UPDATE 2 UK s FTSE considers tightening entry rules
Post on: 2011-11-02 By: admin
* FTSE considers upping free float requirement to 25 pct
* May also look at new indices with higher governance
standards
* Investors concerned over ease of joining index
* Follows string of Russian firms seeking FTSE inclusion
(Adds quotes, background)
LONDON, Nov 1 (Reuters) - The FTSE Group is looking at
tightening entry requirements for its UK indices as investors
voice concerns that it is too easy for companies with low free
floats and hazy corporate governance standards to list on the
prestigious FTSE 100(Euronext: VFTSE.NX - news) .
The consultation, launched on Tuesday, was prompted by a
flurry of Russian firms seeking to join the blue-chip index by
upgrading to a premimium London listing and proposes increasing
the minimum free float for UK incorporated companies.
Steelmaker Evraz and gold firm Polyus are both in
the process of setting up UK holding companies which would allow
them to sidestep FTSE's requirement that non-UK incorporated
companies must have a free float of 50 percent.
"This is something that we have been considering for a
while, however it has added impetus right now given the trend
for, mainly Russian, resources companies seeking a UK
incorporation," Chris Woods, head of index governance and policy
at FTSE Group, told Reuters.
A greater free float improves a stock's liquidity and
ensures a more diverse shareholder base, a particular point of
contention with Russian firms whose ownership tends to be
concentrated among two or three powerful individuals.
"The concern is that if the free float is particularly
small, the ability of minority shareholders to assert their
rights is going to be minimal," said George Dallas, head of
corporate governance at asset manager F&C. "In our view, this is
not consistent with what premium listing is about."
The Association of British Insurers, whose members own 20
percent of the UK stock market, is worried firms enter the FTSE
100 too easily, and is exploring ways to put would-be entrants
under closer scrutiny, an insurance industry source said.
"There's a groundswell of concern about whether the rules
effectively work in a way that best represents the interests of
ultimate savers and investors in the equity markets," the source
said, adding that the current regime could force index-tracking
funds to buy stocks they would otherwise have avoided.
The industry is looking in particular at whether free float
requirements for FTSE entry should be raised to prevent
newly-quoted companies joining the index at inflated prices, due
to lack of available shares, exposing investors to early losses.
The ABI declined to comment.
Under current rules, companies can be included in the FTSE
UK Index Series if at least 15 percent of their shares are free
to be traded, although firms with a market capitalisation of
more than $5 billion can have a free float as low as 5 percent.
FTSE, owned by The Financial Times and London Stock Exchange(LSE: LSE.L - news)
, said it had received requests to up this to 25 percent.
The UK Listing Authority (UKLA) already requires firms
seeking a premium listing to have a 25 percent free float, but
has at times waved this rule -- usually for large firms where it
does not consider liquidity would be dented -- meaning companies
with lower free floats have made it in to the FTSE.
"The question for the consultation is: are FTSE clients
happy to follow the UKLA's line, or should FTSE indices require
a higher standard of eligibility than that determined purely by
being given a premium listing?" said Woods.
Those potentially affected include miners Fresnillo Plc
and ENRC , Essar Energy(Dusseldorf: 11224817.DU - news)and Ukrainian
iron ore producer Ferrexpo (Stuttgart: A0MRG2 - news) , FTSE said.
If a change is made following the consultation, which runs
until Nov. 25 and invites responses from market participants
such as corporate brokers and pension funds, these companies
will be given time to increase their free float.
Following a damaging boardroom battle at Kazakh miner ENRC,
the question of corporate governance has also come to the fore.
Insurers are considering whether overseas firms' compliance
with UK corporate governance standards should be more closely
monitored, the industry source said.
FTSE's consultation includes possibly setting up a new index
series which requires minimum governance criteria.
"FTSE is considering the creation of a new set of UK
indices, running alongside the current series, which would
impose a higher standard of corporate governance," it said.
The UK's corporate governance code, which applies to all
companies with a premium listing, operates on a 'comply or
explain basis' rather than being legally binding.
"It is a developing area. Obviously the more you get a wide
set of cultures coming to London, it becomes a harder job to get
everybody to comply in the same way. You are trying to apply the
rules of a gentleman's club code to people who have never dealt
with anything other than laws," said Philip Wright, Chairman of
the non executive director programme at PwC.
"It is a balancing act between having a good standards and
keeping the crooks out without being overly bureaucratic and
making it too hard to come here. There is no perfect answer."
(Additional reporting by Myles Neligan and Sinead Cruise;
Editing by Erica Billingham and David Cowell)
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