FTSE Tightens Tradeability Rules For UK Index Members

Index provider FTSE says it is raising the minimum free float requirement for companies wishing to be included in its UK index series to 25%. Free float measures the proportion of a company’s shares that is freely tradeable on public markets, and therefore excludes stakes held by large, often majority shareholders.

The decision, taken earlier this week by FTSE’s policy group, follows a consultation process among the index provider’s users.  Over four-fifths of the market participants responding to the consultation said they back an increase in the minimum free float requirement to 25% from the previous 15% or, exceptionally, 5% for companies exceeding US$ 5 billion in market capitalisation.

FTSE’s move means it is now effectively imposing stricter liquidity standards than the UK Listing Authority (UKLA), which is part of the UK’s national securities market regulator, the Financial Services Authority.

While the UKLA also has a minimum free float requirement of 25 percent for companies seeking a London listing, in practice it 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.  Five of these—Fresnillo, ENRC, Essar, Evraz and Ferrexpo—are currently members of the FTSE All-Share, the UK’s benchmark share index, while the first four also make it into the FTSE’s large-cap 100 index.

The UK’s liberal rules on listing and index eligibility have attracted increasing criticism, however, largely as a result of concerns over corporate governance. UK-incorporated mining company ENRC, for example, most of whose operations are in Kazakhstan, underwent a bitter boardroom battle this summer, 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.

The tightening of the free float requirements comes only days after FTSE admitted steel maker Evraz, which currently has only 23.4% of its share capital freely traded, to the benchmark 100-share index as part of its quarterly review of index constituents.

Evraz and the other four FTSE All-Share index constituents that do not meet the new 25% minimum free float requirements will be given two years to comply with the new rules. Glencore, which is also a member of the FTSE 100 but has to meet higher liquidity standards as a non-UK company, says it will increase its free float to a 50% minimum by May 2012.

Given the increasing importance of tracker funds such as index funds and ETFs, eligibility for inclusion in widely tracked share indices like the FTSE 100 has become an important concern of companies interested in listing in London.  FTSE’s chief executive, Mark Makepeace, said today that the index provider had stopped disclosing the names of its policy committee members three years ago as a response to active lobbying of committee members by companies seeking index inclusion.

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