By Sinead Cruise and Kylie MacLellan
LONDON (Reuters) - Just as Britain's government is trying to clear a path for the politically sensitive sale of its 39 percent stake in Lloyds bank, resentment is brewing among the investors who would be expected to buy the stock.
Some fund managers say they are wary of buying stock released in staggered sales until banks and regulators clarify the rules on how quickly company owners are allowed to sell more shares - a dispute that could hurt large stock offers such as Lloyds.
They say they have been burned before by banks allowing owners to bypass lock-up agreements, which are meant to prevent too much stock hitting the market too fast and pushing the share price down.
Any boycott could complicate the privatization of Lloyds Banking Group , one of the government's most high-profile strategies to show it is improving Britain's national finances and getting banks to lend more to businesses.
"Decisions to blacklist are on people's agenda," said one fund manager at a UK investment house running around 80 billion pounds in assets. "This goes right to the heart of whether we have trust in the markets in which we operate."
This shareholder and the other investors who talked to Reuters all declined to be named because of the sensitivity of the situation.
The debate was prompted by a deal in May, where Lloyds sold 15 percent of wealth manager St James's Place , just over 10 weeks after a previous sale, despite having agreed not to reduce its stake further for at least a year.
The lock-up was waived by bookrunner Bank of America Merrill Lynch . Lloyds and BoAML declined to comment.
Although lock-ups are waived relatively often, and investors are warned that the timetable for additional share sales can change, it usually happens closer to the expiry date than in the St James's case.
A person familiar with the matter said the sale had the backing of the Treasury and of UKFI, the organization which manages the government's stakes in banks, because Lloyds needed to boost its capital, and the offer drew strong demand.
However, investors say they want clarity on the terms and conditions under which such agreements can be waived.
The government has flagged it is ready to start offloading shares in Lloyds and on Friday began the process of appointing advisors for the sale, which is expected to take place incrementally over many months.
Further down the line, the government will also look to sell down its even larger stake - 81 percent - in Royal Bank of Scotland .
"It is very important the authorities do what they can to shore up investor confidence before the likes of Lloyds and RBS come to market. They will be some of the biggest partial stake sales seen for a long time," said a second UK investor at a fund management firm running around 50 billion pounds ($76 billion) of assets.
The Association of British Insurers (ABI) has written to regulator the Financial Conduct Authority (FCA) asking them to look at the issue of lock-ups and their importance in maintaining an orderly market, three people familiar with the matter said. The ABI declined to comment.
Some investors are waiting for the outcome of the ABI's discussions with regulators and bankers on whether Lloyds and its advisers behaved appropriately before deciding whether to impose boycotts.
A spokesman for the FCA said the regulator was aware of the issue and was looking into whether this comes under its remit.
People working in equity capital markets say waiving a lock-up is not a decision which is taken lightly, and is only usually done when a stock price has performed strongly, investors want more shares and the seller has a legitimate reason for wanting to raise money.
"While exercising waivers does undermine the integrity of any other lock-ups, generally such early sales are only likely to happen when there is reasonable market demand, thus clearing share overhangs when the market has the appetite," a third investor said, echoing this sentiment.
St James's Place shares had risen 25.5 percent between the first and second sales. The second sale was done at a 9.4 percent discount and after the sale the shares opened nearly 11 percent below the previous day's closing price.
"There is a requirement on companies to take all reasonable care to make sure that any announcement they make to the market is not misleading, false or deceptive and doesn't omit anything that is likely to impact the significance of what they are announcing," the first investor said.
"There is a real question here about whether this contravenes the rules and the FCA needs to clarify this."
(Editing by Ruth Pitchford)