The organisation which selects and monitors members of the Financial Times Stock Exchange (FTSE)index is to consider rewriting the rule book governing the proportion of a company’s shares that must be available to outside investors.
The Equity Indices Committee of FTSE International is expected to decide on a wide- ranging review of the whole “free-float” problem at its meeting on March 10. A representative for FTSE said: “We are about to look at the free- float issue. But this is very difficult, and will not be decided imminently.”
The problem has arisen because demand for shares in the FTSE index of the largest 100 firms is so great it threatens to distort the market. At present, 25% of a company’s shares have to be available to outside investors, but a problem has arisen over how to ensure the spirit of that rule is implemented. An increase in firms with only a minority of shares available – coupled with the growth in index tracker funds, which are obliged to buy equities in proportion to their market weighting – exacerbated the problems.
“We have a difficult situation,” said the representative. “But the percentage of shares available to investors is not easily decided. There is a huge problem in defining what shares are free.”
Shares held by tracker funds could not be considered “free” because indexed funds are not free to sell under the terms of their operation. Other batches of shares could make up a strategic or associated holding and so be nominally available for purchase, but in reality would be impossibly tightly held. On the contrary, some “off-market” shares, such as family holdings, might become available at a certain price or after the owner’s death.
There is thought to be growing pressure from fund managers worried that the market is being distorted by FTSE International’s failure to respond to ownership trends. The arrival of South African firms such as Old Mutual, which will immediately join the FTSE 100, even though a large proportion of the company’s shares have been sold in its home market, has increased those concerns.
One investment manager said: “It is crazy that you can have about 30% of the market held by trackers and closet-trackers chasing a new company which may offer only 30% of its shares for sale. Trackers do not go for 30% of what’s available but 30% of the total, which squeezes outsiders and artificially pushes up the price.”