Pulling In Opposite Directions
September 27, 2012
Page 1 of 2
[This article previously appeared on our sister site, IndexUniverse.eu.]
Amongst other sources of revenue, listing fees provide a major income stream for stock exchanges. Meanwhile, the index providers that are often owned by exchanges are under pressure from investors to ensure tighter governance rules. The resulting tensions aren’t that visible, but they are mounting.
The recent announcement by the UK government that it intends to ease listing rules for perceived “high-growth” companies comes at a sensitive time. It’s not just that Indonesian mining entity Bumi has just announced major financial irregularities, causing the company’s shares to register a near-90 percent decline in little more than a year. There are also broader concerns from many investors that listing standards were relaxed too far during the boom and in fact need to head towards a tightening, not loosening. For index investors, this debate carries a particular resonance.
Bumi was one of a large crop of resource companies with primarily non-UK operations that have chosen to list their shares in London in the last few years, taking advantage of a liberal regulatory regime that allows large companies from all over the world to obtain a so-called premium listing on the London Stock Exchange (LSE) with as little of 5 percent of their share capital available for public trading.
Bumi got its premium listing last July, with the exchange trumpeting that this listing status ensures being made subject “to the highest regulatory standards”. The LSE also advertised that a premium listing ensures eligibility for the “internationally recognised and tracked FTSE indices”. The LSE owned half of FTSE at the time of Bumi’s listing, let’s remember, while this February it took full control of the index firm in a deal worth £450 million.
Recent events at Bumi pose a major question mark over the LSE’s claim about regulatory standards, but the firm’s premium listing indeed made it eligible for FTSE membership. It didn’t quite make it into the FTSE 100 index of the LSE’s largest companies, but it joined and still remains in the FTSE 250 index (from where it will probably be ejected at the next index review as a result of its share price decline).
But pressure from the institutional investor users of FTSE indices has resulted in the index firm deciding earlier this year to set a higher minimum free float requirement for UK-incorporated companies to gain index eligibility—25 percent—than is currently set by the regulator as a prerequisite for UK premium listing status.