Rules for Regulating the Work of Receiving and Financing Banks in Initial Public Offerings of Securities

(First Issue - Rajab 1443 AH / February 2022 CE)

Important Note:
To keep pace with updates and amendments regarding instructions issued by the Saudi Central Bank, the Saudi Central Bank emphasizes the necessity of always relying on the versions published on its website: www.sama.gov.sa

Saudi Central Bank
Saudi Central Bank

Table of Contents

1. Introduction ................................................................................................................................. 3
2. Definitions ............................................................................................................................ 3
3. Objective ................................................................................................................................ 4
4. Scope ................................................................................................................................ 4
5. Governance .............................................................................................................................. 5
6. Risk Management and Operational Capabilities ............................................................................................... 5
   1. Financing Bank ....................................................................................................................... 5
      1. Financing Limits ................................................................................................................... 6
   2. Receiving Bank ...................................................................................................................... 6
      1. Operational Capabilities .............................................................................................................. 6
      2. Liquidity Requirements ............................................................................................................... 7
7. Cybersecurity ..................................................................................................................... 8
8. Refund of Surplus ............................................................................................................................ 8
9. Reporting .......................................................................................................................... 9
10. Implementation and Effective Date .......................................................................................................... 9

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1. Introduction

The Saudi Central Bank issued these Rules based on the powers granted to it under its system issued by Royal Decree No. M/36 dated 1442/04/11 AH, the Banking Supervision System issued by Royal Decree No. M/5 dated 1386/02/22 AH, and the Rules for Implementing the Provisions of the Banking Supervision System issued by Ministerial Decision No. 2149/3 dated 1406/10/14 AH.

These Rules replace previous instructions issued by the Saudi Central Bank regarding the role and participation of banks in initial public offerings, specifically Circular No. 38399/M.A.S./588 dated 1426/11/12 AH, No. 337/M.A.S. dated 1425/11/8 AH, No. 333/M.A./200 dated 1413/8/22 AH, and the Circular on General Rules for Regulating Subscription Operations for Saudi Joint Stock Companies, with emphasis on compliance with these Rules in accordance with other rules, instructions, and regulatory requirements issued by the Saudi Central Bank or other legislative authorities - where applicable.

2. Definitions

1) The terms and phrases listed below - wherever they appear in these Rules - have the meanings indicated next to each of them, unless the context dictates otherwise:

Term	Definition
Central Bank	The Saudi Central Bank
Rules	Rules for Regulating the Work of Receiving and Financing Banks in Initial Public Offerings of Securities.
Receiving Bank	The bank that receives and processes individual subscription requests and amounts in the Initial Public Offering process. In the event of more than one receiving bank in a single offering, the term "Receiving Bank" includes both the Primary Receiving Bank and the Secondary Receiving Bank.
Financing Bank	The bank that grants credit facilities to its customers for the purpose of subscribing to securities in the Initial Public Offering process.
Issuer	The person who issues or intends to issue securities.
Securities	A security is a document that demonstrates legal ownership by a person of a share in a joint stock company, and reflects the financial value of that person's ownership.

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Term	Definition
Offering Period	Includes the period for registering subscription requests, the order book building process, payment of subscription value, and final allocation of offering shares.
Related Parties	Parties specified in Article (2) paragraph (6) of the First Amendment to the Related Parties Rules, communicated via Saudi Central Bank Circular No. 41045379 dated 1441/07/01 AH.
Exposures	Exposures specified in Article (1,3) paragraph (4) of the Large Exposures Rules for Banks, communicated via Saudi Central Bank Circular No. 1651/67 dated 1441/01/09 AH.
Individuals	Natural persons who do not possess any legal personality status and are not Wealthy Subscribers.
Wealthy Subscribers	Natural persons with high financial solvency, classified according to the bank's limits and criteria, with assets under the bank's management not less than 5 million SAR.
Legal Entities	A legal entity such as commercial institutions, companies, government and quasi-government sectors, and financial institutions, or a group of persons or entities or both, who come together for a specific purpose and form a legal entity.
Government Offering	The Initial Public Offering of securities for a company in which the Government of the Kingdom of Saudi Arabia, or any entity directly or indirectly affiliated with it, owns 51% or more.

3. Objective

2) These Rules aim to assist receiving banks or financing banks in Initial Public Offerings of Securities in establishing minimum policies and procedures to mitigate potential risks they may face.

4. Scope

3) These Rules apply to all banks participating in an Initial Public Offering of securities, whether the offering is inside or outside the Kingdom, in either or both of the following capacities:
a) Financing Bank. b) Receiving Bank.

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5. Governance

4) The bank must incorporate the provisions of these Rules into its policies and procedures, and take necessary measures to ensure compliance monitoring. The following governance procedures must be applied - at a minimum:
a) The responsibility for setting criteria for participation as a financing bank or receiving bank lies with the Bank's Board of Directors or its delegate. b) Demonstrating its ability to participate in the initial offering process and perform its role prudently and efficiently, by possessing the financial and operational capabilities, including resources, systems, and procedures necessary for managing associated risks. c) Establishing procedures to supervise activities related to Initial Public Offering processes and comply with the requirements contained in these Rules.

5) Deviation from the bank's internal policies regarding financing programs or other programs is not permitted without obtaining the approval of the Board of Directors or its delegate.

6) Before the start of the initial offering process, the bank must ensure the effectiveness of all related systems.

6. Risk Management and Operational Capabilities

1. Financing Bank

7) A bank wishing to participate in an Initial Public Offering as a financing bank must apply the following requirements - at a minimum:
a) Policies and procedures for financing securities must be documented and adequately cover all major risks the bank may face. b) Adherence to the bank's approved credit policies, and limiting total exposures in each initial offering to an amount within the bank's ability to meet its obligations on the settlement date. c) Following its internal policies regarding collateral, or any other related policies. d) Conducting a comprehensive analysis - before financing the purchase of securities - which includes at least, the potential impact on the capital adequacy ratio, the loan-to-deposit ratio, the liquidity ratio (SAMA liquidity Ratio), the liquidity coverage ratio, the net stable funding ratio, the leverage ratio, large exposure limits, and related party exposure limits, taking into account relevant instructions issued by the Saudi Central Bank.

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1. Financing Limits

8) In individual subscriptions, the leverage ratio must not exceed 50% of the intended subscription amount for each subscriber, with a maximum financing limit not exceeding two million Saudi Riyals.

9) The provisions of paragraph (8) above do not apply to Wealthy Subscribers and Legal Entities; however, the bank must follow its approved credit standards and limit total exposures to an amount within the subscriber's capacity to bear risk (credit lines).

10) The bank must not exceed the exposure limits stipulated in the relevant instructions issued by the Saudi Central Bank.

2. Receiving Bank

11) A bank wishing to participate in an Initial Public Offering as a receiving bank must apply the following requirements - at a minimum:
a) It must clearly understand the role and responsibilities of both the Receiving Bank and the Issuer in the Initial Public Offering process, and these roles must be clearly defined in the Receiving Bank agreement. b) It must perform the role commensurate with its financial and operational capabilities, conducting a comprehensive prior analysis of the potential financial impact arising from its participation in the Initial Public Offering.

1. Operational Capabilities

12) If the bank has not previously participated as a receiving bank in an Initial Public Offering, or if it wishes to participate as a receiving bank in a large-scale offering or a government offering, it must notify the Saudi Central Bank in advance and demonstrate - specifically - that it has sufficient financial and operational capacity to process securities subscription requests in accordance with paragraph (11-b) above, and has the ability to manage the subscription and recycle it in the money market when needed.

13) If the bank intends to participate as a receiving bank in a large-scale offering or a government offering, it must have sufficient experience and a track record showing its previous participation as a receiving bank.

14) The bank must pay attention to the number of branches and their readiness, or any other channels allocated to receive subscription requests, ensuring adequate arrangements to meet the expected demand from subscribers.

15) The bank must ensure its qualification and full familiarity with the Initial Public Offering process, ensuring the concentration of its resources and activation of related policies. In the event that the Initial Public Offering is large-scale or a government offering, the bank must establish a temporary internal committee to coordinate the receipt of subscription information and escalate to senior management if necessary.

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16) When determining whether an Initial Public Offering is large-scale for the bank for the purposes of paragraphs (12 and 13) above, the bank must rely on the (Capital Base) rule to determine and compare the size of the initial offering, by multiplying the expected share price by the number of shares to be offered and dividing the result by the bank's Tier 1 regulatory capital. If the resulting percentage is equal to or greater than 100%, the Initial Public Offering is considered large-scale. The estimated value of subscription amounts to be recycled, general trends in the securities market during the time of the Initial Public Offering, and the expected level of demand from subscribers must also be considered.

17) The Receiving Bank must agree in advance with the Issuer and adopt a plan to deal with high levels of demand for purchasing securities in the Initial Public Offering process. The plan must include - at a minimum - the following considerations:
a) The possibility of adding branches to receive subscription requests if necessary, including making relevant announcements. b) The possibility of engaging another receiving bank to assist in receiving or processing requests. c) The possibility of extending working hours to receive requests, if feasible. d) Arrangements for printing additional copies of subscription forms and prospectuses and distributing them, if necessary. e) Arrangements for appointing additional staff, if necessary.

18) The Receiving Bank must work closely with the Issuer during the Initial Public Offering process to determine the need to take emergency measures in accordance with the approved plan - if required.

2. Liquidity Requirements

19) The bank must manage its balance sheet effectively, planning in advance to ensure continued compliance with the loan-to-deposit ratio, liquidity ratio (SAMA liquidity Ratio), liquidity coverage ratio, net stable funding ratio, and any other liquidity requirements issued by the Saudi Central Bank.

20) The bank must review collateral deposited with the Saudi Central Bank and review its daily limits to ensure sufficient collateral to cover large transfers and liquidity needs during the Initial Public Offering process.

21) The bank must exercise due diligence in recycling subscription amounts in the money market when needed. It is recommended that the bank participate in interbank lending as needed.

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7. Cybersecurity

22) The bank must apply appropriate cybersecurity safeguards to protect the bank's and subscribers' information assets and data from cyberattacks, while complying with regulatory requirements related to cybersecurity.

23) The bank must ensure the application of security monitoring controls for all systems and applications used in the Initial Public Offering process. Monitoring and incident response procedures must be governed according to the cybersecurity incident response policy, ensuring the readiness of incident response teams.

24) The bank must implement a comprehensive testing program to verify the effectiveness and resilience of the cybersecurity of systems and applications used in the Initial Public Offering process, which includes - by way of example and not limitation - the following:
a) Security vulnerability assessment and penetration testing. b) Security assessment of the breach state.

25) The bank must ensure operational resilience by testing a range of potential failure scenarios and verifying compliance with regulatory requirements related to business continuity.

26) The bank must implement preventive measures to mitigate risks arising from reliance on third parties and service providers, in addition to ensuring the third party's readiness to support the systems and applications used in the Initial Public Offering process.

8. Refund of Surplus

27) The bank must establish documented procedures regarding the refund of the value of any subscription surplus, if any, after the allocation of securities.

28) The bank must inform the subscriber of the mechanism for refunding the subscription surplus and the timeline for doing so. The surplus amount must be refunded to the subscriber's account electronically only.

29) In the event of the cancellation or incomplete completion of the Initial Public Offering, the bank must refund the entire subscription amount to the subscriber's account electronically only, according to the timeline for doing so.

30) The bank must exercise due diligence when refunding the subscription amount, and must - at a minimum - verify the subscriber's identity before refunding the amount.

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9. Reporting

31) The bank must provide the Saudi Central Bank with an Initial Public Offering data report on the bases outlined below:
a) A report after the end of the offering period. b) If the Initial Public Offering falls under the definition of a large-scale offering or a government offering, reports must be submitted on a daily basis during the offering period.

32) Reports must be submitted to the Saudi Central Bank no later than one working day from the bases mentioned above.

33) Reports must be submitted to the Saudi Central Bank via the following email:
BankingDataSection@SAMA.GOV.SA

34) The Saudi Central Bank may apply Article (31-b) to subscriptions that do not fall under the definition of a large-scale offering or a government offering at its discretion.

10. Implementation and Effective Date

35) These Rules enter into force as of their date.

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