Thursday, September 14, 2006

Ed Balls moves to protect the London Stock Exchange

Ed Balls announced yesterday that he will be putting through legistation to protect the London Stock exchange from attempts by foreign regulators to encroach.

``The Sarbanes-Oxley regime in the U.S. is not a regime that some companies find easy to deal with,'' Ed Balls, U.K. treasury economic secretary, told reporters in Hong Kong today. ``Were there to be an exchange of ownership, this could have the effect over time of rules from other countries being imported into the U.K.''

The government will legislate to let Britain's securities regulator block any new owner of LSE from changing rules on the market, Balls said in a statement. The Financial Services Authority will seek to ``strike a balance'' between protecting investors and the effect of proposed rules on companies, he added.

Sarbanes-Oxley is the onerous rules-based US regulation introduced after Enron, which has tripled accounting costs as a percentage of revenue for companies with market values of less than $785 million, according to a U.S. Securities and Exchange Commission advisory panel.

Once you are listed on the American exchanges, it is very difficult to delist as you have to prove you have fewer than a 100 American shareholders. International companies who are going public for the first time are therefore seeking to list in Europe instead, in particular they are going for listings on the LSE.

2006 has already become a record year for listings according to the LSE who say:

So far this year, IPOs on the Exchange's markets have raised £17.8 billion, exceeding the £17.4 billion raised by IPOs during the whole of 2000.

During July, the Exchange attracted 25 IPOs, raising £7.4 billion between them. On the Main Market, there were eight IPOs, of which three were international companies, raising £3.9 billion between them. The five IPOs on the UK Main Market raised a total of £3.0 billion – the best single month since July 2000 in terms of money raised. On AIM, there were 17 IPOs, raising £563.0 million between them. Of these, four were from international companies, which raised £120.9 million between them.

London is now running neck-and-neck with the American exchanges - the new listings on the American exchanges are mainly domestic, while little old London is cleaning up the international market. According to the Observer:

London remains the most attractive market for international IPOs, with 37 companies from abroad raising €1.8bn here. The City has proved to be an especially attractive destination for companies from the former Soviet Union following the successful float of Sistema, the Russian telecoms group, last year.

The figures reflect a growing reluctance on the part of Russian and other firms to accept America's Sarbanes-Oxley corporate governance rules.

There are signs that American exchanges are reacting to this by seeking to export their regulatory regime by simply taking over European exchanges, where the American ownership would then make them subject to US regulation and remove their competitive advantage vis-a-vis America. The members of the 200-year old LSE chose to give up it's private status and floated on July 20th 2001, immediately making it a target for bid after bid. So far they've kept the predators at bay, but the odds are that they might succumb at some point. NASDAQ has already built up a 25.1% stake in the LSE.

Mr Balls' legislation is designed to ensure that if the LSE falls to a foreign bid, the regulatory regime will continue to remain British. His intervention wouldn't have been necessary if the members of the LSE had had the sense to keep the exchange private, but given that they've floated, thank goodness the Labour government has come to the rescue!

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