Are we becoming a flag of convenience or are we just whoring our reputation to anyone who will join us? Sorry if I am being rude or at the least somewhat unfair, but here is a very serious issue that seems to be being ignored by the investment authorities and is probably unknown to most investors.

Ever since its inauguration in 1984, the FTSE100 has been seen as a bellwether of international investment and trading, and certainly not as a reflection of the UK domestic economy. The proportion of overseas companies, shareholders and actual overseas turnover of constituent companies has been increasing such that probably over 65% of the index is made up overseas income and trade. In the days of British global trading this, of course, would have been an encouraging sign, but now we are seeing this index having a very different complexion and one which should be of concern to all investors to ensure that they are not being misled into investing into something which purports to be one thing and is in fact something else altogether.
We have had a growing number of foreign companies wishing to come and list on the London Exchange which of course is laudable and to be appreciated. However, you have to ask why should we be preferred over many other trading centres? London has always been able to fall back on the strengths that it has in other related areas, such as legal and accounting support, a very broad international banking base to provide all the additional facilities needed for a company wishing to be in London in some depth.

Whilst this is true, there are also other more fortuitous reasons that may also have an impact. Language: English is the globe’s legal language (at least for the moment until my Mandarin improves). Longitude: we are in a useful time-zone between the West and East, straddling their trading days is helpful. Independence: London is not New York. This may sound tautological, but actually many companies are happy to trade with the US so long as they are not bound by US rules, regulations and reactions. Somehow London seems more ‘New York-lite’ as one corporate investment banker described it – all of the flavour, none of the fat. To these reasons you could also add the ancillary benefits of London property, London culture (and certain night clubs that seem to attract a certain clientele). That could be too flippant and superficial – but I wouldn’t be so sure.

The authorities at the London Stock Exchange (LSE) seem to have become more relaxed over the requirements for companies to come and enjoy a ‘premium listing’ in London, with some even coming into the FTSE100. We have already 64 ex-Soviet Union companies listed on London’s market, including some larger ones like ENRC and Kazakhmys. These tend to be mostly mining companies with connections to the Russian oligarchs, who seem slightly less committed to Mikhail Gorbachev’s idea of glasnost (the ex-Soviet policy of openness and transparency) than one might like.

So what are my worries?

Firstly, we are quite likely diluting the reputation of our leading index by having companies of questionable background and reputation. I certainly don’t want to see London and the FTSE100 being seen as an alternative frontier index for mining and
exploration companies seeking to gain credibility by adopting the respectable clothes of others.

Secondly, such flotations will also ensure that good quality UK investment funds will be drawn in to them - especially index hugging stockbrokers and tracker funds. There is nothing wrong with the ETF or Tracker concept, so long as you know exactly what that index is in fact made up of. For these adventurers coming in, they gain the credibility of a better range of investors, but those investors need to be aware of what they are investing in by default.

Thirdly, the free float. In order to meet the listing requirement, at least 25% of the shares must be in a free float for adequate trading. It seemed last week that there was some thought that such a ‘trivial’ rule might be waived to allow another Russian miner (gold this time), Polyus, with a free float of a mere 13%. In fact this has not gone ahead - not due to increased rigour on the part of the FTSE 100; instead the Russian government raised some unknown objections.

The free float of 25% is important and in my view should probably be higher. The narrower the free float, the more volatile the share prices can become and potentially more open for manipulation. This should be a particular concern if such shares are then held as collateral for other loans and facilities.

Also it should be recognised that such flotations should not just be the playthings of the wealthy controllers, dealing with the company as they wish. They have responsibilities to all the shareholders and especially the minority ones. Thus some of the dealings and actions have been somewhat questionable, as we have seen with the like of ENRC when two of its independent directors were kicked off because they disagreed with the controlling oligarchs.

The great value that we have in London is our rule of law and governance. We gamble with this at our peril. Poor governance will taint more than just those companies mentioned it will mar reputations on a wider scale as well; if left unchecked will severely stain the good name of the LSE and the FTSE100. If to control this we have fewer listings but of better quality, then so be it. Companies should aspire to joining the FTSE100, not conspire to join it.

And finally.......... Reuters reports that a naked and drunk motorist sped through central Moscow on Sunday, crashing into 17 cars before being stopped by police who chased him across a large part of the capital.

"When police made him open his door, it became clear he was completely naked," said State TV, showing lines of cars with shattered windscreens and battered sides.

Local media said the man, who appeared to be in his 40s, was from Moldova and showed a picture of him grinning in the back seat of a police car.

State TV said preliminary tests showed the driver had an “abnormally high" level of alcohol in his system.

“The most dangerous part was when he almost hit a bus full of school children," police spokesman Gennady Bogachev told State TV, adding that four of the 17 vehicles were police cars.

He probably also did not have proper leather seating; that would have been very uncomfortable and could have led to much squeaking - I hope he had his heater on.

Have a good week.

Justin

* The term ‘flag of convenience’ refers to the practice of registering a merchant ship in a different sovereign state, in order to enjoy preferential regulations in comparison to the country where the owners reside.