How Meloni’s new ‘capital bill’ will backfire on Italian companies

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Forget the frenzied excitement of the past few weeks when the S&P 500 and U.S. indexes hit record levels. The FTSE MIB index, made up of Italy’s 40 biggest stocks, is where the real boom story lies. Over the past three years, the Italian benchmark has outperformed the S&P 500 index on a local currency basis. And while the S&P failed to set new highs and fell back in January, the Italian market continues its upward momentum.

This boom is also arguably healthier. While the Magnificent Seven’s tech stocks account for much of the U.S. rally, Italy’s bull market has been driven by a broader range of companies. carmaker Ferrari (up 50%); and banks led by UniCredit (up 77%).

Now, Giorgia Meloni’s government is promising to make the stock market more accessible and reward shareholders for long-term investing. DDL Capital — or the capital bill — is expected to pass Congress in the coming weeks. The move is believed to boost Italy’s economy and stem the flight of local companies to rival EU hubs, particularly the Netherlands. It should also directly benefit the government’s privatization program, which he plans to raise 20 billion euros over the next three years.

However, there is growing concern among some companies and shareholders that the bill may have the opposite effect, rather than liberalizing and encouraging investment in Italian companies. Recent amendments give protectionist leanings that could benefit Meloni’s allies and discourage international investment.

Among the most striking amendments are rules that would give extreme incentives to hold stocks for more than 10 years and give such investors 10 times more voting rights than short-term shareholders. Although this provision would theoretically apply to all investors, in practice it has been applied to certain types of Italian shareholders, namely family-backed companies seeking to maintain control of the company, and local investors. This generally works in favor of shareholders. fondazione They are long-term shareholders of Italian banks, although they are often politicized.

The benefits of additional voting rights are expected to be most significantly exercised through another important provision of the new law, which gives shareholders greater say in the appointment of corporate directors. That may sound positive. But that would cripple hedge fund activists. And the complex new mechanism for appointing directors could potentially undermine an already bizarre corporate governance system in which the boards of large companies and their most vocal shareholders often submit competing lists of director candidates. Experts say it will make it impossible. The Consob Securities Regulatory Authority’s report said the reforms “could result in unique reforms”. [set-up] Internationally, the objectives of simplification, stability and clarity of sector regulation are being undermined. ”

The most obvious beneficiary of the amended bill is billionaire Francesco Gaetano Caltagirone, a major shareholder in two of Italy’s most powerful financial services groups, Generali and Mediobanca. He is an 80-year-old construction and media mogul. He and his allies were thwarted in their attempts to install new boards at both companies. Mr. Caltagirone is also a key ally of Meloni’s government and owns influential newspapers in areas where Mr. Meloni has strong support.

If the bill passes as proposed, it would be the second setback for the Italian market in a matter of months. Last August, bank stocks fell following the chaotic announcement on bank taxes. After wrangling within Mr Meloni’s coalition government, the tax rate was lowered and an alternative scheme was introduced that would allow banks to increase their reserves instead of paying the levy.

Italy’s finance ministry welcomed the result, which resulted in little increase in tax revenue, saying it would help banks strengthen their capital strength, amid fears that rising interest rates would cause a surge in non-performing loans. Even if this were true, the windfall gains would be undermined by the reputational damage caused by the episode. Extraordinary taxes and policy reversals have many U.S. asset managers wary of markets such as Italy, Spain and the United Kingdom.

So far, the Italian stock market has thrived despite all this. However, the Meloni government cannot afford to be optimistic. The S&P 500 has a price-to-earnings ratio (PER) of approximately 25 times. FTSE MIB is still in single digits.

patrick.jenkins@ft.com