Published on 22 June 2018

CSR

The London Stock Exchange loosens regulations in a bid to attract Saudi Aramco IPO

The introduction of the oil giant Saudi Aramco IPO onto the stock exchange is causing quite a stir amongst financial institutions. To attract this major player, with a capital estimated at $2 trillion, the London Stock Exchange decided to relax its governance and transparency obligations for state-owned companies.

Saudi Aramco is the largest oil and gas company in the world. Its market capitalisation is estimated at $2 trillion.
@SaudiAramco

Following an announcement made more than two years ago, Saudi authorities have confirmed that the state-owned oil company, Saudi Aramco, will join the stock exchange in 2019. This is a historic operation since the market capitalisation of the company is estimated at $2 trillion. That's twice as much as Apple, the largest company listed today. To start, 5% of the business, or $100 billion, will be put on the market.

This listing is of interest to the New York, Hong Kong and London Stock Exchanges. And it is the latter that seems to have an advantage, as Prime Minister Theresa May has put all her diplomatic weight into attracting the Saudi company. The most recent decision from the Financial Conduct Authority (FCA), the regulator for financial markets, should increase London’s attractiveness.

Relaxed rules of governance

Without directly appointing Saudi Aramco, the FCA has decided to authorise the creation of a new "Premium Listing", designed to accommodate companies held by sovereign wealth funds, thereby relaxing the rules of governance. For example, financial transactions between these major groups and shareholders can be done without consulting minority interest. Moreover, there will no longer be a minimum share of companies listed on the stock market.

According to FCA, these new rules must promote state-owned companies in the eyes of investors. The regulator has deemed previous obligations, intended to protect shareholders, as too restrictive. This “Premium Listing” will be launched as of 1 July 2018. However, the companies that will be listed, such as Saudi Aramco, will not be able to join the flagship index, FTSE100 Stock Exchange, to prevent them from destabilising it.

These new rules "mean that when a state-controlled company is listed here, investors can benefit from the protections afforded by the Premium category," says Andrew Bailey, chief executive of FCA. He adds, "these new rules encourage more companies to adopt high standards of governance in the UK".

A tax haven

The regulator’s new measures have been applauded by stock exchange operator, the London Stock Exchange Group (LSE), which manages the London Stock Exchange. "This will allow the British market to support a range of companies by setting high standards of governance and transparency for investors and the market," said an LSE spokesperson to the Guardian.

Other players in the financial market are worried about relaxing the rules. Stephen Martin, Director General of the Institute of Directors (IoD) said, "the IoD is deeply disappointed that the FCA has decided to press ahead with the creation of a new premium listing category which reduces key corporate governance requirements. This decision has been made despite opposition from across the governance spectrum and without providing evidence as to the necessity for the reduction in standards. 

A year ago, the regulator of the stock exchange had given up on such a measure. Its fear was that, amid the Brexit crisis, London’s stock market would be perceived as a tax haven. Obviously, decision-makers decided to do away with this risk, favouring greater attractiveness. The FCA does not hide the fact that this new listing must also bring competitiveness to London.

Championing extractive industries

Ken Costa, a former investment banker appointed as the UK government’s special adviser to Saudi Arabia, told the Financial Times, " Politically it’s a sign that London continues to be open to business no matter what happens on Brexit, showing it to be an international, transparent and liquid market". It also shows that when European markets, such as Paris, Luxembourg or Frankfurt, try to become references for sustainable and responsible finance, London is in obvious offence of inconsistency.

Though the British market and its government have launched the "Green Finance Initiative", it still holds "Stranded Assets", or fossil assets that may lose significant value due to the low-carbon transition currently underway.

In fact, in the last decade, the London Stock Exchange had already chosen to tweak its requirements, including transparency, to accommodate Russian, Chinese and Kazakh extractive companies (specifically mining and oil sectors) ...with success. 362 extractive companies are now listed on the British market. This represents a market capitalisation of €1.2 trillion. Just to compare: the three largest US markets combined (NYSE, AMEX and NASDAQ) include 525 companies from this sector, for a market capitalisation of €3.4 trillion.

Ludovic Dupin @LudovicDupin

 


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