Index provider FTSE is considering raising the minimum free float requirement for UK-incorporated companies seeking to gain entry to the company’s widely followed share indices.
The possible tightening of free float requirements has been driven by requests from index users, the company said. In particular, it said its clients have raised concerns over companies seeking to incorporate and to list their shares in London, while allowing only a small proportion of their companies’ share capital to be freely traded.
Under current rules, the UK Listing Authority has set a minimum free float requirement of 25 percent for companies seeking to obtain a listing on the London Stock Exchange.
In practice, however, the UKLA has been willing to waive this requirement for larger foreign companies willing to reincorporate in the UK. Since 2007, several companies of foreign origin with free floats of under 25 percent have reincorporated and listed their shares in London. Four of these—Fresnillo, ENRC, Essar and Ferrexpo—are currently members of the FTSE All-Share, the UK’s benchmark share index, while the first three also make it into the FTSE’s large-cap 100 index.
And in the past month both Roman Abramovich’s steel business Evraz and Russian gold miner Polyus have said that they are seeking to list their shares in London, while also seeking similar free float waivers from the UKLA.
In an interview given to IndexUniverse.eu last year, one London-based corporate financier who works with natural resources companies predicted an increase in the number of foreign companies trying to list in London, citing the possibility of index inclusion as a motivating factor.
“For a Russian oligarch, a [London] premium listing offers the one thing they typically crave—respectability. Of course, having access to the pool of capital that index inclusion brings with it is also a key factor,” said the banker, who requested anonymity.
However, the UK’s liberal rules on listing and index eligibility have attracted increasing criticism, largely as a result of concerns over corporate governance. ENRC underwent a bitter boardroom battle this summer, for example, with the controlling shareholders ejecting non-executive directors from the company’s board. Other firms have obtained permission to list their shares in London while not meeting the UK’s corporate governance code under a “comply or explain” provision in the rules.
For its part, FTSE currently has a minimum free float requirement of only 15 percent for UK-incorporated companies to be eligible for inclusion in its UK share indices. For larger companies, whose market capitalisation exceeds US$5 billion, the minimum proportion of shares that can be freely traded while preserving index eligibility can be as low as 5 percent.
Now, however, FTSE is seeking guidance from its clients on whether to raise the minimum free float requirement for UK share index eligibility to 25 percent or more. If FTSE does tighten its index rules—something that will be decided by year-end—the index provider will effectively be applying tougher standards than the UK regulator.
Companies that are already members of FTSE’s UK share indices but which do not meet any new requirement on minimum free float will be given up to two years to comply. And there’s a temporary loophole and a way into the index for any foreign companies nimble enough to list their shares in the coming weeks, FTSE made clear on a conference call earlier today: any tightening of the index rules will not take effect until after the company’s indices undergo their next quarterly rebalancing in December.