London Push to Tame Foreign Oligarchs May Trim City IPOsRuth David and Matthew Campbell
Over the last decade London became a second home for billionaire resources oligarchs attracted by its stability and flexible tax laws.
Their companies soon followed as commodities empires from Kazakhstan’s Eurasian Natural Resources Corp. to India’s Essar Energy Plc filed initial public offerings on the London Stock Exchange, gaining access to a vast pool of investors and the imprimatur of a Western bourse. The listings provided steady work to the British capital’s bankers and lawyers.
Now, the trend has put U.K. financial regulators in a bind. A series of financial and boardroom controversies at some foreign billionaire-controlled businesses shows that the oligarchs are acting as if their companies are private, investors and analysts say. Regulators have responded by proposing to rein in the power of dominant shareholders while stepping carefully so as not to drive away foreign firms, which account for more than half of London banks’ IPO fees.
The measures may require independent directors be in the majority for companies with “controlling shareholders,” who themselves would be barred from influencing day-to-day operations.
“The proposed measures may succeed in curbing questionable corporate governance practices, but may also result in companies opting for destinations that don’t have as many rules governing IPOs,” said Christopher Laing, Deutsche Bank AG’s managing director for equity capital markets for emerging countries. “Markets like those in Hong Kong, Singapore, Amsterdam and Frankfurt are viable destinations for companies from emerging markets looking to list overseas.”
Much is at stake for the City, London’s financial district. Foreign firms accounted for 65 percent of the $8.1 billion that companies raised from IPOs in London last year, according to data compiled by Bloomberg. That’s up from 2010, when overseas businesses accounted for 54 percent of the $13.8 billion raised through initial share sales in London. Globally, London hosted 31 percent of all cross-border IPOs by amount raised last year compared with 55 percent in the U.S., according to PricewaterhouseCoopers LLP.
“There have never been any barriers preventing foreign companies from entering London,” said Clifford Tompsett, senior partner for capital markets at PricewaterhouseCoopers LLP in London. “It is perceived as a more open market globally.”
That openness has contributed in part to the City’s troubles, said George Dallas, director of corporate governance at London-based F&C Management Ltd., which manages about 95 billion pounds in assets. “Some of the companies are from countries with different rules and standards of law and order,” he said.
One incident that sparked investor complaints occurred at ENRC, which is controlled by a trio of Kazakh billionaires. Two independent directors were voted off the board and two others resigned in 2011 after tensions rose between them and the founders over a controversial mining project in the Democratic Republic of Congo.
ENRC’s three founding investors, Alexander Machkevitch, Patokh Chodiev, Alijan Ibragimov and his family together own nearly 44 percent of the company.
The company’s chairman, Mehmet Dalman, may leave over a disagreement with company executives on “issues of principle,” the Financial Times said this week, citing a person it didn’t identify. The shares, which have slumped by more than half since ENRC’s 2007 IPO, fell 4.7 percent in London percent yesterday, the most in more than two weeks.
Dalman is leading an internal probe into allegations of fraud in connection with ENRC’s assets in Kazakhstan, the paper said. In a statement, Dalman said he’s committed to the role.
“Our chronic failure to meet the governance standards expected of a FTSE 100 company was eventually laid bare,” director Ken Olisa wrote in a farewell letter after he was voted off the ENRC board.
In another governance controversy, Essar Energy, an Indian oil and gas producer that listed in London in 2010, replaced chairman Ravi Ruia with his 44-year-old nephew in 2011. Ruia resigned when he was charged with concealing certain facts as he sought licenses to run mobile-phone services in India.
Ruia and his brother Shashi control 77 percent of the company, and shareholders easily approved the appointment of Prashant Ruia over objections from Pensions Investment Research Consultants, a U.K. investor group, which said he could not be independent based on his close connection to his uncle.
Essar Energy shares have declined 66 percent since its IPO. Ravi Ruia has pleaded not guilty to the charges. A spokesman for the company declined to comment.
Incidents like these underscore the need for greater shareholder rights and protections, said Reuben Edelson, a proxy adviser at shareholder-advice firm Glass Lewis & Co. LLC in Limerick, Ireland.
“I think people look to London as a stable market to invest in, and then you have incidents that flip these things upside down,” he said.
More recently, mining group Bumi Plc was rocked by a dispute between Indonesia’s billionaire Bakrie family and co-founder Nat Rothschild. The scion of the Rothschild banking dynasty had tried to take control of Bumi’s board from the Bakries, who own 30 percent of Bumi, amid a probe of alleged financial irregularities.
The governance measures are expected to be finalized by the U.K.’s new Financial Conduct Authority as soon as next month. They may require that independent directors constitute a majority of the board at companies with a “controlling shareholder” -- defined as holding at least 30 percent of stock. To ensure autonomy, an independent director’s appointment would need approvals in separate votes from minority shareholders as well as all investors.
Another provision could reinstate a rule, dropped in 2005 by what was then known as the Financial Services Authority, that bars controlling shareholders from influencing the day-to-day running of a company. The new measures would apply to both new issuers and listed companies.
“The move to tighten listing requirements in London can be linked to companies which, although public, continue to act as private,” said Mariyam Zhumadil, an analyst at investment bank Halyk Finance JSC in Almaty, Kazakhstan.
In a statement releasing its proposals before the FCA took over financial regulation, the FSA wrote that while reforms are “necessary at this time,” the measures should not be so stringent as to deter new IPO listings.
It proposed, for instance, to keep unchanged, at 25 percent, the minimum portion of shares that an IPO candidate must have openly traded and to cap any exceptions to the rule at 20 percent. Activist investors were seeking at least a 50 percent minimum free float as a bulwark against dominant shareholders. Such a “blunt tool” could “only be effective at the cost of damaging London’s attractiveness to issuers,” the FSA wrote.
By contrast, the benchmark FTSE 100 Index, responding to investor complaints, is raising the minimum free float to 25 percent from 18.4 percent to qualify for inclusion in the index. Inclusion in the FTSE 100 generally benefits share price as some mutual funds are required to buy all the stocks in the index.
For investment banks, IPOs are among the most lucrative advisory businesses. They earned about $154 million in IPO underwriting fees in London in 2012, according to researcher Freeman & Co., about 53 percent from foreign companies. JPMorgan Chase & Co. is the top-ranked underwriter in the City this year, with estimated fees of $14 million, Freeman said.
“The FSA needs to be careful not to throw the baby out with the bathwater,” said Charles Jacobs, a partner at London law firm Linklaters LLP. “They need to strike the right balance between welcoming multinational companies and coming up with sensible measures that regulate but aren’t excessive.”