Skip to main content

Chelsea soccer club owner Roman Abramovitch, in brown jacket, at an English Premiership football match. Mr. Abramovitch is a part-owner of Evraz, the Moscow-based steel maker, which wants to list in London. PAUL ELLIS/AFP/Getty ImagesPAUL ELLIS/AFP / Getty Images



Having made their mark on London's football clubs and top end properties, Russia's oligarchs are extending their reach to the U.K.'s stock market.

On Friday, Polymetal, a gold and silver producer, announced that it would float in London with a market capitalization of £3.5-billion ($5.6-billion U.S.). It's not the only one. Polyus Gold, a Russian miner part-owned by Mikhail Prokhorov, had hoped to slip into the index – until Russian Prime Minister Vladimir Putin delayed the move this week. Then there is Evraz, the Moscow-based steel maker part-owned by Roman Abramovich, owner of Chelsea football club.

They all want a U.K. listing and, potentially, entry into the FTSE 100 index.

But while football fans and property agents have welcomed the new arrivals, London's investors are lukewarm. Some fear the influx, combined with the entry of a number of other overseas-based resources companies, will debase both the market itself and the blue-chip index.

"They are less growth prospects than an opportunity to take advantage of a cyclical boom in commodities. When we look over these companies we find them un-investable," says the head of equities at a leading U.K. insurer. "We are worried about liquidity, accounting standards and corporate governance." Another investor says the volume of new entrants "will change the character of the index."

Concern over the new entrants falls broadly into two categories: the transparency and governance of the new arrivals; and their impact on the FTSE indexes.

The concerns over transparency arise because many of the companies are dominated by a single family or set of shareholders whose interests may be at odds with other investors. Many of the companies who hope to list would keep more than 75 per cent of the shares out of public hands. "Control is the bottom line," says a director of one of the U.K.'s leading shareholder groups.

Eurasian Natural Resources Co., 44-per-cent-owned by three founders, shocked the market this year when it defenestrated two independent directors and outlined plans to transfer more assets from the major shareholders' private businesses to ENRC.

The issue of control is relatively new for the U.K. market, which is built around a corporate governance regime in which a diverse shareholder base holds management to account.

Not everyone is worried about the trend, though. Market experts say London's reputation as a financial centre is founded on its history of attracting high-growth companies from all over the globe. They point out the job of the market has always been to price risk efficiently. Transparency is key to pricing capital properly and if investors spot uncertainty, they will demand higher returns for the risk they take on. They also point out that, with so few other IPOs taking place, these companies offer a rare opportunity for a new investment.

The second concern over the new arrivals is that they alter the nature of the U.K.'s flagship indexes – the FTSE 100 and the FTSE All-Share. Membership of the indexes is one of London's main attractions. According to one banker, without it many of the newly listed companies, "would be orphans." It guarantees the backing of a valuable set of long-term investors.

It's not just the investment that counts for the FTSE hopefuls. Being part of the FTSE 100 is also a badge of pride for its members. But observers worry that investors – particularly those funds that track the FTSE 100 and All Share indexes, which make up about 10 per cent of the money invested in the U.K. market – are being manipulated into buying the shares.

Access to the indexes is guarded by a number of conditions, many of which surround the free float – the percentage of shares not in the hands of controlling shareholders. But several of the new entrants that have come or are coming to market with small free floats have sought waivers from the U.K. Listing Authority.

The FTSE 100 debut in 2008 of ENRC was mired in controversy because less than 25 per cent of stock was in public hands. Polyus Gold, one of the new hopefuls, is planning to have a free float of just 20 per cent if its float goes ahead, which would require special approval from the listing authority. And Glencore was fast-tracked into the FTSE 100 despite having a free float of less than 25 per cent, although it has committed to achieving a free float of more than 50 per cent by next May.

One influential U.K. investor said: "It is perhaps tilting too much toward an imbalance." The concern is that by allowing in companies whose corporate structure does not immediately meet the rules, the authorities are lowering the market's standards.

Mark Makepeace, chief executive officer of the FTSE, a joint venture between the Financial Times and the London Stock Exchange, points out that many institutional investors are more selective, picking bespoke benchmarks against which they measure performance. These benchmarks can exclude certain types of company or sector. And weighting in the indexes is determined by free float as well as market capitalization – the lower the free float, the lower the weighting in the index, so the lower the investment required from trackers.

Nevertheless, he admits that he is on guard against the pipeline of companies that he believes may be seeking a waiver from the listing rules that would passport them into the FTSE All Share.

But one top U.K. investor urges the U.K.'s Listing Authority to look harder at the rules governing entry. The authorities, he says, "should identify these companies as clearly different from conventionally governed and owned stocks in the London market."

Copyright The Financial Times Ltd. All rights reserved.

Interact with The Globe