FTSE entry criteria tightened, free float upped

FTSE Group will introduce tighter rules on companies hoping to secure a spot in London's prestigious FTSE 100 index, requiring them to maintain a free float of at least 25 percent. The group, which runs indexes including the UK's blue chip FTSE 100, was responding to investor concern that companies with hazy corporate governance could muscle their way in using loopholes.
Existing companies that currently fall below the 25 percent threshold, including those on the mid-cap FTSE 250 index and the FTSE All Share, will have 24 months to boost the number of tradeable shares in order to stay in the key index tracked by many pension and investment funds, FTSE Group said on Wednesday.
The rules come into force for new entrants on January 1, 2012. The resources sector will be hardest hit by the rule change and four of its members already in the FTSE 100 ENRC , Fresnillo, Evraz, and Essar Energy will be affected. FTSE 250 miner Ferrexpo will also have to raise its free float to meet the new rules. ENRC, whose corporate governance troubles this year prompted concerns over minority investor rights, has a free float of around 18.6 percent.
Mexican silver miner Fresnillo is more than 77-percent controlled by parent Industrias Penoles, owned by the family of Chairman Alberto Bailleres. A greater free float improves a stock's liquidity and ensures a more diverse shareholder base, a particular issue for some of the largest resources firms, where ownership tends to be concentrated among two or three powerful individuals, a model uncommon in Britain or the United States.
Both the Association of British Insurers and the National Association of Pension Funds, whose members own a large slice of the UK stock market, have fretted firms enter the FTSE 100 too easily and without sufficient safeguards for minority investors. Joanne Segars, in a letter to the Chief Executive of the FTSE Group earlier this week, said the threshold should be raised not just to 25 percent, which brings the FTSE into line with UK Listing Authority rules, but, in time, to as much as 50 percent for UK companies.
That would bring UK-based firms into line with requirements for companies incorporated overseas eyeing a FTSE spot. "We would like to see FTSE commit to increasing the minimum free float to closer to 50 percent over time," she said in the letter. NAPF, whose members account for one sixth of investment in the UK stock market, had requested a transitional period of two years and also suggested a gap between listing and inclusion in the indices to allow investors more time. Glencore, for example, was in the FTSE 100 just days after listing due to its size.
NO MORE WAIVERS? Under current rules, companies can be included in the FTSE UK Index Series if at least 15 percent of their shares are free to be traded, although firms with a market capitalisation of more than $5 billion can have a free float as low as 5 percent. FTSE, soon to be wholly owned by the London Stock Exchange , said it had received requests to up this to 25 percent.
The UK Listing Authority (UKLA) already requires firms seeking a premium listing to have a 25 percent free float, but has at times waved this rule - usually for large firms where it does not consider liquidity would be dented - meaning companies with lower free floats have made it in to the FTSE.
London has seen a number of Russian companies jostle for premium listings in recent months, seeking increased liquidity and a stronger acquisition currency. Precious metals miner Polymetal and steelmaker Evraz became the first Russian companies in the FTSE 100 last week.
Polymetal has a majority free float and 24.8 percent of Evraz shares are already tradeable. Polyus Gold, seen obtaining a premium listing in the new year, was expected to list with a smaller-than-required free float. Trader Glencore, which listed in May, has a free float of just 17 percent at the moment but will not be affected by the review as the percentage of tradeable stock will go up to over 50 percent in May next year when lock-up provisions expire.
The FTSE Group had also said last month it was considering running a set of UK indices alongside the current series "which would impose a higher standard of corporate governance", though some in the industry had expressed concern that could undermine London's credibility.