The UK has been lobbying to secure the listing ever since it was originally touted at the beginning of 2016 by the then-Deputy Crown Prince Muhammad bin Salman. With New York and Hong Kong still in the running, an accommodation on the regulatory front certainly wouldn’t have hurt London’s cause, although the FCA will doubtless face allegations that it has made concessions under pressure from Whitehall. With London’s primacy as a global financial centre in the balance following the EU referendum, the FCA’s decision would certainly have played well with City Lord Mayor Charles Bowman, who headed a delegation to the Desert Kingdom last year to hold talks with state officials, including representatives of the Riyadh Stock Exchange.
Nevertheless, the proposed admission has proved divisive on several fronts, and leaving aside any political angle, the main contention centres on corporate governance, or as the IC pondered a year ago, “whether probity will again give way to financial expediency”. Stephen Martin, director general of the Institute of Directors (IoD), is unequivocal on the issue: “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.”
Under a premium listing, companies “are required to meet the UK’s super-equivalent rules which are higher than the EU minimum requirements”, thereby enabling them to secure access to “a lower cost of capital through greater transparency and through building investor confidence”. But it’s difficult to imagine what any of that means to minority shareholders when just 5 per cent of Aramco’s shares are in public hands. The statutory requirement for a 25 per cent free-float under a premium listing can be waived if the FCA is satisfied that sufficient liquidity is ensured, specifically whether the expected market value of shares in public hands at admission will exceed £100m, a non-issue when you consider that a survey conducted by investment bank EFG Hermes revealed that institutional investors expect Saudi Aramco to have an implied value of $1 trillion to $1.5 trillion.
Regulators make all the right noises about shareholder engagement, but you could argue that a 5 per cent free-float is essentially tokenistic; what possible influence could minority shareholders have on capital or governance issues? The FCA did mandate that the election of independent directors be subject to approval from independent shareholders under the new category. This is possibly a nod to some of the corporate governance issues that led to the de-listing of Kazakh mining group Eurasian Natural Resources back in 2013, although it’s debatable whether this will have much effect either. The UK Corporate Governance Code states that the role of an independent director is important in the relationship between major shareholders and the board. However, in the case of Saudi Aramco, you imagine that it would be difficult to define where the interests of one begins, and the other ends.
The UK watchdog has also given assurances covering proportionate voting and adherence to the principles of pre-emption rights. This is to be welcomed, particularly as the latter system differentiates the UK equity market from that of the US and other countries in that it stops management from effectively transferring the wealth of a company from existing shareholders to new investors.
