The UK Financial Conduct Authority has this month published a Discussion Paper entitled “Review of the Effectiveness of Primary Markets: The UK Primary Markets Landscape”. The paper is wide-ranging in its scope and covers in six chapters key questions concerning the future of both the equity and debt listing regimes in the UK, including the listing of exchange-traded funds, the development of listings by science and technology companies, the creation of a new wholesale bond multilateral trading facility in the UK and the encouragement of wider access to debt markets by retail investors.
However, the most crucial aspect for foreign companies with equity or GDRs listed on London is the future of the “standard segment” discussed in chapter 3 of the Paper, and this is what we will look at this newsletter.
The UK main market listing regime in its current form is divided into a “premium” listing segment and a “standard” listing segment.
This dual structure emerged in the middle of the last decade in the wake of the implementation of EU primary markets legislation which harmonised the securities regimes in European member states, in particular, the Prospectus Directive, the Transparency Directive and the Market Abuse Directive. The perception of the FCA’s predecessor, the FSA, at the time was that while these directives were important in establishing common ground with regard to the legislation for inside information, financial reporting and prospectus disclosure, they were not effective in dealing with issues such as shareholder participation in listed companies. The UK therefore decided to adopt a dual-track approach by creating the two different segments. The premium segment was created as a “super-equivalent” regime, retaining, in addition to the European legislation, much of the UK regulation existing before the European harmonisation relating to governance and other aspects of the ongoing running of companies (for example pre-emption rights). Companies listed on the standard segment, on the other hand, need only follow the minimum requirements imposed by the European Directives.
The standard segment is used by:
Results of discussions with stakeholders suggest that the standard segment is generally seen as unattractive and listings are becoming rarer. This is especially the case for listings by overseas companies, with many companies in recent years having cancelled their secondary listings or migrated over to other exchanges such as the AIM.
The FCA postulates a number of reasons for this decline:
The standard segment remains the default regime for Global Depositary Receipts (GDRs). However, the FCA points out that GDRs are targeted at sophisticated investors and are thus generally inaccessible to retail investors wishing to invest in overseas companies.
The listing and governance requirements of an international segment would be more tailored to the particularities of international corporations, especially those companies which have large family or government shareholdings whose control rights are incompatible with a conventional premium listing.
On the other hand, the new segment would also aim at attracting a more diversified panel of investors by offering them appropriate protections, such as the requirement to appoint a listing sponsor, a minimum market capitalisation, unqualified working capital statements, and an unqualified audit report.
These protective measures will be further developed based on the responses to the Paper, the deadline for which is 14 May 2017.
It is as yet unclear how the plans for an international segment would affect the standard segment, and whether the standard segment will remain as it is, be scrapped completely, or simply undergo a name change to render it more appealing. Discussions will be carried on in the context of the “Brexit”, and this will add an additional dimension to the analysis since, following the UK’s withdrawal from the EU, harmonization of UK rules with those of the EU is likely to gradually diverge meaning that the standard segment will lose one of its roles: that of being an equivalent to a normal equity listing in other EU member states.
For those companies which have traditionally listed on the standard segment because they are unable to fulfil the “super-equivalent” requirements of the premium segment, the FCA will be keen to remain competitive to ensure that London retains an appropriate listing platform to avoid companies going elsewhere.
The future of GDRs listed on the standard segment is also uncertain. The FCA will want to keep its considerable GDR business, especially from emerging markets issuers, and indeed the Paper singles out both Russia and Kazakhstan as significant contributors to London IPO volumes in previous years. It remains to be seen whether GDRs will remain on the standard segment or migrate over to any newly-created international segment.