Britain's financial regulator proposed stricter rules on reverse takeovers and opened the debate on whether to tighten requirements for premium 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.

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 had previously used this 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 to secure a spot on London's prestigious stock market.

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 shares are listed in London have the majority of their shareholding controlled by two or three powerful individuals.

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

The FSA also tightened its grip over so-called externally managed companies -- 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.

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