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Saudis Cap Aramco Stock To Prevent Market Meltdown

The Saudi stock exchange Tadawul has introduced a 15-percent cap on any stock’s weight in its equity index to avoid Aramco overweighting the index when it lists later this month.

Reuters quoted a statement by the exchange as saying, “Any constituent whose index weight reaches or exceeds the threshold will be capped in accordance with the set limit.”

The cap will “ensure more balanced indices, which will accurately represent the movement of the market, enhance disclosures and transparency and minimize securities’ dominance,” the statement also said.

Aramco will list 1.5 percent of its shares this week, targeting local investors, both large and retail. The company has yet to announce the price, which it said will happen when it announces the listing. For now, the oil giant has only announced a range, of between 30-32 riyals, ($8-8.52). Taking the mean of this range, Aramco’s value is around $1.7 trillion and the value of the 1.5 percent to be listed on Tadawul would be around $25.6 billion.

Aramco attracted bids worth $44.3 billion by the deadline for retail investors to express interest in the listing.

The company will by all means be the largest listed on the Saudi exchange, and this has sparked worry that it will weight the equity index of Tadawul excessively toward energy stocks.

There is, however, a bigger concern. A lot of Saudis are taking on debt to buy into the state oil company, with banks relaxing their lending requirements especially for them. The Kingdom has doubled the leverage limits for loans that banks will extend to domestic retail investors who want to buy shares.  

Earlier this year Middle East scholar and Saudi expert Ellen R. Wald warned that this could cause a crisis of sorts, similar to the one that hit the Saudi economy in 2006, when lots of people borrowed to buy stocks listed on Tadawul, which caused their prices to balloon and then crash.

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By Irina Slav for Oilprice.com

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