Fund Firms Turn Up the Heat on Saudi Aramco Listing

Fund firms are urging the London Stock Exchange and the regulator responsible for stock market listings not to bend the rules to allow Saudi state-owned oil company Saudi Aramco to list part of the organization in the U.K.

On Thursday, investment managers Hermes Investment Management, Royal London Asset Management, and Schroders joined those investors calling on the U.K.’s Financial Conduct Authority not to accommodate a float where only a small portion of the company is listed or where normal governance requirements are waived.

In May, Institutional Investor’s Sovereign Wealth Center reported that Saudi Arabia’s Public Investment Fund (PIF), the kingdom’s sovereign wealth fund, was seeking to float part of the state-owned oil giant to boost domestic investment. Saudi Aramco is seeking to float only 5 percent of its shares, according to published reports.

As it stands, companies outside of the U.K. need to list at least 50 percent of their free float shares in London in order to be eligible for inclusion in the FTSE indexes, an LSE spokesman told Institutional Investor. The requirement for U.K. domiciled companies is just 25 percent, he said.

However, just because a company doesn’t appear on an index, doesn’t mean it is ineligible to be listed. The FCA has the power to allow a company to float, even if it doesn’t list 25 percent of the company in London, if it considers that the market would continue to “operate properly,” according to the LSE spokesman.

To obtain what the LSE calls a premium listing, firms are also required to supply full, audited accounts for the past three years and adhere to the U.K. governance code. Media reports that some exceptions may be made for Saudi Aramco have not gone down well with investors.

“We do not believe that a new listing standard to accommodate the IPO of Saudi Aramco would be desirable for investors,” said Tim Goodman, director of Hermes EOS at Hermes Investment Management, in an e-mailed response to questions. “We believe that the governance protections provided by the Premium Listing standard help maintain very necessary protections for institutional investors and the ordinary people for which they work.”

Royal London’s corporate governance manager, Ashley Hamilton Claxton, said that an attempt to bend listing rules to facilitate Saudi Aramco’s IPO “is highly inappropriate and flagrantly ignores the principles which the UK’s listing rules were designed to defend,” adding, “Given the size of Saudi Aramco, even a five per cent listing would mean the stock would become a key part of many of the passive equity funds. The pension funds of millions could end up holding Aramco shares without many of the governance protections usually available to UK investors.”

Jessica Ground, Schroders’ global head of stewardship, stressed the need to be “very firm about the governance standards and free float requirements.”

Today’s public airing of investor concerns follows private correspondence on June 1 between the Investment Association, which represents U.K. asset managers, and the regulator. In the letter, seen by Institutional Investor, I.A. chief executive Chris Cummings told the FCA that good governance and liquidity are critical elements to the IPO process.

“We would like to reiterate our members’ view that 25% should be the minimum free float level for any premium listed company in the UK, irrespective of the size of the company being listed,” Cummings wrote. “This should be preserved at all costs to protect the integrity and standard of the UK premium listing.”

When asked whether it would be possible for one of the world’s largest companies to be listed in London but not be included in the FTSE 100, the LSE spokesman explained that this would be at the discretion of the FTSE Russell Governance Board, which would consult major passive fund investors to inform its decision, as passive funds often use these indexes as benchmarks. Index fund operators BlackRock and Vanguard did not respond to a request for comment. Saudi Aramco did not respond to a request for comment by publication time.

In an interview with the BBC, Saudi Aramco’s chief executive Amin Nasser said, “We have always been transparent with our one shareholder, which is the government, and with our board. When we are listed and there are many shareholders, we will be sharing data like any IPO’d company is doing, quarterly sharing [of] results and data. When we share it, it will be a pleasant surprise for the rest of the industry.”