UPDATE 2-UK to close stock market listing loopholes

* Financial watchdog to clamp down on reverse takeovers

* Aims to strengthen investor protection

(Adds London Stock Exchange comment)

By Luke Jeffs and Chris Vellacott

LONDON, Oct 2 (Reuters) - Britain's financial watchdog is to close loopholes that allow companies to list shares on the London Stock Exchange without being fully vetted, in a bid to better protect investors.

The Financial Services Authority (FSA) said on Tuesday it will clamp down on reverse takeovers, which enable privately owned companies to sell their shares to the public without going through the exchange's rigorous listing process.

The use of reverse takeovers - where a private company buys one already listed - by firms based in emerging markets has been criticised by shareholder and lobby groups for posing risks to investors, particularly those who automatically buy the shares through funds that track key indexes.

Critics also warn the practice could undermine the credibility of the London stock market.

The FSA's announcement comes days after Bumi , an Indonesian venture that was listed on the London Stock Exchange

via a reverse takeover, launched an inquiry into $500 million of alleged irregularities at subsidiaries.

Companies that want to list their shares in London have to first publish detailed financial information and demonstrate they are well run before they are allowed to join the club. Reverse takeovers are largely exempt from this level of scrutiny

and it is these exemption that the FSA wants to tighten up.

"We believe these proposals will strengthen the investor protections afforded by the Listing Regime, particularly for companies with controlling shareholders," said David Lawton, the FSA's director of markets.

The FSA will insist on having a majority of independent directors on the board of a company with a dominant shareholder to help safeguard the interests of minority investors.

Changes to the rules on reverse takeovers will take effect from the start of next year, the regulator said. The corporate governance changes are effective immediately.

The regulator also plans to remove the minimum requirement of the number of shares to be listed where there is sufficient liquidity, in an effort to encourage more companies to list their shares.

The FTSE Group, which runs the blue-chip FTSE 100 index , took similar steps to increase investor protection in December. It said then that it was tightening rules governing entry to its indexes to protect minority investors and stop companies with poor corporate governance from exploiting loopholes.

(Editing by Erica Billingham)

((luke.jeffs@thomsonreuters.com)(+44 207 542 2471)(Reuters Messaging: luke.jeffs.thomsonreuters.com@reuters.net))