London?s ambitions to attract foreign-owned mining companies have suffered a sharp blow with the announcement by Bumi Plc of an inquiry into alleged irregularities at subsidiaries, just days before a clamp-down on listing rules.
The Financial Services Authority (FSA) will publish proposals next Tuesday designed to protect investors and ease concerns that London-listed companies such as Bumi, an Indonesian coal venture co-founded by financier Nat Rothschild, are diluting standards of corporate governance.
Bumi?s launch of an inquiry this week into potential irregularities in more than US$500 million of funds follows unrelated concerns at fellow natural resources firm ENRC and oil producer Genel.
?Bumi is one of a number of recently listed companies that, whilst traded on the UK market, is essentially an overseas business,? said PIRC, a corporate governance consultant that advises pension funds and fund managers with combined assets of over 1.5 trillion pounds (US$2.44 trillion).
PIRC noted concerns shared by regulators and investors about groups with dominant shareholders in which relatively few shares are traded on the market.
?A number of such companies in the extractives industries have a very limited free float, meaning that minority shareholders can struggle to have their voices heard, and unusual governance practices are difficult to challenge,? it said.
The FSA proposals are expected to tighten rules on reverse takeovers - often seen as backdoor listings - as well as addressing the size of free floats, the power of controlling shareholders, corporate governance and the independence of company boards.
They are also likely to prevent cash shell companies, small listed companies into which larger private groups are typically folded in a reverse takeover, from joining London?s top indices.
Pushing some new listings onto ?regulatory light? standard listings, rather than premium listings, might not seem too onerous for those seeking cash quickly. But preventing them from joining the prestigious FTSE indices will protect tracker fund investors from unwittingly placing cash in riskier companies.
Nevertheless, experts concede the FSA?s powers to improve corporate governance are limited. As it tries to strike a balance between tightening rules and ensuring London remains attractive for international companies the principle of ?caveat emptor? ? or ?let the buyer beware? - rules.
?If you comply with listing rules, there is often very little the FSA can do,? said one source familiar with the regulator. ?It is ultimately up to individual shareholders whether they buy into that particular company.?
Bumi was born after London-listed cash shell Vallar - led by 41-year-old Rothschild, the hedge fund veteran and scion of the Rothschild banking dynasty, and James Campbell, the former head of Anglo American?s coal arm - engineered a reverse takeover of Indonesian coal assets and re-listed in 2011.
The aim was to marry the Rothschild name to the Bakrie brothers, one of Indonesia?s most powerful business families, to create the world?s biggest thermal coal company and one of the largest listed groups on the London bourse.
But as newly-named Bumi joined London?s FTSE index, tensions rose quickly. A leaked letter last year from Rothschild to Ari Hudaya, then chief executive of both Bumi Plc and an affiliate, PT Bumi Resources, urged a ?radical cleaning up? of Jakarta-listed PT Bumi Resources.
On Monday the company commissioned London law firm Macfarlanes to launch an urgent investigation into potential financial irregularities at its subsidiaries, including PT Bumi Resources, sending its shares spinning.
Roger Barker, head of corporate governance at the Institute of Directors, told the Reuters Russia Investment Summit in Moscow that the affair had called into question the ?Rothschild model? of creating a shell to invest in emerging markets assets.
?Given what has happened to the share price of that particular vehicle, it hasn?t been a good deal for investors, and investors are going to be looking quite warily at that type of approach going forward,? he said.
The story echoes that of ENRC, which has had two separate independent probes following whistleblower allegations, one involving Kazakh and one its international businesses. The results of the first have been presented verbally to Britain?s Serious Fraud Office. The second is still underway.
Lawyers expect Bumi?s Macfarlanes report also to find its way to the SFO. The fraud squad declined to comment.
Russian firms and companies in the natural resources sector have increasingly dominated the trickle of businesses going public in London, raising concerns about investor protection.
The FTSE Group, an index provider owned by the London Stock Exchange, has already tightened entry requirements for its UK indices. This responded to investors? worries that companies with low free floats and hazy corporate governance standards could join the FTSE 100 index of top blue-chips too easily.
?I welcome the bar being high, so companies that get there, stay there,? said Riccardo Orcel, deputy chief executive of Russian bank VTB Group.
London has long been considered the listings hub for natural resources companies. But in an effort to broaden its appeal, it plans to lift some restrictions for technology listings, paving the way for a battle with dominant tech hub New York.
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