Salomon stops making grey market in Zeneca: Stock Exchange request halts dealing until after the rights price has been announced

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The Independent Online
SALOMON BROTHERS, the US investment bank, has stopped making a market in shares of Zeneca and new ICI, the two companies that will be created when Imperial Chemical Industries splits in June, following a request by the London Stock Exchange.

Salomon has been making a market in the two companies' shares since Tuesday and this morning was quoting prices of 690p for Zeneca and 590p for new ICI. Dealing in the shares will not start until 1 June and there will be no indication of the price of the two stocks until the prospectus for Zeneca's pounds 1.3bn rights issue is published on 12 May.

ICI's shares closed at pounds 12.89, up 11p.

Dealing in shares that have not been issued - known as grey market trading - by Stock Exchange members is banned unless the exchange expressly permits it. Although Salomon used a subsidiary that was not an exchange member for the trading - so had not broken any rules - it still agreed to the request.

The episode has prompted the exchange to conduct a review of the rules for grey market trading with the aim of establishing a new framework that will determine when such trading is allowed. It is becoming increasingly common, although rules have so far been built up on a piecemeal basis.

The exchange is concerned that, because only one firm was offering the service, it was not available to all investors on an equal basis and not all relevant information - including the rights price - was available. It is, however, likely to sanction grey market trading for members after the rights price is announced.

There has been a grey market in other demergers, such as Racal, but a Stock Exchange spokeswoman said the information was more widely available and there was no pricing issue.

It is also common before gilt auctions, but deals are generally between market professionals and help the Bank of England determine the auction price. The exchange has also allowed members to participate in grey markets on international issues, such as Euro Disney and SmithKline Beecham, to avoid them losing out on business opportunities.

Meanwhile, the High Court has ruled that Zeneca shares, one of which will be given free to investors for every ICI share held, should be treated as capital, not income, by trustees.

The decision avoids a potential problem for trustees who have to pay income to one set of beneficiaries, while retaining the capital for others. The case was supported by ICI, which was concerned that trustees might feel obliged to sell the shares to escape the problem.

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