Determining
the nationality of a company is becoming more and more difficult thanks to developments
such as the creation of the euro, cross-border mergers and the migration of stocks to
large financial centres. Despite this difficulty, national regulators still require
(either directly or indirectly) many funds to hold the majority of their investments in
domestic assets (however defined). In some cases, these regulations are designed to
defend perceived national economic interests; in others, to protect beneficiaries by
encouraging funds to match assets and liabilities.
Today, FTSE determine the
nationality of a company on the basis of its country of incorporation and tax residency.
The primary listing is normally on the stock exchange of the country of
incorporation. However, some companies are associated with one country but legally
registered and/or traded elsewhere.
One example is the Jardine group;
it is incorporated in Bermuda, has its primary listing in London and the majority of
trading in its shares occurs in Singapore, while most investors consider it to be a Hong
Kong stock.
Another complication concerns
companies which have been formed by cross-border mergers. These companies operate
across several countries and their corporate structures are often determined by the most
efficient tax or regulatory environment for them. Some companies create a dual
nationality structure and others incorporate the holding company in a single country.
FTSE rules governing nationality
differ between the UK indices and those covering the world and Europe. The UK rules
only use the tests of tax residency and incorporation to determine the nationality of a
company, whereas the European and world index rules have evolved to cope with more
complicated arrangements.
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FTSE
propose to align the rules and, if based on the world index rules, the new nationality
rule would be as follows;
"Stocks
are included in that country where the company is legally registered and is recognised for
taxation purposes including regulation of its financial affairs. However,
exceptions may be made where international investors' recognition, trading and/or its
market listing clearly suggest a different allocation."
The key tests of nationality
remain the country of incorporation and tax residency. If the primary listing and
trading is on an exchange in the same country as these two criteria, the stock will be
allocated to that country. However, if this is not the case, the stock will be
treated as an exception and our committees will need to use their judgement in allocating
the stock to the most appropriate country.
In addition, FTSE have already
announced an initiative to create a separate series of indices covering multinational
companies. This new series is expected to be introduced in late Autumn 1999.
While the existing FTSE indices will remain unchanged, it is their intention to
create a new index series which strips out the global multinational companies from each
market.
If you have any views and
comments on any of these issues, we would be pleased to receive them by email and relay them to FTSE International.
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