So far this year, global investment banking fees are set to exceed any similar period since the financial crisis driven partially by a big increase in the number of initial public offerings across all the major capital markets. However, in 2018, a big fish still awaits one lucky market – Saudi Aramco. With a possible market capitalisation exceeding $1 trillion, the market that is selected alongside the Saudi Exchange (Tadawul) will win a major boost to liquidity and will help flotations from similar businesses across the Middle East. The decision has already been delayed as the Saudi hierarchy mulls its options.
Inevitably, competitive pressures on both markets are strong – in public and probably behind the scenes – resulting in proposals in the UK to flex and adapt existing rules to make room for a new category of shareholder structure. Apparently, the US SEC is also undertaking a review to make space for Saudi Aramco. The FCA’s proposal was under consultation until late last week. The regulator proposes to construct a new premium category for state-owned businesses with low levels of free float and continued state ownership. On the launch of the consultation, the FCA’s CEO Andrew Bailey defended the plan, saying the proposal would make UK markets “more accessible whilst ensuring that the protections afforded by our premium listing regime are focused and proportionate…..Sovereign owners are different from private sector individuals or companies – both in their motivations and in their nature. Investors have long recognised this and capital markets are well adapted to assess the treatment of other investors by sovereign countries.”
The possibility that new listing rules could have resulted in Saudi Aramco appearing in the FTSE 100 resulted in howls from institutional investors and was quickly dismissed by FTSE Russell – free float and domicile rules ensure this is practically impossible. However, the proposed premium listing changes do raise the possibility of a new category of equity appearing in UK funds – with different levels of protection for minority investors.
ShareAction is supportive of improving the attractiveness of the UK capital market to foreign state-controlled businesses and of occasional reviews of the FCA listing requirements to ensure they are ‘fit for purpose’. However, these changes need to be handled with care. In the noughties, standard and premium listings were introduced by the FCA in reaction to corporate governance issues surrounding London-listed but foreign-domiciled commodity businesses such as ENRC, Bumi, and Nikanor plc. At the time, one institutional investor stated “(the scandal surrounding) ENRC has not been good for shareholders, the City ofLondon or anyone. It more than anything highlights the dangers of buying into companies with poor corporate governance and a structure of control that resembles an oligopoly.”
In response to these dangers, the FCA’s consultation highlighted that protections will remain to ensure experienced institutional investors will be able to make proper judgement on the sovereign and ownership risks in this new market segment. History from that period does not seem to support this argument. For institutions and retail investors, being a joint owner alongside a dominant foreign state shareholder may provide new challenges. Indeed, the real risk of this new category may only really emerge in periods of economic stress when national governments’ priorities change and they may be less concerned about transgressing FCA rules.
If the FCA does introduce this new category, one aspect of our consultation which we feel investors should push for is the inclusion of clear and rapid mechanisms for delisting businesses which have transgressed the new listing criteria or governance codes.
We believe, and argued in our response to the consultation, that there are other ways which might be considered to enable state-owned enterprises to access London capital markets rather than altering well-established rules. The proposed flotation of En+ is a good example of this type of process in action. The $10bn Russian aluminium and hydro-electric conglomerate is intending to raise $1.5bn through the sale of global depository receipts (GDRs) on the London and Moscow Stock Exchanges. For a number of years, GDRs have been used as an effective mechanism for international investors to hold foreign businesses. Like many Russian businesses, we suspect that En+’s governance, ownership and history may not be to investors’ liking, but at least there is a clear divide between GDR and premium listing. Fund managers will be investing in En+ GDRs with their eyes open. As an alternative to reviewing the premium listing maybe the FCA should look to strengthen rules around minority protections and voting rights on GDRs.
Despite other options being available, commercial pressures may prevail as stock markets race to ease governance protections to catch the big fish that is Aramco. As a financial centre, London must be careful not to damage its own reputation for high governance standards by disturbing a set of rules that has largely served investors well for the last 10 years. A premium listing has established a gold standard for governance standards and minority protections that investors should fight hard to protect despite near-term commercial interests.
Toby Belsom is Head of Investor Research and Analytics at ShareAction.