(Corrects fourth para to show May visit was last month)
* Mega IPO unlikely to meet premium free float requirement
* Sources say FTSE inclusion unlikely
* FCA looking at "international segment" - paper
By Dasha Afanasieva and Michelle Price
LONDON/HONG KONG, May 4 The London Stock
Exchange is working on a new type of listing structure
that would make it more attractive for oil giant Saudi Aramco to
join the bourse, sources familiar with the discussions said.
Exchanges around the world are vying for a piece of Saudi
Aramco's initial public offering (IPO), expected to be the
largest in history. The company is expected to list on the
Riyadh exchange, the Tadawul, and at least one major
international stock market.
The LSE is seen as one of the front-runners to win part of
the IPO and has been pushing hard to land it.
LSE chief executive Xavier Rolet travelled with British
Prime Minister Theresa May last month to Saudi Arabia, with the
pair meeting the kingdom's sovereign wealth fund, which is
expected to be a major decision-maker in the listing process.
But none of the exchange's current listing structures are
likely to appeal to Aramco. It is working on a new model that
would allow it to avoid the most onerous corporate governance
requirements of a primary listing, without being seen as second
Such an approach could leave the British stock market open
to criticism that it is changing the rules in order to attract
large state-backed companies which are reluctant to meet more
stringent corporate governance requirements.
Currently most companies on the LSE have a "premium
listing", which is required if they are to be included in the
FTSE index. That requires firms to list at least 25 percent of
their shares in a free float, unless regulator Financial Conduct
Authority (FCA) makes an exception, and be subject to corporate
governance rules which include giving minority shareholders
extra voting power on issues such as independent directors.
But Saudi Aramco, which estimates its total value to be
around $2 trillion, has so far indicated it wants to list no
more than 5 percent of its shares, leaving private investors
with little chance to influence the company.
The existing alternative is for Aramco to opt for a
"standard listing" which has less onerous corporate governance
requirements, especially in relation to the issue of controlling
shareholders. Standard listings are however generally seen as
less attractive to investors and have connotations of being
Advisers often tell companies not to pursue this option.
"By listing as premium or standard, big pension funds and
asset managers know where they sit in terms of governance," said
Russell Holden, corporate partner at international law
firm Taylor Wessing.
Instead, sources said the LSE and the UK Listing Authority,
which is part of the Financial Conduct Authority, are discussing
a new category of listings for large international companies
which may fail to meet the premium listing standards but is more
prestigious and more appealing to investors than the "standard"
In a recent discussion paper, the FCA said a proposed
international segment "may be attractive to companies where
there is a founding family or government that wishes to retain
control rights that are incompatible with a conventional premium
While the paper discussed general listing rules, sources
familiar with negotiations said the new segment was being
devised specifically with Aramco in mind.
They said both the LSE and government were putting pressure
on the FCA to help them come up with a workable structure of
this kind in order to clinch the deal.
An FCA spokesman declined to comment on an individual
company's listing arrangements but said it aimed to ensure
markets functioned well:
"Our recent work considers some important questions about
the primary markets, and some potential enhancements, and are
part of the FCA’s wider work on UK primary markets as set out in
our 2016/17 Business Plan," the spokesman said in response to
questions about the creation of a new segment.
The LSE declined to comment. Saudi Aramco said it did not
comment on rumour or speculation.
The creation of a new listing segment comes just four years
after the UK Listing Authority (UKLA), which is part of the FCA,
announced new rules designed to prevent controlling shareholders
from exercising undue influence over a company's board.
In the 2000s, as the LSE sought to attract new money from
overseas companies, the UKLA waived the usual governance
requirements for five new overseas companies, allowing them to
list less than 25 percent of their shares as it sought to
attract money from overseas.
Those rules were tightened in 2013 after scandals at two
high-profile emerging market companies - ENRC and Bumi, both
controlled by foreign tycoons - left investors nursing heavy
The FCA made several changes then to protect minority
investors, including introducing a requirement for companies in
which one shareholder owns more than 30 percent to have a
"relationship agreement" in place to ensure they can operate
independently from that shareholder.
But there has never been a listing close to the size Aramco
is proposing, and a person familiar with May and Rolet's visit
said some of the current rules may not be appropriate for
The source characterised the approach to accommodating
Aramco as “bespoke treatment”.
In a note, law firm Davis Polk questioned whether the new
listing segment was targeted at only those companies with the
type of features that caused the past scandals, investor outcry
and tightening of the premium listing regime.
Even if it lists with the proposed new structure, there are
still doubts over whether Aramco would be eligible to join the
UK's FTSE stock indices. The FTSE 100 is the most traded
index of British firms in the world and inclusion would give
Saudi Aramco access to passive index tracker funds as well as
exposing it to more active stock pickers.
Two of the sources said benchmark inclusion was unlikely for
Saudi Aramco, with one saying clients of the FTSE would
complain: its huge market capital would mean it dominated the
index. JP Morgan, not yet formally mandated but said by
bankers to be leading negotiations on index inclusion, declined
One of the sources noted that the London Stock Exchange
pitch talked about a "flexibility of the listing structure".
"FTSE will strongly defend the integrity of the benchmark,"
the source said.
(Additional reporting by Reem Shamseddine and Katie Paul in
Riyadh; editing by Andrew Roche)