Russia's UC RUSAL, the world's biggest aluminum maker, may not be able to sell IPO shares to retail investors even if it wins approval for its increasingly troubled $2 billion Hong Kong initial public offering.

Hong Kong's Securities and Futures Commission has proposed limiting the IPO sale to institutions, preventing private individuals from taking part in the landmark float, IFR Asia reported on Thursday, citing sources.

A separate Reuters source confirmed the SFC proposal, which would be a major setback in the group's lengthy quest to raise cash to pay down debt, but said the Hong Kong Stock Exchange did not agree with the condition.

The SFC plans to hold a meeting on Friday to further discuss the issue to see if they can resolve the matter, according to that source. A RUSAL spokeswoman declined comment.

UC RUSAL, controlled by industrial magnate Oleg Deripaska, has secured Russia's largest-ever debt restructuring and is trying to press ahead with plans to list 10 percent of its shares in Hong Kong and Paris.

Hong Kong regulators will not approve the listing until RUSAL meets certain conditions.

The RUSAL deal has raised a lot of questions, said a Moscow fund manager, who asked not to be named.

The law suit against Deripaska is one of the concerns. The company has gone through a debt restructuring, it's the first Russian company to list in Hong Kong -- I can understand why Hong Kong is showing caution.

OUTRAGE

One of the conditions is expected to be clarification of the repayment terms of a $4.5 billion loan from state bank VEB -- part of a government-backed rescue of the firm last year.

Russian news agency Interfax reported on Thursday that RUSAL's improved financial state could allow it to refinance the debt with a commercial bank, which The Financial Times said was likely to be Russia's biggest lender, Sberbank .

Hong Kong regulators were meeting with RUSAL representatives to discuss other conditions for the IPO, sources close to the matter have told Reuters. It is not yet clear if Hong Kong regulators or RUSAL have reached any final agreement on whether the IPO could officially go forward.

Although RUSAL has restructured its debt, the company is still very new turf for Hong Kong regulators.

The primary listing of a non-Asian company on Hong Kong's exchange is very rare and regulators have spent weeks mulling it over.

Earlier this month RUSAL named two Hong Kong based non-executive directors to its board.

Hong Kong's population are famously enthusiastic about IPOs, often lining up at banks for popular offerings. But small investors are also notorious for publicly venting their outrage when they feel regulators have let them down.

(Additional reporting by Fiona Lau and John Bowker; Editing by David Cowell)

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