A quiet revolution is going on in the UK stock market. Principles that have underpinned London’s reputation for high standards of corporate governance are being diluted.
The Financial Conduct Authority has already relaxed requirements for its premium-listed segment to allow dual-class shares and a reduced minimum free-float of 10% rather than 25%. This waters down the one-share, one-vote principle and shows a short memory of the price distortions caused by limited free-floats during the tech bubble.
Single standard
Now the FCA is considering, in its primary markets effectiveness review, merging the premium and more relaxed standard segments into one. But in a sign that high standards of investor protection cannot be squared with a hit-and-miss approach to corporate governance, the requirements for premium listing would be maintained on a voluntary basis.
My bet would be that the 400 or so companies with a premium listing would opt for this and that their appeal to investors will still be reflected in tailored indices. In any case, existing FTSE 100 and 250 constituents are unlikely to rush to drop their standards.
But the relatively small number of premium-listed companies (as opposed to investment vehicles) on London’s senior equity market is an indication that it has become rather rarefied (the Aim and Aquis markets are regarded as junior). Further evidence of this was cited in the Kalifa and Hill reviews, which lamented the falling number of initial public offerings (IPOs) in London.
The irony is that the London equity market has dodged bullets in not attracting as many flaky tech companies as the Nasdaq
If this exercise is not simply to be a dumbing-down, one option is to extend the premium requirement for companies to follow the UK’s corporate governance code to the new catch-all segment. After all, the ‘comply or explain’ model is flexible enough to allow companies to duck requirements they find irksome.
Overall, the proposals, which include potential simplification of requirements for IPO prospectuses, depend on honest and complete disclosures by companies, and on shareholders engaging with them. This is rather idealistic since the shares in question are mostly held by institutions with large portfolios and a reliance on automated screens to count companies in and out of different funds.
The irony is that the London equity market has dodged bullets in not attracting as many flaky tech companies as the US’s Nasdaq exchange. In any case, as debt becomes more expensive, the scales are shifting towards a revival in equity funding, albeit under duress.
Secondary fundraising
Less controversial are various reforms of fundraising conditions for existing listed companies – the Austin review of secondary capital raising is well worth reading. Covid prompted shareholders to allow companies to raise up to 20% of their share capital in a placing, without pre-emption rights. With the blessing of an annual shareholder vote, and overall monitoring by the Pre-Emption Group (which represents listed companies, investors and intermediaries), this is likely to become permanent.
Other good ideas include doing away with compulsory fundraising prospectuses. Investors already receive regular financial updates to the last annual report, and should have been informed of any price-sensitive changes. I would still want to see a working capital/indebtedness statement.
The dangers of relaxing regulation are clear but the pendulum is swinging in that direction. Let’s hope the fine intentions of promoting growth and strengthening London’s position are realised before the next scandal sends the pendulum back the other way.
