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Inside the Fight Over Saudi Aramco

The U.K.’s Financial Conduct Authority has outlined plans for a new stock market category that would make it easier for Saudi Aramco to partially list in London — over the strenuous objections of investors.

The U.K.’s Financial Conduct Authority unveiled a proposal on Thursday to allow foreign sovereign-owned companies to list on the London Stock Exchange under a new category, a move investors say is a ploy to win a London listing for Saudi state-owned oil company Saudi Aramco — and one that will erode governance standards and lower shareholder protection. 

The FCA has proposed a new category within its premium listing regime “to cater for companies controlled by a shareholder that is a sovereign country,” according to the announcement. “The proposal aims to enable companies which may the subject of major privatisation transactions to choose the higher standards of premium listing, rather than standard listing.” 

Premium listings require companies to meet strict corporate governance standards, according to a Financial Times report, which notes that standard listings are off-putting to many investors. The proposal would create a new premium listing category that relaxes these standards.

The regulator unveiled the proposal over the objections of investors urging it not to bend the rules so that Aramco could list part of its business in London. Despite this, FCA chief executive Andrew Bailey said in the announcement that sovereign owners were “different from private sector individuals or companies” and that the listing regime should be refined accordingly.

“Refining the listing regime in this way would make UK markets more accessible whilst ensuring that the protections afford by our premium listing regime are focused and proportionate,” he said in the statement.

But market investors are crying foul.

“It looks like the FCA is consulting on amending the existing listing rules to accommodate the peculiarities of one company,” Ashley Hamilton-Claxton, corporate governance manager at Royal London Asset Management, tells Institutional Investor.

The firm has previously warned that any change to the listing rules to accommodate Saudi Aramco could leave many pension funds holding Aramco shares without the governance protections usually available to U.K. investors.

“If the proposals in this consultation document are implemented, it will be bad news for London and will reverse the progress we have made in recent years to uphold strong governance and protect minority shareholders,” Hamilton-Claxton says, adding that the listing rules should apply for any premium listing, regardless of whether the controlling investor is a private individual, a consortium, or a sovereign state.

Aviva Investors’ head of investment stewardship, Mirza Baig, echoes Hamilton-Claxton’s concerns. Baig says the FCA’s proposals are indicative of a wider global trend to attract large IPOs.

“We are not supportive of the dilution of listing standards to accommodate foreign issuers,” he says. “This unfortunately is a growing trend around the world as exchanges compete for large IPOs.”

Baig calls the trend a “race to the bottom amongst exchanges” which he thinks could be “dangerous,” as it would erode investor protections.

These concerns would be heightened if these companies were to be included in any of the major investment benchmark indexes, such as the FTSE 100, as index trackers and exchange-traded funds would have to buy the constituents of these indices, regardless of corporate governance issues.

A London Stock Exchange spokesman, speaking on Thursday before the FCA’s announcement, said that currently, companies outside of the U.K. need to list at least 50 per cent of their free float shares in London to be eligible for inclusion in the FTSE indexes, while the requirement for U.K.-domiciled companies is 25 per cent. However, a company could still float in London even if it doesn’t list 25 per cent, the spokesman said, although it wouldn’t be automatically considered for inclusion in the indexes.

Still, this would be a tough sell to fund managers, whose trade association today issued a statement on the FCA’s announcement. Chris Cummings, chief executive officer of the Investment Association, said the FCA’s consultation on removing key investor protections from the premium-listed segment to accommodate sovereign-controlled companies would not be popular.

“Investors believe a premium listed segment without these investor protections is not a premium segment and will not provide the protections that investors expect,” he said in the statement.

However, Cummings added that investors recognize that the U.K. needs to maintain a good flow of business coming to list on the London market and should offer a competitive market structure. 

It is not the first time that a regulator has attempted to alter the rules to accommodate a large IPO listing. Earlier this year, shares in the parent company of Snapchat were admitted to the New York Stock Exchange with zero voting rights.

The FCA has asked for responses to its proposals as part of a consultation period ending in October. Saudi Aramco is seeking to list 5 percent of the company, with plans to list in 2018. 

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