Saudi Arabia will permit foreign institutional investors to buy shares directly in IPOs, a move that could help the government sell billions of dollars' worth of stakes in state-owned companies including oil giant Saudi Aramco.

New rules published by the Capital Market Authority on Aug. 18, taking effect at the start of next year, list qualified foreign investors among the types of institution allowed to bid in the book-building process that underwriters use to price and allocate shares in IPOs.

Previously, the CMA had said foreign institutions would be permitted to buy shares directly from IPOs only on a case-by-case basis, although they could participate indirectly through channels such as local IPO funds.

Under sweeping economic reforms designed to reduce Saudi Arabia's reliance on oil exports and announced this year, the government plans in coming years to offer shares in a wide range of firms, including a stake of up to 5% in Aramco that could be worth tens of billions of dollars.

Some of the shares may be offered abroad, but they are also expected to be listed on Riyadh's bourse. With a capitalization of just $380 billion, the Saudi market is too small to absorb many large IPOs, so inflows of foreign capital may be key to ensuring the offers go smoothly.