Saudi poised to lift foreign-ownership cap in bold move to revive its underperforming stock market

Saudi is poised to take one of the boldest steps in its ongoing effort to revitalize an underperforming equity market: potentially lifting the foreign ownership cap that currently limits foreign stakes in listed Saudi companies to 49%. This development, discussed by Abdulaziz Abdulmohsen Bin Hassan, a member of the five-person board overseeing the Capital Market Authority (CMA), signals a substantial shift in the domestic investment landscape. In a recent interview, Bin Hassan indicated that the regulator is “almost there” and that the policy could come into effect before the end of the year. This move, if implemented, would mark a watershed moment in Saudi financial markets and could alter the dynamics of investor flows, market liquidity, and index composition across regional and global portfolios.

Background: Foreign ownership rules, CMA governance, and the path to relaxation

Saudi Arabia’s equity markets have long operated under a framework that restricts foreign ownership in listed companies to a ceiling of 49%. This cap has shaped investment strategies, liquidity, and how foreign investors participate in the market. The Capital Market Authority, which governs the regulator’s rules and policy direction, is led by a five-person board. One of its members, Bin Hassan, has signaled that the process toward relaxing the cap is nearing completion. He noted that the regulators are “almost there,” suggesting that the relaxation could take effect by year-end if ministries and stakeholder bodies align on the policy and its implementation.

The potential change would interact with how MSCI and other major indices treat Saudi stocks. In practice, increasing permissible foreign ownership would reduce the number of shares subject to ownership limits and raise the effective free float of Saudi companies. This, in turn, would influence index weightings that are calculated by global benchmark providers such as MSCI. Specifically, when foreign ownership limits constrain a company’s free float, MSCI typically lowers its weight in the relevant MSCI Emerging Markets index. Conversely, if the cap is raised, the free float would rise, and Saudi stocks could receive a larger weighting in MSCI benchmarks. This mechanism is central to understanding the broader financial system’s response: more favorable index weights can attract passive investment and, over time, broaden the base of foreign capital flowing into Saudi equities.

Approval for any relaxation is not a unilateral decision by the CMA alone. Bin Hassan acknowledged that the regulator is prepared to advance with the policy, but emphasized that “approval is still needed from other stakeholders in the government.” The process includes coordination with other government entities and likely a careful assessment of macroeconomic and financial stability implications. While Bin Hassan did not specify the final size of the potential foreign stake allowed, the policy’s design would need to balance liquidity benefits with domestic market protections and governance considerations.

The market currently faces a situation in which some companies have relatively high foreign ownership levels, while others remain firmly under local control. Notably, several Saudi firms already have meaningful foreign participation. In particular, Tawuniya (an insurance provider), Rasan (a technology firm), and Etihad Etisalat (a telecom operator) are among the companies with the highest foreign ownership among the larger listed names—each standing above 20% but below 25%. If the cap is raised, these and other companies could see more rapid increases in foreign stakes, potentially altering their shareholder bases, governance dynamics, and equity risk profiles.

The MSCI linkage and the timing question

A change in foreign ownership limits would directly impact MSCI’s index weightings. Saudi Arabia’s main market capitalization stands at approximately US$2.3 trillion, and its shares currently account for around 3.3% of the MSCI Emerging Markets Index. A relaxation of the limit would likely trigger a reweighting, with Saudi stocks potentially capturing a larger portion of the index. This, in turn, would influence passive investment flows, as much of the liquidity in global equity markets is driven by index-tracking funds that rebalance in response to MSCI’s methodology and constituent changes.

The potential policy shift comes at a time when the broader market has experienced a period of underperformance relative to regional peers and global benchmarks. The context matters: an improved foreign investment framework could help Saudi equities attract not only passive inflows but also a broader spectrum of active investors seeking exposure to a market being shaped by ambitious reforms and growth ambitions.

Market performance, drivers, and the case for reform

Saudi Arabia has faced a challenging run in its stock market, with the main Saudi index posting a decline of about 9.6% year-to-date, marking the weakest performance within its regional universe. In contrast, the MSCI Emerging Markets Index has climbed by approximately 25% in U.S. dollar terms. This divergence highlights how external catalysts, internal policy shifts, and market-specific dynamics can influence relative performance. Among the contributing factors are geopolitical tensions, fluctuations in oil prices, and revisions to public works programs and spending plans that affect macroeconomic stability and expected government expenditures.

Despite the recent softness, there is a notable and continuing trend: foreign investors have not disengaged from Saudi equities. Instead, they have increasingly allocated capital to Saudi stocks, drawn by market reforms, projected growth under Vision 2030, and the attraction of relatively low valuations. This indicates that there is a strong base of international interest that could be leveraged further by enlarging foreign ownership. The growing focus on structural reforms and diversification away from oil revenue aligns with a broader strategic objective: to transform Saudi Arabia into a regional financial hub with a more liquid, more globally connected equity market.

The broader macroeconomic environment compounds these considerations. The country’s Vision 2030 plan aims to diversify the economy, create new revenue streams, and develop non-oil sectors. However, this transformation occurs in a context where high government spending and variable oil revenues create budget deficits that necessitate external capital inflows and more resilient capital markets. Enlarging foreign investor participation could be one mechanism to stabilize and enhance long-term financing for public and private sector initiatives, consistent with the economic transformation goals.

From an investor sentiment perspective, the prospect of higher foreign ownership could shift perceptions of Saudi equities from being a local-market play to a more globally integrated opportunity. A larger foreign component in the investor mix may improve price discovery, widen market participation, and increase liquidity. The correlation between foreign ownership and liquidity is well-established in many markets: higher foreign participation often improves turnover and reduces price volatility over the long run, especially when supported by strong governance, transparency, and credible policy signaling.

Implications for MSCI indices, flows, and portfolio positioning

For asset owners and fund managers, the potential relaxation of foreign ownership caps holds substantive implications for portfolio construction and risk management. If the cap is increased, Saudi equities could secure a larger share of the MSCI Emerging Markets Index. This shift would likely attract more passive inflows from index-tracking funds seeking to align with MSCI’s updated weights. The practical effect would be a higher baseline demand for Saudi stocks, potentially reducing the dependence on domestic liquidity to drive gains and enabling more diversified access for international investors.

Investors and analysts expect that the relaxation could also spur a re-evaluation of Saudi equities by active managers. While passive funds would redraw their benchmarks, active funds may adjust stock selections to reflect new ownership dynamics, corporate governance expectations, and the evolving exposure to key sectors within the Saudi economy. The anticipated effect is a more balanced demand-supply environment, with possible improvements in liquidity and tighter bid-ask spreads as foreign participation expands.

One notable risk that markets would monitor relates to the sizing of foreign stakes and governance considerations. If foreign ownership rises rapidly in certain flagship companies, there could be concerns about concentration risk, minority shareholder protection, and strategic influence over corporate decisions. Regulators face the challenge of maintaining a robust governance framework that protects all shareholders while enabling international investors to participate meaningfully. This balance is critical to sustaining long-term investor confidence and ensuring that the benefits of higher foreign participation are broadly distributed across sectors and companies.

In terms of sectoral exposure, certain companies already show higher foreign ownership. Tawuniya, Rasan, and Etihad Etisalat—each with foreign ownership above 20% but below 25%—illustrate the potential impact of relaxing caps on major players. If the policy changes and foreign stakes are permitted to rise further, these and other large-cap names could experience accelerated shifts in ownership, which could influence governance dynamics, share liquidity, and valuation multiples. The overall market would need to absorb such shifts to maintain orderly price formation and robust market functioning.

The relative performance of Saudi equities in a global context would also be affected by how other markets respond to the policy change. As foreign capital seeks opportunities across emerging markets, a more open Saudi regime could become increasingly attractive, potentially signaling a broader trend of reform in the region. This could attract not only passive index investments but also strategic investments by sovereign wealth funds, large global pension funds, and multinational corporations seeking exposure to Saudi growth drivers and the broader Gulf Cooperation Council (GCC) economic narrative.

Investor perspectives: who benefits, and how to position for potential changes

From an investor’s standpoint, the potential relaxation of foreign ownership limits could be a catalyst for altering exposure and rethinking risk-adjusted return profiles. For passive investors, the change would primarily affect index weighting and the size of the mandated holdings in Saudi equities. An increased foreign stake allowed by policy would lift Saudi weightings in MSCI benchmarks, potentially accelerating inflows from passive funds that track these indices. This mechanism can improve liquidity and reduce the cost of capital for listed companies, while also broadening the investor base beyond domestic participants.

Active managers could find new opportunities in a more liquid, globally connected market. Higher foreign participation may lead to improved corporate governance experiences as firms respond to increased scrutiny and the expectations of international investors. Active managers may also reallocate allocations toward companies that are poised to benefit from higher foreign exposure, particularly if governance standards are reinforced in tandem with the policy shift. The combination of stronger governance and expanded investor base can support more accurate pricing and more stable long-term earnings expectations.

For domestic investors, the policy shift could create both opportunities and challenges. On the positive side, improved liquidity and faster price discovery can benefit individual and institutional local participants who trade actively. On the downside, a more liquid and globally connected market can introduce heightened volatility, particularly around policy milestones and valuation reappraisals driven by index reweightings. Investors would need to adapt risk management strategies, recalibrate benchmarks, and consider hedging or incorporating international exposure as a core component of their portfolios.

In terms of company-level implications, the relaxation could influence capital-raising dynamics, M&A activity, and corporate governance reforms. Firms that attract higher foreign stakes may experience greater pressure to adopt transparent reporting standards, robust internal controls, and governance practices aligned with international expectations. This could enhance investor confidence, support higher valuations, and encourage more aggressive growth strategies monetized through equity financing. Conversely, companies with limited foreign interest may need to intensify reforms to remain attractive to a broader investor base and to mitigate any potential mispricing caused by persistent ownership caps.

Economic context: Vision 2030, deficits, and the case for capital market deepening

Saudi Arabia’s broader economic transformation, underscored by Vision 2030, aims to diversify away from oil dependence and to unlock new growth engines across sectors such as finance, technology, tourism, and manufacturing. A deeper, more liquid equity market is a key alignment with this strategic objective. The country’s budget deficits, driven by sustained high spending and variable oil revenues, heighten the importance of attracting foreign capital to support public spending and investment programs. A more open foreign ownership regime can strengthen confidence that Saudi assets will be integrated into global capital markets, facilitating easier access to long-term capital and improving the efficiency of capital allocation within the economy.

The evolution of foreign participation also has implications for resilience in the face of external shocks. A more diversified investor base can help stabilize market dynamics when oil prices decline or geopolitical tensions flare. By increasing the attractiveness of Saudi equities to international buyers, policymakers can help ensure a steadier stream of investment that supports ongoing development projects and the execution of strategic plans in alignment with Vision 2030. In this sense, the potential policy shift is not merely a technical adjustment; it represents a strategic alignment with long-term economic diversification and the pursuit of sustainable growth through financial market deepening.

From a macroeconomic perspective, the policy shift carries a range of potential channels. Enhanced foreign participation can improve liquidity, reducing the bid-ask spread and narrowing the cost of capital for listed firms. It can also enhance price discovery by integrating global information flows and analytical resources into the Saudi market. In addition, higher foreign ownership can foster the adoption of best-practice governance standards, improved disclosure, and stronger corporate accountability, all of which are essential for attracting and retaining long-term institutional capital.

The timing of any relaxation remains a critical variable. While there is optimism among market participants that the policy could take effect before year-end, the actual implementation depends on the final policy design and the approvals process across government stakeholders. The readiness of the CMA to proceed, coupled with ongoing regulatory reviews and alignment with broader fiscal and economic objectives, will influence whether the changes are enacted promptly or deferred to a later date. Regardless of the exact timing, the signal itself—an openness to greater foreign participation—carries substantial implications for investors and the market’s trajectory.

Corporate sector dynamics: governance, exposure, and readiness for change

The potential widening of foreign ownership could accelerate changes in corporate behavior across Saudi-listed companies. Firms with higher foreign participation tend to adopt more rigorous governance practices to meet the expectations of international investors. The prospect of greater investor scrutiny may prompt improvements in financial reporting, risk management, and strategic transparency. As the policy unfolds, corporate boards and management teams may prioritize initiatives that align with global governance standards to attract and retain foreign capital. This could include enhanced disclosure, clearer capital allocation policies, and more robust board independence.

Companies with notable levels of foreign ownership—such as Tawuniya, Rasan, and Etihad Etisalat—are particularly relevant to the reform narrative. If foreign stakes can rise beyond current levels, these firms could become early beneficiaries of the policy shift, experiencing improved access to capital and potentially higher valuations. This could stimulate investment in growth initiatives, technology adoption, product innovation, and market expansion. The broader corporate ecosystem—from financial services to telecommunications and technology—stands to gain from a more vibrant market that rewards efficiency, innovation, and governance excellence.

For investors, observing how these firms adapt to changing ownership dynamics will be informative. The combination of greater foreign participation and stronger governance can lead to more stable cash flows, clearer corporate strategies, and better long-term earnings visibility. These factors, in turn, support more confident investment decisions and can attract a broader base of global stakeholders who value transparent, well-governed enterprises operating within a market designed to reward efficiency and growth.

Risks, safeguards, and forward-looking considerations

Any move to lift foreign ownership caps carries potential risks that policymakers and market participants will need to monitor carefully. A rapid expansion of foreign stakes could lead to concentration risk if a few large investors dominate certain companies or sectors. To mitigate such risks, the government and the CMA would need to ensure that governance frameworks, minority shareholder protections, and robust corporate oversight remain strong. Maintaining market integrity and preventing excessive volatility will require ongoing supervision, transparent disclosure, and a credible, predictable regulatory environment.

Market liquidity is another critical dimension. While broader foreign participation can enhance liquidity over time, the transition period may involve adjustments as investors reposition portfolios in response to the policy shift and index reweightings. Volatility could spike around policy milestones, as some participants anticipate higher foreign ownership and others reassess risk exposure. Market infrastructure, including clearing, settlement, and trading platforms, would need to be sufficiently robust to accommodate rising volumes and complex cross-border transactions.

The policy’s success will also depend on broader global macroeconomic conditions. Factors such as oil price trajectories, global growth, and geopolitical developments will continue to influence demand for Saudi equities. A favorable global environment, combined with credible domestic reforms, would reinforce the policy’s positive trajectory, while a less favorable environment could complicate the expected flows and outcomes. Investors should monitor how international capital markets respond, as well as any shifts in Saudi government spending and debt management that accompany greater openness to foreign investment.

Finally, governance enhancements and regulatory clarity will play a crucial role in sustaining confidence. If foreign ownership expands, market participants will be particularly attentive to the transparency of corporate governance, the consistency of regulatory rules, and the predictability of policy adjustments. A clear, stable framework that protects all shareholders and provides a credible path for gradual, well-communicated changes will be essential to realizing the long-term benefits of this policy shift.

Conclusion

Saudi Arabia is considering a landmark revision to its foreign ownership framework, with the potential to raise the cap beyond 49% for listed companies. The CMA, under the leadership of a five-member board including Abdulaziz Abdulmohsen Bin Hassan, indicates that the policy could be implemented by year-end if approvals from other government stakeholders are secured. The change would likely influence the weighting of Saudi equities in MSCI and other global benchmarks, potentially triggering increased foreign investment and further diversifying the investor base. Saudi stocks currently account for about 3.3% of the MSCI Emerging Markets Index, and any expansion of foreign ownership could meaningfully raise that share and attract passive inflows from index-tracking funds, thereby boosting liquidity and market depth.

At the same time, market dynamics remain nuanced. The Saudi market has underperformed this year relative to regional peers and the broader MSCI Emerging Markets benchmark, with the main index down 9.6% year-to-date versus a 25% rise in MSCI EM in U.S. dollars. Yet, there is a trend of growing foreign investment, driven by reforms and valuation attractively low relative to global standards. The policy could reinforce this trend by addressing structural liquidity constraints and aligning with Vision 2030’s broader objective of economic diversification and a more open, globally integrated financial system.

If implemented, the policy shift would carry significant implications for investors, companies, and the economy at large. Passive and active fund managers would recalibrate portfolios in response to updated index weights and governance expectations, while Saudi firms would have opportunities to access new pools of capital. The policy would also necessitate vigilant risk management, notably around governance, minority protections, and market stability during the transition. Ultimately, the potential relaxation of foreign ownership caps represents a strategic move to deepen Saudi Arabia’s financial markets, encourage long-term investment, and support the ongoing transformation of the economy in line with Vision 2030.