreign Investor (QFI) program: The most direct route, allowing registered foreign institutions to buy and sell Saudi-listed equities, sukuk, and ETFs directly on Tadawul. QFI registration requires a minimum portfolio of $500 million in assets under management, regulatory authorization in the investor’s home jurisdiction, and registration through a CMA-authorized broker. Individual QFI ownership is capped at 10 percent of any listed company, with total QFI ownership capped at 49 percent.

Swap agreements: Foreign investors who do not meet QFI requirements can gain economic exposure to Saudi-listed securities through equity swap agreements with CMA-authorized persons. Under a swap, the foreign investor receives the economic returns of Saudi securities without direct ownership.

International funds and ETFs: Various international funds and ETFs include Saudi equities in their portfolios, providing indirect exposure without the need for direct market access. Many emerging market funds now include Saudi allocations following MSCI and FTSE index inclusion.

The QFI program has been progressively liberalized since its launch in 2015 (when the minimum portfolio size was $5 billion), and further opening is expected as Saudi Arabia continues to deepen its capital markets.

3. What is the IPO process for listing on Tadawul?

The Tadawul Main Market IPO process involves several phases:

Preparation (6–12 months): Select advisory team (financial advisor, legal counsel, auditor), restructure the company as a JSC if needed, prepare IFRS financial statements, establish corporate governance, and address any regulatory issues.

Documentation (3–6 months): Prepare the prospectus, submit to the CMA for review and approval, and file the listing application with Tadawul. CMA review typically takes 30–60 days with multiple comment rounds.

Marketing and pricing (2–4 weeks): Conduct investor education and book-building. Institutional investors submit orders indicating their demand at various price levels. The financial advisor recommends a final offering price based on book-building results.

Listing (1–2 weeks): Shares are allocated, settlement occurs, and trading begins. The financial advisor may conduct stabilization activities during the first 30 days.

Requirements: 3 years audited IFRS financials, demonstrated profitability, SAR 300 million minimum market cap, 30 percent minimum free float, 200 minimum shareholders post-IPO.

Costs: SAR 10–50 million total, including advisory fees (2.5–5 percent of offering proceeds), legal, audit, CMA and Tadawul fees.

For Nomu (Parallel Market), the process is faster (4–9 months) and less expensive (SAR 2–8 million), with simplified requirements (1 year financials, no profitability requirement, SAR 10 million minimum market cap).

4. What are the key indices and how is the market structured?

Tadawul All Share Index (TASI): The benchmark index tracking all Main Market listed companies, market-cap weighted. TASI is the primary measure of Saudi stock market performance.

Nomu Composite Index: Tracks all companies listed on the Parallel Market.

Sector indices: Tadawul publishes sector-specific indices for banking, energy, materials, telecom, real estate, healthcare, consumer goods, and other sectors, enabling sector rotation and thematic investment strategies.

MSCI Saudi Arabia Index: The Saudi component of the MSCI Emerging Markets Index, used by international institutional investors as a benchmark for Saudi equity allocation. Saudi Arabia’s approximately 4 percent weight in the MSCI EM index makes it one of the largest single-country allocations.

Market sectors: The market is organized into approximately 20 sectors. Financial services (banks and insurance), energy (Aramco), and materials (SABIC, petrochemicals) represent the largest sector weights by market cap. Technology, healthcare, and consumer sectors are growing rapidly as new companies list.

5. How does the sukuk market work?

Saudi Arabia has the largest sukuk (Islamic bond) market globally. Key features include:

Sovereign sukuk: The Saudi government issues monthly tranches of riyal-denominated sukuk through the National Debt Management Center (NDMC), with maturities from 5 to 30 years. These form the benchmark yield curve for the Saudi fixed-income market. The government also issues international US dollar-denominated sukuk.

Corporate sukuk: Major Saudi companies (Aramco, STC, Saudi Electricity Company, banks) issue sukuk for capital expenditure and refinancing. Corporate sukuk provide yield premiums over sovereign sukuk based on credit risk.

Sukuk structures: The most common structures are sukuk al-ijara (lease-based), sukuk al-murabaha (cost-plus sale), and sukuk al-wakala (agency-based). Each structure uses a different Sharia-compliant mechanism to generate returns for investors.

Trading: Sukuk are listed and traded on Tadawul’s sukuk and bonds platform. Settlement follows T+2 conventions. QFI investors can access the sukuk market through the same registration process used for equities.

Tax treatment: Returns on sukuk are economically equivalent to bond coupon payments and are subject to the same withholding tax regime (5 percent on payments to non-residents, reducible under double tax treaties).

6. What are Saudi REITs and how do they work?

Saudi Arabia’s REIT market, launched in 2016, has grown to approximately 20 listed REITs with combined assets exceeding SAR 50 billion. Key features:

Structure: Saudi REITs are listed investment funds regulated by the CMA, not operating companies. They are managed by CMA-licensed fund managers and governed by independent boards.

Distribution: REITs must distribute at least 90 percent of net income to unitholders annually, providing a steady income stream.

Investment requirements: At least 75 percent of assets must be in developed, income-producing real estate. Up to 25 percent may be in development projects, real estate securities, or cash.

Leverage: Borrowing is limited to 50 percent of total asset value (with CMA approval required above 30 percent).

Tax treatment: REITs are exempt from corporate income tax at the fund level. Distributions to foreign investors are subject to 15 percent withholding tax (reducible under treaties).

Property types: Saudi REITs hold diversified portfolios including office buildings, retail centers, hospitality properties, residential complexes, and mixed-use developments. Some REITs focus on specific property types or geographic regions.

Access: Foreign investors can purchase REIT units on Tadawul through the QFI program or swap agreements.

7. What are the trading rules and market mechanics?

Trading sessions: Pre-opening auction (9:30–10:00 AM), continuous trading (10:00 AM–3:00 PM), closing auction (3:00–3:10 PM), all times AST (UTC+3).

Price limits: ±10 percent daily for Main Market, ±30 percent for Nomu. These limits prevent extreme intraday volatility.

Settlement: T+2 (two business days after trade date), consistent with international standards. Settlement is managed by Edaa (Securities Depository Center).

Order types: Market orders, limit orders, stop orders, and special crossing orders for block trades.

Short selling: Permitted for qualified investors under CMA-regulated conditions, with securities lending and borrowing framework.

Market making: CMA-licensed market makers provide liquidity for selected securities, particularly ETFs and smaller-cap stocks.

Disclosure: Listed companies must immediately disclose material events and file quarterly financial reports (semi-annual for Nomu). Insider trading and market manipulation are prohibited and actively enforced by the CMA.

8. How are Saudi companies governed?

Listed companies on Tadawul must comply with the CMA’s Corporate Governance Regulations:

Board composition: Minimum three directors, at least one-third (minimum two) independent. The board must include members with relevant industry, financial, and governance expertise.

Committees: Mandatory audit committee (all non-executive, at least one with financial expertise), nomination and remuneration committee (majority non-executive), and risk committee.

Disclosure: Annual governance reports, immediate disclosure of material events, quarterly financial reporting, and disclosure of board and executive compensation.

Related party transactions: Must be conducted at arm’s length. Material RPTs require independent director approval and, in some cases, shareholder approval. All RPTs must be disclosed.

Shareholder rights: Minority shareholders are protected through tag-along rights, tender offer requirements, and cumulative voting for board elections.

Internal controls: Companies must establish internal control frameworks, risk management systems, and internal audit functions.

Saudi corporate governance standards have improved significantly since the CMA’s establishment, and the Kingdom’s governance framework is now broadly aligned with international best practices.

9. What is the derivatives market like?

Saudi Arabia’s derivatives market is in the early stages of development:

Single-stock futures: Tadawul launched single-stock futures contracts on select Main Market stocks, providing leveraged exposure and hedging capabilities.

Index futures: TASI futures are under development, which will enable investors to gain or hedge broad market exposure through index derivatives.

Options: Stock and index options are being developed as part of Tadawul’s market deepening strategy.

OTC derivatives: Interest rate swaps, forward contracts, and other OTC derivatives are available through Saudi banks, though the market is less developed than in major financial centers.

Currency derivatives: Limited by the riyal’s dollar peg (which reduces the need for currency hedging), but cross-currency swaps and forwards are available for non-dollar exposures.

The derivatives market is expected to grow significantly as Tadawul continues its market development program and as international investors increase their participation in the Saudi market.

10. What is the outlook for Saudi capital markets?

The outlook for Saudi capital markets is positive, driven by several factors:

IPO pipeline: A robust pipeline of companies preparing to list, including PIF portfolio companies, family businesses converting to public ownership, and growth companies listing on Nomu.

Market deepening: New products (derivatives, ETFs, REITs), new market segments (carbon credits, digital assets), and improved market infrastructure (securities lending, market making) are deepening the market.

International integration: Growing QFI participation, international index inclusion, and cross-border regulatory cooperation are integrating Tadawul with global capital markets.

Liquidity growth: Increasing institutional participation, growing retail investor sophistication, and expanding product range are driving liquidity improvement.

Regulatory modernization: The CMA continues to modernize its regulatory framework, improving transparency, investor protection, and market efficiency.

ESG development: Saudi Arabia is developing ESG disclosure requirements and sustainability indices, responding to growing international investor demand for ESG-aligned investments.

The structural drivers of Saudi capital market development — economic diversification, government reform, demographic growth, and international opening — are long-term trends that support continued market expansion and deepening.

Additional Capital Markets Questions

11. How does the Saudi market compare to other GCC exchanges?

Saudi Arabia’s Tadawul dominates the GCC capital markets landscape by every significant measure — market capitalization, trading volume, listed companies, and institutional depth. With a market cap exceeding $2.8 trillion, Tadawul is approximately four times larger than the Abu Dhabi Securities Exchange ($700 billion), the next largest GCC exchange, and roughly 15 times larger than the Dubai Financial Market ($180 billion) or the Qatar Stock Exchange ($170 billion).

This dominance reflects the scale of the Saudi economy itself — the Kingdom’s $1 trillion+ GDP is larger than all other GCC economies combined. Tadawul’s inclusion in the MSCI Emerging Markets Index (with an approximately 4 percent weight) gives it a presence in global passive investment flows that no other GCC exchange matches. The UAE exchanges are included in the MSCI EM index at a combined weight of approximately 1.5 percent, while Qatar represents approximately 1 percent.

Tadawul’s product range is also broader than its GCC peers, offering equities, sukuk, REITs, ETFs, and (increasingly) derivatives. The exchange’s settlement infrastructure (Edaa), regulatory framework (CMA), and market surveillance capabilities are among the most sophisticated in the emerging market universe.

For investors constructing GCC allocations, Saudi Arabia’s weight in any market-cap-weighted GCC portfolio will inevitably dominate, and the question becomes whether to complement Saudi exposure with satellite allocations to UAE and Qatar or to treat Saudi Arabia as a standalone allocation separate from the broader GCC.

12. What tax considerations apply to capital markets investment?

Taxation of capital markets investment in Saudi Arabia involves several layers that foreign investors must understand:

Capital gains tax: Capital gains realized by foreign investors on Saudi-listed securities are generally exempt from capital gains tax. This exemption applies to gains on equities, sukuk, REITs, and other listed instruments traded on Tadawul. However, this treatment may be subject to change, and investors should monitor ZATCA guidance for any updates.

Dividend withholding tax: Dividends paid to non-resident investors are subject to a 5 percent withholding tax at source. This rate may be reduced under applicable double tax treaties between Saudi Arabia and the investor’s country of residence. The withholding tax is applied by the paying company and remitted to ZATCA.

Sukuk distributions: Distributions on sukuk held by non-resident investors are subject to withholding tax at rates ranging from 5 to 15 percent depending on the nature of the payment and the applicable treaty. Sukuk distributions structured as lease payments (ijara) may be subject to different withholding rates than distributions structured as profit-sharing.

REIT distributions: Distributions from Saudi REITs to foreign investors are subject to 15 percent withholding tax, which may be reduced under applicable tax treaties.

Zakat: Saudi and GCC national investors are subject to zakat (Islamic religious levy) at 2.5 percent of the zakat base, rather than corporate income tax. Foreign investors are subject to corporate income tax on Saudi-source income.

Investors should consult qualified tax advisors to understand the specific tax implications of their Saudi capital markets investments, including the availability of treaty relief and the interaction between Saudi withholding taxes and their home country tax obligations.

13. What are the key risks for capital markets investors?

Investors in Saudi capital markets should consider several categories of risk:

Market risk: The Saudi market, while deep, can experience significant volatility driven by oil price movements (which affect Aramco and petrochemical companies), global emerging market sentiment, regional geopolitical developments, and domestic policy announcements. The 2006 crash, while driven by different dynamics than today’s market, serves as a historical reminder that the Saudi market is not immune to severe corrections.

Liquidity risk: While the largest companies (Aramco, Al Rajhi, SNB, STC) enjoy deep liquidity, smaller Main Market stocks and Nomu-listed companies may have limited trading volumes, making it difficult to enter or exit positions at desired price levels without market impact.

Regulatory risk: The CMA has broad authority to change market rules, adjust ownership limits, introduce new requirements, or modify the tax treatment of securities. While regulatory changes have generally been market-friendly in recent years, investors should monitor the regulatory environment for changes that could affect their positions.

Concentration risk: The Saudi market is heavily concentrated in a few sectors — energy (Aramco), banking (Al Rajhi, SNB), and materials (SABIC) — which collectively represent the majority of market capitalization. Sector concentration means that broad market returns are significantly influenced by the performance of a small number of large companies.

Currency risk: The riyal’s peg to the US dollar largely eliminates currency risk for dollar-based investors. However, investors with non-dollar base currencies bear the same currency risk as with any dollar-linked investment. While the peg is widely considered sustainable, it cannot be guaranteed in perpetuity.

Donovan Vanderbilt is the founder of The Vanderbilt Portfolio and publisher of Invest Riyadh. These FAQs are for informational purposes only and do not constitute investment advice.