The London Stock Exchange has traditionally been seen as one of the most
coveted exchanges for a company to be listed on. But investors have raised
concerns that this reputation may be at risk because of an influx of companies
from emerging markets – which have followed different accounting and governance
rules – trying to list on it as a way of raising capital quickly. According to
the LSE, during 2007 London’s markets attracted 95 international initial public
offerings, raising £15.2bn between them.
However, investors have raised concerns that the label “London listing” is
too general, lacks clarity and that different companies with such a listing will
be subject to different corporate governance and reporting requirements. As a
result, the Financial Services Authority has published a Discussion Paper
reviewing the structure of the UK Listing Regime.
Presently, the term “London listing” can refer to primary and secondary
listings, as well as listings on the Alternative Investment Market (Aim) for
small cap companies and Global Depository Receipts (GDRs) – bank certificates
that facilitate share trading and are commonly used to invest in companies from
developing or emerging markets, especially Russia.
But institutional investors have raised concerns about confusion between
these different types of listings because each has different requirements. For
example, to gain a primary listing (the most stringent), a company must be able
to show a three-year revenue earning record, as well as an unqualified working
capital statement. Once it has obtained a primary listing, it must then inform
the market of material changes and corporate governance of the company.
But to gain a secondary listing, a company does not need to even have a
primary listing elsewhere and will not be subject to such robust regulatory
requirements. Companies listed on Aim are also subject to much weaker
regulation, say critics.
Responding to these concerns, the FSA’s paper discusses ways to re-label the
primary and secondary listing segments to help investors better understand the
obligations on issuers of the various types of listed securities.
The move has largely been welcomed in the City. Adam Kinsley, director of
regulation at the LSE, said, “This discussion paper is an important opportunity
for the FSA to update the terminology and labels used to describe the different
listing routes available to companies in London. In a growing market it is
crucial for investors to be able to identify the regulatory standards that
apply, as well as who is applying them.”
Issues raised in the paper include:
- Whether the “super-equivalent” standards (those imposed over and above the
minimum requirements of EU directives) applied to those companies with a primary
listing should be retained.
- Whether the standards for UK and overseas companies should be aligned in
relation to corporate governance and pre-emption rights. Currently, overseas
companies must disclose whether or not they comply with the corporate governance
regime in their country of origin and disclose the significant ways in which
their corporate governance practices differ from those in the Combined Code. The
FSA paper seeks views on whether requiring overseas companies to “comply or
explain” against both the Combined Code and the UK pre-emption rights regime
would lead to substantive changes in behaviour by investors and issuers.
- Whether UK companies should have access to secondary listing.
- How the listing regime should be segmented and labelled.
Two options are outlined in relation to improving the segmentation and
labelling of the listing regime:
- Under Option 1, there would be a single listing segment for equity
securities, which would be the “premium brand” of the official list, with
super-equivalent standards (currently primary listing of equity securities).
Secondary listing of equity securities and the listing of GDRs would be dropped
from the official list. Securities which would previously have received the
secondary or GDR listing label could, however, still be admitted to trading on a
regulated market on a “directive minimum” basis.
- Option 2 involves maintaining the “super-equivalent” and “directive minimum”
equity security segments of the listed market.
The FSA says that pursuing Option 1 would make the brand more recognisable with
less scope for confusion, thereby preserving the London market’s reputation. The
regulator also points out that a distinctive listing brand – which is not
associated with any particular exchange – would generate more competition among
exchanges in the UK for listed securities.
However, the regulator says that – on the downside – following Option 1 may
make the UK less competitive for listing if issuers prefer to have the “listing”
label. It believes that issuers may seek a listing in jurisdictions where they
may refer to securities with EU minimum regulatory standards as “listed”.
Yet, if the FSA decides to follow Option 2, it believes that issuers will
continue to have the choice they currently have, which will continue to make
London attractive and competitive as a venue for listing where issuers consider
that having the “listing” label is important in their choice of venue for
raising equity capital.
But the regulator also concedes that this approach presents several problems.
First, the confusion surrounding what constitutes a London listing will remain,
although this may be alleviated by clearer labelling. Second, adopting Option 2
will result in treating UK companies differently to other classes of companies
by restricting them to a single segment.
Irrespective of which option is followed, it is proposed that the label “Tier
1 listing” will be used to denote the primary listing of equity shares and “Tier
2 listing” will be applied to all other listed segments.
DP08/1: A review of the Structure of the Listing Regime can be found on the FSA
See law firm Herbert Smith’s Investment funds e-bulletin update January 2008 by
then search for “listing regime structure review”
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