Change follows concerns over illiquidity and corporate governance in UK-incorporated foreign companies listed on London
We reported in this post on 2 November 2011 on the reasons for the FTSE Group’s market consultation on its minimum free float requirement for the FTSE UK Index Series. Inclusion in that Series makes it much more likely that index-tracking funds will have to invest in a company’s shares – which, given a choice, they may not wish to do if the vast majority of the shares are tightly-held by founders, oligarchs or foreign governments. A tightly-held company may give rise to concerns about illiquidity in the traded shares or about poor corporate governance.
The FTSE Group announced the results of its consultation today. It is moving to a minimum free float requirement of 25% (from 15%). This will match the UK Listing Authority’s free float requirement. But where the UKLA waives that 25% figure – as it has done on a number of recent listings of foreign mining and commodity companies – the FTSE Group will retain its 25% free float requirement. The result may be the inclusion of a company on the Official List and its admission to trading on the London Stock Exchange, but its exclusion from the FTSE UK Index Series. From the FTSE Group announcement today:
“In response to this market feedback, the FTSE Policy Group have approved the following changes to the Ground Rules of the UK Index Series:
1. The minimum free float for a company to be eligible for inclusion will be set at 25%.
2. In the event of FTSE applying a minimum 25% threshold and in cases where the UKLA has granted an exception to the 25% minimum shares in public hands it requires of UK incorporated companies seeking a premium listing, FTSE will maintain its 25% free float threshold.
3. Companies which had previously been admitted to the FTSE All-Share with a free float of less than 25% will be given a time period of 24 months to increase their free float to 25%.
In response to concerns expressed by certain respondents that a 25% minimum free float threshold may prove insufficient, FTSE will undertake further consultation on whether a higher threshold would be appropriate, or whether additional governance standards should be incorporated in the FTSE All-Share Index.
These changes will be applied to the FTSE UK Index Series (which includes the FTSE 100 Index, the FTSE 250 Index and the FTSE All-Share Index) from 1 January 2012.”
As to which companies will now have 24 months in which to comply with the 25% free float requirement, see this post from FT Alphaville.
For a strong critique of FTSE’s decision, see the comments of Ian Hanham of JP Morgan Cazenove in this Daily Telegraph article, arguing that the move may result in foreign companies listing in New York or Hong Kong and observing that for some large companies selling more than 25% of their listed shares into the market may not be feasible in current conditions.
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