By Nicolas Parasie 

DUBAI--Saudi Arabia on Monday laid down the final rules for the long-awaited opening of its $590 billion stock market to foreigners, allowing only large institutions to invest in one of the last major bourses to have remained mostly shut to international investors.

The rules, which take effect on June 1 ahead of the market's planned opening on June 15, permit only qualified foreign investors such as banks, brokerages, fund managers or insurance companies with at least $5 billion in assets under management to invest in the Middle East's biggest market.

Saudi Arabia last year signaled that it would allow direct foreign purchases of stocks to promote institutional investments in a market largely dominated by local retail investors, a move that would help reduce the high volatility there and also improve the corporate governance practices of traded companies.

The market's opening to large institutional investors will likely bring in hundreds of millions of foreign cash, boosting the Saudi economy as it copes with the impact of low oil prices, its main source of revenue. The kingdom's foreign reserves have dropped by $36 billion, or 5%, over the past two months as it maintains government spending plans despite lower oil-sale income.

Foreign investors until now had only limited indirect access to the Saudi market through instruments such as swaps.

"The Saudi approach to opening its market has been a pragmatic, considered and robust exercise and in that sense is not in our view materially different from the way other emerging economies have handled similar exercises," said Jamal Al Kishi, the chief executive officer at Deutsche Securities Saudi Arabia.

"The $5 billion threshold is broadly considered a reasonable level to allow for an orderly opening up of the market. It seems to be aimed at achieving a manageable launch process and to ensure strong credibility of new market participants by only allowing investors with scale to initially participate," Mr. Kishi added.

Some of the world's largest asset managers such as BlackRock, Franklin Templeton and Schroders, whose assets under management easily surpass the minimum levels stipulated by the Capital Market Authority, will likely qualify to buy Saudi stocks. It isn't however clear which international institutions are planning to invest in the Saudi market.

But the $5 billion minimum requirement also excludes a vast number of smaller asset managers, typically those that track frontier markets, from directly investing in the Saudi stock exchange.

Saudi Arabia is expected to be classified by 2017 as a frontier or emerging market by index compilers such as MSCI Inc., which are tracked by global funds managing billions of dollars.

Several analysts and fund managers had hoped that the regulator would lower the bar for the minimum requirements, something Saudi Arabia could still consider in the future. The CMA said it may reduce the minimum assets under management threshold to $3 billion, but didn't clarify further.

The Saudi rules also impose restrictions on how much outside investors can buy. For example, foreign investors are forbidden from holding more than 10% of the combined bourse's market value at any time. Similarly, foreign ownership of a single company is restricted to 49%. A single investor also isn't allowed to own more than 5% of a stock.

"The 'opening up' of the Saudi market is likely to be an incremental process, with this being the first small step," said Zachary Cefaratti, risk officer at Dalma Capital, a Dubai-based asset manager. "Like the floodgates of a dam, once markets are opened, it becomes much easier to open them further than to close them back up," he said.

Opening the Saudi bourse, or Tadawul as it is locally known, will give foreign investors access to some of the world's biggest corporates. such as petrochemical giant Saudi Basic Industries Corp. or dairy company Almarai.

Saudi stocks are among the best performers in the Middle East this year, up about 17% to date.

Ahmed Al Omran in Riyadh contributed to this article.

Write to Nicolas Parasie at nicolas.parasie@wsj.com

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