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Aramco IPO: Alliance, defiance and danger!

There is big hype going on in the Saudi IPO scene.

Aramco’s share sale, potentially the biggest equity sale in history, will take place in the second half of this year.

The sale of up to 5% of Saudi Aramco is the main focus of Prince Mohammed bin Salman’s vision 2030 intended to create a $2 trillion sovereign wealth fund to end the kingdom’s dependence on oil.

While some countries are keen on investing in this IPO or listing Aramco’s shares on their stock exchanges, others are not likely to make any concessions to lure what could be the world’s biggest IPO.

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But above all this, great danger is looming in the horizon.

So what’s the hype all about?

Potential alliance

According to Reuters, Russian pension funds are considering investing in Saudi’s Aramco in a bid to boost Moscow’s partnership with Riyadh.

“Moscow and Riyadh should be coordinating oil policies for many more years,” Reuters quoted the head of Russia’s Direct Investment Fund, Kirill Dmitriev, as saying.

“We see great interest in the Aramco IPO from Russian pension funds as well as from our Chinese partners,” said Dmitriev.

In 2017, Chinese state oil companies announced that they were willing to become key investors in the Aramco IPO and even China itself proposed to buy outright the entire 5% at discounted prices.

UK bending rules

In 2017, the Financial Conduct Authority (FCA) proposed relaxing existing rules to allow sovereign-owned companies to list on the London Stock Exchange, according to Business Insider (BI).

“The move is believed to be almost solely a means of making the UK more attractive to Saudi Aramco’s bosses,” said BI.

BI explained that under new proposals, the regulator would create a new category “within its premium listing regime” for sovereign-owned companies looking to enter the market.

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“Regulatory protections for investors lie at the core of the listing regime,” BI quoted Andrew Bailey, the FCA’s chief executive, as saying.

“Refining the listing regime in this way would make UK markets more accessible whilst ensuring that the protections afforded by our premium listing regime are focused and proportionate.”

FCA has also proposed loosening free float requirements.

London Stock Exchange (LSE) CEO Xavier Rolet told Bloomberg last year that there is no governance rule in place that would require the LSE to insist on any company listing at least 25% of its shares on a premium market.

US defiance

While US President Donald trump expressed last year how much the US would appreciate Aramco’s IPO listing on New York Stock Exchange, the US declared that it is not ready to “bend over backwards” to lure the IPO.

Reuters quoted John Tuttle, who is in charge of global listings at the NYSE, as saying that the exchange “would not need to water down its stricter disclosure requirements to land such a huge IPO.”

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“You don’t see the United States bending over backwards to accommodate any specific company like you see in other jurisdictions,” he told Reuters in an interview on the sidelines of the World Economic Forum in Davos.

Tuttle defended NYSE saying that “the greatest companies in the world are listed on the New York Stock exchange and disclosure is one of the pieces of that, and part of the reason why our market is robust and as liquid and investor-based as broad as it is, is because it’s a very transparent market place.”

The NYSE listing is also tricky.

“Aramco’s lawyers have warned about litigation risks linked to the US Justice against Sponsors of Terrorism Act. Passed last year, the law allows the Saudi government to be sued on the grounds it helped plan the Sept 11, 2001 attacks on the United States,” said media reports.

Saudi has recently asked that all lawsuits by families of victims of the Sept 11 2001 terror attacks be dropped against the kingdom for lack of evidence

Tadawul bourse carnage

According to media reports, Saudi Arabia has shortlisted New York, London and Hong Kong – each alone or in a combination of two or even all three – for the listing.

But the kingdom is also planning on listing Aramco shares on the local exchange market Tadawul.

State news agency SPA said that the Shura Council’s fiscal committee has asked the Capital Market Authority (CMA) to make sure that the stock market’s liquidity does not become concentrated on the giant oil company alone.

There is concern in Saudi financial circles that the IPO could be too large for the local market to absorb, according to SPA.

“The Saudi market only has a capitalisation of about $470 billion, meaning it could be destabilised by Aramco’s listing if other stocks are sold heavily to raise funds for investment in the oil company.”