The London market strives to stay relevant

It is moving in a direction completely opposite of where Sebi has taken us

“The financial services sector is central to the UK economy, and at the heart of this government’s growth mission,” said Rachel Reeves, the UK’s new chancellor, on July 11. She was commenting on the UK’s Financial Conduct Authority (FCA) approving the biggest changes to its listing rules in over three decades, which take effect from July 29.  “These new rules represent a significant first step towards reinvigorating our capital markets, bringing the UK in line with international counterparts and ensuring we attract the most innovative companies to list here,” she added.

This shake-up of the regulations has long been in the making. The UK markets have been battered by global competition, and London risks losing its stature as one of the world’s leading financial centres.

This move can be seen as similar to Securities and Exchange Board of India’s (Sebi’s) recent series of discussion papers directed towards “ease of doing business.” However, the motivation is different. Sebi’s move followed the 2023-24 Union Budget that tasked the financial sector regulator to review the existing regulators with the aim of simplifying, easing and reducing the cost of compliance. Nikhil Rathi, the FCA boss, indicated that refusing to overhaul the rules would risk the UK regime falling “increasingly out of step with those of other jurisdictions, making it less likely that companies eager to grow choose the UK as a place to list their shares.”

There are several changes, and some are discussed here. For a while, London has allowed companies to list on the “main market” in either the standard or premium segment. A standard listing allows issuers to list by meeting the European Union’s (EU’s) harmonised standards only, while a company with a premium listing is expected to meet the UK’s higher standards of regulation and corporate governance. Both of these have now been merged.

As the motivation is for London to be the preferred place for companies, especially startups, to list and the ripple effect this has on the economy, the FCA’s relaxations are generous in various instances. Permitting dual-class shares is one example.

Dual-class shares structures (DCSS) are the bugbear of all investors. The rationale for issuing DCSS is that they allow a set of shareholders — usually the founders —to control boardroom (and voting) decisions, even as they raise growth capital and dilute their economic interest in the firm. This gives public market investors a chance to participate in the company’s expansion, something that they may not be able to do if such structures were not permitted.     

The FCA, in its document, has cited the reservations that pension funds and other investors have about dual-class share structures; it has also cited studies that argue against DCSS. The report then inverts on itself, arguing that while governance considerations are important, there is no compelling evidence that these are inimical to the market. The FCA has now permitted these. The pressure from the US markets, where these are permitted and where startups prefer to list, has been a compelling reason to let go.

The protection offered to investors is the 10-year sunset clause to DCSS structures — five-years in our Indian market. Unfortunately, some of the other checks that Sebi has put in place in India, like voting on related-party transactions etc, are not included in the UK listing rules.

The focus — to attract startups to list— is also seen in the rules that remove the requirements for a three-year financial and revenue-earning track record.

Two other elements will resonate with our markets. The first deals with the presence of controlling shareholders — typically “promoters” in the Indian market.

Defined as shareholders who control 30 per cent or more of the votes on their own or together with any person with whom they are acting in concert, they are seen as being closely involved in the decision-making.  Therefore, to safeguard the interests of minority shareholders, the company and its controlling shareholder enter into a relationship agreement. Under this they (i) undertake to conduct transactions with controlling shareholders and their affiliates at arm’s length; (ii) the election and re-election of independent directors will be approved by the independent shareholders as well as by all shareholders on normal commercial terms; and (iii) neither the controlling shareholder nor their affiliates, will prevent the company from complying with, or seek to circumvent the proper application of, the listing rules.

There will no longer be a requirement for a written relationship agreement. Instead, if a controlling shareholder proposes a shareholder resolution, the board will need to include an opinion statement in the circular on that resolution.

Linked to this is that shareholder votes will no longer be needed for large transactions (other than reverse takeovers) and related-party transactions. Companies are now being given increased flexibility regarding the timing and content of transaction announcements for significant transactions — rather than needing to release a transaction announcement with prescribed content as soon as possible once the terms are agreed. This is completely opposite of where Sebi has taken us.

There is much more, but what I find curious is that the regulator has repeatedly warned that the new rules will mean a higher risk for investors. It has defended itself by arguing that “the changes we are setting out today will better reflect the risk appetite the wider economy needs to achieve growth and promote a more diversified listed market.” Don’t expect to hear this from our regulators anytime soon. 

The writer is with Institutional Investors Advisory Services India Ltd. The views are personal. X: @AmitTandon_in