The London Stock Exchange (LSE) is stepping up efforts to woo mainland enterprises that have become increasingly wary of the severe regulatory regime of the New York bourse.

Emphasizing the London exchange's high standard of integrity, its chairman, Chris Gibson-Smith, says that it "can be more flexible" when compared to New York. Such flexibility arises out of a different approach rather than a different standard in governance, according to Gibson-Smith.

Speaking to China Daily in Hong Kong, Gibson-Smith says that while the US has adopted a regulatory-oriented structure augmented by stiff penalties, "the UK has always been different".

"We define in principle how they (listed companies and market participants) should behave," he says.

"Both approaches have produced the same end-product, and that is a market of the highest standard." Gibson-Smith says he believes that the focus on broad principles rather than on detailed rules obviously allows for a greater degree of flexibility.

This particular distinction could be a major factor in swaying mainland entrepreneurs and corporate executives towards London as they look to tap its market for new capital at a time when liability risks are on the rise as a result of tightening US securities regulations and reporting requirements after the Enron and Worldcom debacles.

The severity of the US' regulatory regime is exemplified by the Sarbanes-Oxley Act of 2002, which is widely believed to have made achieving a US listing much more onerous than before.

The strict requirements of the Act pose an even greater challenge to mainland enterprises which operate under a markedly-different market environment and accounting standards.

Under the new rules, mainland enterprises seeking a listing in New York will invariably need to go through a tedious process of setting up an entirely new and complicated in-house system of financial reporting and management procedures and controls.

Such a structure becomes very complicated because it has to encompass the entire chain of reporting, from top management all the way down to the line operators.

There are no shortcuts because the Act seeks to hold individuals throughout the reporting chain responsible for any irregularities. What's more, the penalties are stiff. Transgressors are liable to fines of US$5 million and/or 20 years in prison.

Another distinction between London and New York lies in the litigation environment. While the legal systems of both jurisdictions are based on common law, the US is seen to be a great deal more plaintiff-friendly, especially for commercial cases.

For instance, the Sarbanes-Oxley Act has made it possible for a simple restatement of accounts to form the grounds for a class-action suit by shareholders. This risk of litigation was made obvious to mainland executives and entrepreneurs by the class-action suit filed in a US district court by US shareholders against the management of China Life for alleged accounting irregularities.

(In 2003, China Life, the mainland's largest insurer, launched the year's largest IPO amounting to US$3.46 billion in New York and Hong Kong).

Class-action that is seen to lead to "spurious" litigation does not exist in the UK, says Gibson-Smith.

"We don't have class-action suits," he says. He recalls that during the 20 years he worked in the US, he was dogged by a class-action suit which was only recently dropped.

"It was really very unpleasant," he says.

Other than the risk factor, the actual cost of a London listing can be substantially lower than one in New York.

For example, the cost of meeting the disclosure requirements of the New York stock exchange and the Securities Exchange Commission of the US can amount to more than US$2 million a year, compared with less than US$1 million in London.

What's more, the listing fees on the London Stock Exchange amounts to a maximum of US$30,000 a year, compared to US$500,000 for New York. Of course, New York, being the biggest capital market in the world, has its allure. Liquidity, for instance, is never an issue, even for the largest IPOs.

Although the London market is considerable smaller than New York in total size, it is seen as more international because a much larger portion, some 40 per cent to 50 per cent of the shares traded on the London stock exchange are foreign, compared with less than 15 per cent on the New York exchange.

More importantly, London is a global fund management centre. Around US$4.5 trillion worth of funds are managed by London-based institutions, and these highly sophisticated investors definitely have a global outlook, says Gibson-Smith.

"The investment managers in London are very professional people with an in-depth knowledge of China," Gibson-Smith says.

"They are well aware of the potential value of mainland enterprise shares and the level of risks involved in investing in them."

In such a highly professional market, fair pricing can be assured and liquidity should not be an issue, he says.

While he was group managing director of British Petroleum, he presided over a decision to buy in an IPO issued by one of the mainland's leading oil companies, Sinopec. That investment was sold after a few years at a 40 per cent profit, he says.

Gibson-Smith says that up till now, the London exchange has not made enough effort to promote its advantages to Asia in general or on the mainland in particular. This is going to change, he says.

To show its commitment to this region, the exchange recently opened an office in Hong Kong that "will be targeting large privatization deals and stock flotations to large enterprises in China," Gibson-Smith says.

Meanwhile, the exchange will continue to "promote dual listings in London and Hong Kong through a single prospectus," he adds.

The "single prospectus" concept is a reflection of the exchange's more flexible approach to documentation.

It allows foreign companies listed on the exchange to submit reports on their activities in the currencies of their respective countries of origin. However, the quality of companies allowed on the exchange must meet the highest international standards, Gibson-Smith says.

Total capitalization of the London market amounts to about US$6 trillion. More than half of that amount is the combined value of foreign stocks. Such a high level of internationalization has made "the (London) exchange a natural home for Asian, particularly Chinese companies' shares," Gibson-Smith says.

(HK Edition 11/02/2004 page16)