By Sinead Cruise and Kylie MacLellan
LONDON, June 30 (Reuters) - Just as Britain's government istrying to clear a path for the politically sensitive sale of its39 percent stake in Lloyds bank, resentment is brewing among theinvestors who would be expected to buy the stock.
Some fund managers say they are wary of buying stockreleased in staggered sales until banks and regulators clarifythe rules on how quickly company owners are allowed to sell moreshares - a dispute that could hurt large stock offers such asLloyds.
They say they have been burned before by banks allowingowners to bypass lock-up agreements, which are meant to preventtoo much stock hitting the market too fast and pushing the shareprice down.
Any boycott could complicate the privatisation of LloydsBanking Group, one of the government's mosthigh-profile strategies to show it is improving Britain'snational finances and getting banks to lend more to businesses.
"Decisions to blacklist are on people's agenda," said onefund manager at a UK investment house running around 80 billionpounds in assets. "This goes right to the heart of whether wehave trust in the markets in which we operate."
This shareholder and the other investors who talked toReuters all declined to be named because of the sensitivity ofthe situation.
The debate was prompted by a deal in May, where Lloyds sold15 percent of wealth manager St James's Place, just over10 weeks after a previous sale, despite having agreed not toreduce its stake further for at least a year.
The lock-up was waived by bookrunner Bank of America MerrillLynch. Lloyds and BoAML declined to comment.
Although lock-ups are waived relatively often, and investorsare warned that the timetable for additional share sales canchange, it usually happens closer to the expiry date than in theSt James's case.
A person familiar with the matter said the sale had thebacking of the Treasury and of UKFI, the organisation whichmanages the government's stakes in banks, because Lloyds neededto boost its capital, and the offer drew strong demand.
However, investors say they want clarity on the terms andconditions under which such agreements can be waived.
The government has flagged it is ready to start offloadingshares in Lloyds and on Friday began the process of appointingadvisors for the sale, which is expected to take placeincrementally over many months.
Further down the line, the government will also look to selldown its even larger stake - 81 percent - in Royal Bank ofScotland.
"It is very important the authorities do what they can toshore up investor confidence before the likes of Lloyds and RBScome to market. They will be some of the biggest partial stakesales seen for a long time," said a second UK investor at a fundmanagement firm running around 50 billion pounds ($76 billion)of assets.
UNDERMINES INTEGRITY
The Association of British Insurers (ABI) has written toregulator the Financial Conduct Authority (FCA) asking them tolook at the issue of lock-ups and their importance inmaintaining an orderly market, three people familiar with thematter said. The ABI declined to comment.
Some investors are waiting for the outcome of the ABI'sdiscussions with regulators and bankers on whether Lloyds andits advisers behaved appropriately before deciding whether toimpose boycotts.
A spokesman for the FCA said the regulator was aware of theissue and was looking into whether this comes under its remit.
People working in equity capital markets say waiving alock-up is not a decision which is taken lightly, and is onlyusually done when a stock price has performed strongly,investors want more shares and the seller has a legitimatereason for wanting to raise money.
"While exercising waivers does undermine the integrity ofany other lock-ups, generally such early sales are only likelyto happen when there is reasonable market demand, thus clearingshare overhangs when the market has the appetite," a thirdinvestor said, echoing this sentiment.
St James's Place shares had risen 25.5 percent between thefirst and second sales. The second sale was done at a 9.4percent discount and after the sale the shares opened nearly 11percent below the previous day's closing price.
"There is a requirement on companies to take all reasonablecare to make sure that any announcement they make to the marketis not misleading, false or deceptive and doesn't omit anythingthat is likely to impact the significance of what they areannouncing," the first investor said.
"There is a real question here about whether thiscontravenes the rules and the FCA needs to clarify this."
Lloyds (LLOY)