Call for FTSE entry rule shake-up to protect UK equity investors

Industry figures have urged the authorities to make it tougher for companies to list in the UK, as the FTSE launches a consultation on entry rules.

Sparked off by concerns over a fresh influx of mining companies, they warn the implications of allowing the rules to be maintained in their current form include threats to corporate governance, share price volatility and liquidity concerns for UK equity investors.

The FTSE Group this month launched a consultation into whether it should raise requirements on free floats – the amount of a company’s stock available for public investment.

It is asking whether it should require a free float of at least 25% for UK-incorporated companies before they are eligible for inclusion in its indices, up from a current level of 15%.

The UK Listings Authority requires a free float of 25% for firms seeking premium listings but has issued waivers in the past.

“We have real concerns about the wisdom of having granted these waivers,” said Karina Litvack, head of corporate governance at F&C.

“The whole idea of the free float requirement is to ensure the overwhelming influence of the controlling shareholders doesn’t become such as to disenfranchise minority shareholders.”

A premium listing typically serves as a passport to FTSE 100 inclusion and the consultation is also asking whether the FTSE should follow the UKLA’s decision in such cases.

The point of contention over waivers was emphasised earlier this summer when miner ENRC, which has a free float of under 20%, forced out independent directors.

Russian gold miner Polyus Gold is now also looking to list in the UK with a free float of 15%, as part of a wider influx of mining companies that are set to further concentrate the domination of metals and resources stocks within the FTSE 100. Mining stocks alone currently make up 12% of the index.

“Some of the companies potentially listing in the UK have mixed reputations,” said Neil Gregson, who will shortly take over management of J.P. Morgan’s £2.5bn Natural Resources fund.

Gregson said the prospective entrance of more mining companies into the blue-chip index would cause concern for UK equity investors, whether or not free floats were limited.

“If I was a UK or a passive manager I would have something to say. It would be something to be wary of,” he said.

Ben Russon, manager of the £403m Newton UK Opportunities fund, said smaller free floats also lead to share prices being artificially squeezed higher due to a lack of liquidity.

“Moves to resolve the issue can only be a good thing for the wider market and general investors,” he said.

David Snell, AIM partner at PwC, said small-cap managers’ concerns over free floats – AIM has no free float requirements – were increasingly being echoed by large-cap investors.

Litvack suggested one outcome of the consultation may see investors asking if even a 25% free float is high enough.

“What we are seeing right now is a blurring of what are supposed to be high standards. It makes the market inefficient and it raises the cost of capital, which is no good for anyone,” she said. “We are not saying we do not want foreign issuers coming to London – we really do. But we need credibility, not companies repackaging themselves as being akin to M&S, for example, when they are not like that at all.”