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Aramco: King Kong ping pong

When Saudi Arabia unveiled plans to float Aramco, an old gag appeared to apply, as follows. Question: where does an 800 pound gorilla sit? Answer: anywhere he likes. New York and London were vying to lure an oil company valued at $2tn to their stock markets. With obstacles looming, Aramco now resembles a 400 pound orang-utan less sure of securing a comfortable foreign perch.

Law firm White & Case has told Aramco a New York listing could in certain circumstances embroil it in lawsuits brought by the families of victims of the 9/11 attacks. The Investment Association, which represents UK fund managers, has warned against any relaxation in listing rules. These have been mooted as the price of bringing Aramco to London.

The IA may be worried a full listing could allow the oil group to join the prestigious FTSE 100 index and receive automatic investment from passive funds. A free float of at least 25 per cent for UK-registered vehicles is stipulated by two gatekeepers: FTSE Russell, the indices subsidiary of the London Stock Exchange, and the UK’s Financial Conduct Authority.

Their rule books contain waivers that could permit Aramco to achieve its target free float of just 5 per cent, still worth $100bn at the upper end of estimates. The IA believes scale is irrelevant to good corporate governance. It argues minority investors need to hold at least a quarter of a company’s shares to guarantee this.

London tightened listings rules a few years ago following corporate governance debacles at foreign-controlled groups, such as Eurasian Natural Resources Corp, a chaotic Kazakh miner. The lesson FTSE Russell and the LSE should remember was that bending rules to suit high rollers can tarnish the reputation of the whole market.

The impact of Aramco on the FTSE 100 should not be overstated. Lex has valued the company at about $900bn after discounting heavy costs. Index weightings reflect free float levels, moreover. Aramco would thus be worth only 1.9 per cent of the FTSE 100 at its current level, the same as National Grid, a power distributor.

The real gorilla in the room is passive fund management that has left index compilers as the new king makers. Beneath a gloss of impartiality, some of their decisions may prove every bit as arbitrary as those of old-style active managers.

Email the Lex team at lex@ft.com