FCA proposes new "premium" listing for state-backed firms; sovereign companies could be exempt from certain rules.
Britain wants to loosen rules on listing state companies, a move that critics say is designed to help London win the lucrative IPO of Saudi Arabian oil giant Saudi Aramco <IPO-ARMO.SE> but could weaken minority investor protection.
The Financial Conduct Authority's proposals on Thursday would create a new listing category for companies controlled by sovereign states and come as exchanges around the world are vying to win the Aramco listing, which is expected to be the largest initial public offering (IPO) ever.
But they met with criticism from British fund managers, who have already expressed concerns about Aramco's governance.
"Investors believe, a premium listed segment without these investor protections is not a premium segment and will not provide the protections that investors expect," Chris Cummings, chief executive at the Investment Association said.
Reuters reported earlier this year that the London Stock Exchange Group (LSE.L)
was working on a new type of listing structure that would make it more attractive for Aramco to join the bourse.
"No decision has been made on the venue yet," a source close to Aramco told Reuters on Thursday following the proposals, which come as the government and City of London are trying to keep Britain's financial markets attractive to international investors and companies after it leaves the European Union.
The FCA said on Thursday it is proposing a new "premium" stock market listing category that will exempt companies controlled by sovereign states from certain requirements and be available to companies listed in London using depositary receipts, financial instruments used to represent a foreign company's shares, rather than the shares themselves.
International companies including Russian state firms Gazprom and Rosneft are listed using depositary receipts on the LSE.
"Refining the listing regime in this way would make UK markets more accessible whilst ensuring that the protections afforded by our premium listing regime are focused and proportionate," FCA chief executive Andrew Bailey said
Ashley Hamilton Claxton, Corporate Governance Manager at Royal London Asset Management said this may reverse progress made on governance and protecting minority shareholders.
"It looks like the FCA is consulting on amending the existing listing rules to accommodate the peculiarities of one company, which is not a very effective strategy for regulating the market as a whole," Hamilton Claxton said.
BRIDGING THE GULF
Under the FCA's proposals, sovereign-controlled companies will be able to obtain a "premium" listing on the London Stock Exchange without complying with certain rules on related party transactions and controlling shareholders.
The changes are likely to make Britain's stock market more attractive to state-controlled companies just as several Gulf countries are considering listing part of their oil assets. Aside from Saudi Arabia, Oman and Abu Dhabi have also said they might float part of their state oil businesses.
"This is a clever solution to the dilemma of Aramco, which does not meet the general requirements regarding free-float and corporate governance," Edward Bibko, head of capital markets in Europe, Middle East and Africa at law firm Baker McKenzie, said.
"And there is likely demand for a new segment. We are aware of other large privatisations in the works that may also benefit from this new category."
At present companies which do not meet Britain's "premium" listing requirements have to take a standard listing. These are seen as less attractive as they have lower corporate governance requirements, do not qualify for entry into most stock indices and have connotations of being second best.
To qualify for a premium LSE listing at the moment, a shareholder that controls more than 30 percent of a company has to enter into a legally binding arrangement to ensure that transactions between the company and the controlling shareholder will be conducted at 'arms length' and on commercial terms.
The listed company also has to obtain prior approval from independent shareholders before entering into a deal with a 'related party' with a major shareholder.
The FCA said it believed controlling sovereign owners tend to act differently from private ones so it was legitimate to grant them exemption to these requirements.
"Sovereign owners tend to be different from private sector individuals or entities in both their motivations and their nature," it said in its consultation paper.
"We believe that investors and the market are sufficiently able to assess the additional risks arising from sovereign ownership".
The FCA has set a deadline of Oct 13 for comment on the proposals, which are part of a wider review it is undertaking into Britain's listing rules but were brought forward because it said it thought there was a gap in its current rules.
By Dasha Afanasieva and Clara Denina