Britain's financial regulator proposed stricter rules on reverse takeovers and tighter requirements for premium stock market listings as part of a broader drive to improve investor protection.

The use of reverse takeovers to fast-track London Stock Exchange listings for companies based in emerging markets has been criticised for posing risks to shareholders, particularly those investing passively through funds tracking key indexes.

The Financial Services Authority (FSA) said on Thursday that it hoped the new rules, which it outlined in a consultation paper, would help clamp down on such practices.

The proposed changes will ensure that reverse takeovers cannot be used as a 'back-door' route to listing for companies that would otherwise be ineligible, the FSA said in a statement.

There are currently exemptions that remove some acquisitions from the reverse takeover requirements. These proposed changes will narrow these exemptions, it added.

FSA MOVE FOLLOWS SIMILAR ONE BY FTSE GROUP

Richard Brown, a partner at law firm Hogan Lovells, said British authorities had to tread carefully between enforcing good corporate governance procedures while ensuring London remained an attractive market-place for international companies.

They have to strike the right balance. The London market is a very attractive one for international companies, but those companies could also look to list elsewhere in America or Asia, said Brown.

Last year, Vallares, a listed investment vehicle set up by former BP boss Tony Hayward, financier Nat Rothschild and banker Julian Metherell, bought Turkish company Genel Energy , to form a new company which was listed on the London Stock Exchange.

Rothschild used the same technique when helping investment company Vallar buy up Indonesian coal assets in a deal with the politically connected Bakrie family to form Bumi Plc .

The FSA's move follows a similar step to increase investor protection taken in December by the FTSE Group, which runs the blue-chip FTSE 100 index.

The FTSE Group said it was tightening rules governing entry to its indices in order to protect minority investors and stop companies with poor corporate governance from exploiting loopholes.

FTSE said companies which want to be included in its UK indices -- including the FTSE 100 -- must ensure at least 25 percent of their shares are freely tradeable.

Several foreign-owned natural resources companies whose stock is listed in London have the majority of their shares controlled by two or three powerful individuals.

Increasing the free float of such companies would allow smaller investors a greater say in their running.

The FSA has also tightened its grip over so-called externally managed companies -- which have outsourced major management roles to an offshore advisory firm -- to ensure that such companies would not be eligible for a primary London Stock Exchange listing.

The Association of British Insurers (ABI), whose members own 20 percent of the UK stock market, welcomed the FSA's proposals but added that the matter needed careful consideration.

The FSA has recognised the renewed debate on the reputation and quality of the market. The matters raised are complex, but do go wider than the specification of the Listing Rules themselves and they need to be carefully worked through, said Michael McKersie, head of capital markets at the ABI.

(Reporting by Sudip Kar-Gupta; Editing by Myles Neligan and David Cowell)