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Thrills and frills in Aramco’s IPO

By Sonny Atumah

International stock exchanges have intensified lobbies on which financial centre gets the nod to sell the Kingdom of Saudi Arabia’s state owned oil company, Saudi Aramco’s shares in initial public offering, IPO.

The public offering was announced in January 2016, by the recently declared crown prince, and promoter of the Kingdom’s Vision 2030, Muhammed Bin Salman. The Saudi Aramco company valued at US$2 trillion has been described as the world’s biggest public offering in recorded history.

Expected to be floated in late 2018, the five percent equity stake to be sold would make the listed company the global most valuable company.  It would be part of the vision 2030 plan to diversify the Saudi economy and reverse budget deficits occasioned by the 2014 oil price slump.

The proceeds of the traded company would be invested in non-oil industries to reduce the Saudi economy’s reliance on oil. With the global campaign against carbon emission and fossil fuels the Saudis hope to invest in technology to transform and diversify their economy.

The 95 percent balance in the Aramco deal will be transferred from the government to the Saudi Public Investment Fund, PIF. The PIF was established in 1971 to operate as a sovereign wealth fund and also finance projects locally and internationally.

Two stock giants, the New York Stock Exchange and the London Stock Exchange are jostling to win the listing out of the sixteen ‘Trillion Dollar Club’ members globally.  Saudi Aramco has become the bride-to-be; wooed by many venues for the record listing. Each member in the 16 stock exchanges has a market capitalization of over 1trillion dollars.

In an IPO the issuer obtains the assistance of an underwriter to determine the type of security to issue, the best offering price, the amount of shares to be issued and the time to bring it to the market. Saudi Aramco has appointed JP Morgan, Morgan Stanley and HSBC as financial advisers for the listing. These banks are lead underwriters and global coordinators for the IPO.

Although Saudi Aramco has been allegedly overvalued many believe that its real value depends on the price of oil and the taxes for its revenues.  Saudi Arabia has laid an industrial base to attract investors in its IPO.  Analysts believe that the production cut by OPEC late 2017 for price stability was orchestrated by Saudi Arabia to favour its IPO listing.

Again Saudi Arabia considerably enticed investors by cutting the tax rate for large oil producers including Aramco from 85 percent to 50 percent. Aramco would benefit from the new tax rates effective March 2017. Although, investors often discount the value of largely state-owned companies to account for political risks, the confidence in Saudi Arabia is determined by the link between Aramco and the kingdom’s use of economic stratagems.

With a strong crude reserve and global refining capacity Saudi financial advisers’ opinion tilt towards the New York Stock Exchange believing that it has the greatest global pool of investors while legal concern is against listing in New York.

Legal experts believe that the 2016 United States Congress legislation on terrorism encouraged families of victims of the September 11, 2001 terror attacks to sue Saudi Arabia in American law courts. Since shareholders have the rights to sue companies for regulatory violations, Aramco’s assets in America including the biggest refinery Motiva are all vulnerable to legal action.

The UK is influencing Saudi Aramco to get the listing. Last April the UK Prime Minister, Theresa May, and the LSE head, Xavier Rolet, shuttled Saudi Arabia to meet Aramco’s Chairman, Khalid al-Falih, who is also the kingdom’s Energy Minister.

Already the United Kingdom’s Financial Conduct Authority, FCA has accused the LSE of dishonesty in laxer listing rules to become the preferred exchange for the Aramco listing. The FCA created a new listing category for state owned oil companies, exempting them from certain rules that apply to others including allowing it to have a premium listing.

The Guardian of London reported that the FCA’s proposal would allow state-owned companies to qualify for a premium listing—which has more onerous corporate governance rules—without having to meet two criteria. One relates to how the company and the controlling shareholders conduct deals with each other, and the other allows investors a vote on independent directors.

Investors have warned that the FCA’s proposal to create a new category for firms controlled by a shareholder that is a sovereign country could damage London’s reputation for protecting shareholders in companies that have dominant owners.

In the UK, companies with less than 25 per cent are prevented from a free float into the FTSE 100. The Index ground rules for premium listing in London include minimum free floats of 25 percent for UK incorporated companies and 50 percent for non-UK incorporated companies. A reversal will affect corporate governance that protects minority shareholders in the UK.

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