UPDATE 14 December 2011: FTSE has now announced the results of this consultation, as we discuss in this post.
Move follows investor concern that index-tracking funds are having to invest in companies with poor corporate governance standards
The FTSE Group (FTSE) yesterday announced that it is consulting on changing the requirements for UK-incorporated companies to be included in the FTSE UK Index Series (which includes the FTSE 100 and FTSE All-Share Index). At present, a UK-incorporated company is eligible for inclusion in these indices if it has a free float of at least 15% of its listed securities, or 5% in the case of companies with a full market capitalisation of $5 billion. (Non-UK companies need a free float of 50%.)
The result is that various companies – ENRC, Essar, Fresnillo and Glencore – are included in the FTSE 100, although their free float is less than 25%. Inclusion in the FTSE 100 may mean that managers of passive investment funds that have a mandate to track the FTSE 100 are required to buy the shares of those companies – whether they wish to do so or not. Some institutional investors wish not to do so, given that the reason for these companies having a low free float is that a substantial majority of the shares are held by a majority shareholder (or a small group of oligarchs or founders), with the attendant concerns about poor corporate governance. See, for example, the corporate governance shenanigans at ENRC.
FTSE is therefore asking in its consultation:
- Should FTSE apply a minimum free float threshold of 25% for UK-incorporated companies when determining eligibility for inclusion in the FTSE UK Index Series (including the FTSE All-Share and the FTSE 100 Index)?
- In the event of FTSE applying a minimum 25% threshold and in cases where the UKLA has granted an exception to the 25% minimum free float it requires of UK incorporated companies seeking a premium listing, should FTSE maintain its 25% threshold or permit flexibility to follow the UKLA’s decision?
Although the UK Listing Authority has a free float requirement of 25%, this is frequently waived, as it has been in the case of the companies referred to here. FTSE’s proposed rule change would at least mean that there is consistency between the UKLA’s criteria for listing and FTSE’s criteria for inclusion in its UK indices – but given the UKLA’s willingness to grant derogations from its 25% free float rule, that is probably all it will do.
The more interesting move on FTSE’s part is the announcement in the same consultation that it is proposing to create a new set of UK indices “which would impose a higher standard of corporate governance”. Such a move would feed into the heightened concentration on corporate governance by some investors, regulators, the UK government and the European Commission since the start of the financial crisis – see the many recent developments on this front in our Corporate Governance category – and create a specialist index for long-term investors with a focus on corporate governance to track.
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