As Britain's stock market watchdog pores over the implications of scandals at mining companies ENRC and Bumi, the role of sponsor banks who helped lead their listings is coming under scrutiny. Such banks act as liaison with regulators and vouch for the firms they are listing in an "eligibility" letter, putting them potentially in the firing line if problems develop at the companies they worked for.
Regulators are already bringing in changes, some prompted by issues raised by the two miners, and say they have increased their focus on the role of sponsors. They made changes to the rules last year, including expanding the circumstances in which a sponsor must be appointed, and have more reforms planned for the listing rules.
For sponsor banks it all adds up to an increasingly costly and bureaucratic process which some argue could deter them from acting as sponsors in future.
Yet some investors have accused banks of letting standards slip in the race for boom-time listings, and of ignoring common sense towards a sector which delivered rich returns in recent years.
Resource and mining firms accounted for just under a third of the investment banking fee pool in London since 2011, according to data from Thomson Reuters/Freeman Consulting. In aggregate across the last decade, the mining sector has been the second-highest contributor of deal fees for banks after the financial sector, the data shows. Some lawyers at top firms advising leading banks said they expect investigations and increased scrutiny.
"It is a challenge," said Nicholas Holmes, partner and head of equity capital markets at law firm Ashurst. "ENRC, Bumi - it all leads to a feeling on the part of the regulator that they need to control more, and they need to put an onus on somebody to take more responsibilities for these things.
"That translates into further burdens for the sponsors."
The issues have come into focus following problems at Kazakh-focused ENRC, which listed in London in 2007, and Indonesia-orientated Bumi, which listed in 2011.
Both have been hit by corruption probes and shareholder battles that have battered their shares, raising questions about how they came to market.
ENRC is facing a potential buyout by its founders at less than a fifth of its value at 2008 peaks. Its sponsor was Deutsche Bank, which made almost $37 million in fees on the deal, according to Thomson Reuters data, but which has since resigned as the company's corporate broker. Bumi's sponsor bank was J. P Morgan, which made $11 million with the listing of Bumi and predecessor shell company Vallar, according to Freeman Consulting.
J. P Morgan had sent its eligibility letter on Bumi to the UK Listing Authority (UKLA) just a year before a damaging corruption probe. The UKLA is the body which administers stock market flotation rules.
Bumi listed after a deal between financier Nat Rothschild and Indonesian investors led by the Bakrie family. The tie-up involved miner Berau, a stake in Bumi Resources and an indirect holding in Bumi Resources Minerals (BRM) being folded into shell company Vallar.
In the letter, which was seen by Reuters, J. P Morgan, which was adviser to both Bumi Plc and Vallar, highlights its "considerable experience of doing business in Indonesia" and its "long-standing relationship" with the companies and their management.
Indeed, it took Berau and BRM public in Jakarta. "The management of Berau and Bumi were questioned at length and in person in Asia on corporate governance matters and on allegations of bribery," it says in an appendix to the letter, referring to questions by "Vallar and its advisers".
"Vallar was satisfied with the responses provided by the management teams to these enquiries and is comfortable that both companies have adequate controls in place," the letter said.
The allegations in question, according to a source with direct knowledge of the matter, regarded tax avoidance and payments to an Indonesian tax official convicted of bribery, which were also included in Bumi's prospectus.
Bumi said at the time that no charges were filed and an internal investigation found the allegations to be groundless. But Bumi's controls were called into question, with allegations of corruption in a whistleblower investigation just over a year after the listing. Its shares are still suspended as it reviews the accounts of unit Berau.
Further changes to the listing rules expected to be detailed in the coming weeks do not involve further alterations to rules providing for fines and suspensions of errant banks. But the UKLA is being pressed to pay closer attention to banks' actions, given it has only rapped the knuckles of one new issue sponsor in more than a decade of regulating London listings.
In 2011 it censured BDO for failing to alert it that a transaction involving its client Shore Capital was likely to constitute a reverse take-over. "These things (ENRC and Bumi) were seen by many as accidents waiting to happen before they were even listed," said Tim Bush, head of governance and financial analysis at advisory firm PIRC.
The use of sponsor banks is not unique to London and dates back to the London Stock Exchange's (LSE) roots as a members' club, when a new company wanting to be admitted would need to be sponsored by an existing member.
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