Bumi shares freefall in mining disaster The shares dropped 25pc in a day. "With the financial irregularities investigation, significant credit risks, and uncertainty around PT Bakrie's debt issues, the risks outweigh the potential rewards, in our view," was the unsurprising conclusion from analysts at Nomura, as they downgraded their recommendation on Bumi from "neutral" to "reduce." Caveat emptor might be the conclusion of many. After all, the prospectus for Bumi's admission into a premium London listing boasted 20 pages of "risk factors." Unfortunately, since it has been a constituent of the FTSE 250 share index since the end of last year, many tracker funds - often holding people's retirement nest-eggs - will have automatically placed cash with Bumi. The crisis is crystallising concerns about what benchmarks businesses must meet in order to obtain a listing on the London Stock Exchange and inclusion in the FTSE indices. "It is not unusual for there to be problems with large shareholders, controlling or otherwise, and related parties," says a spokesman for Pirc, the shareholder advisory service. Prevailing governance and listing standards have been consistently moving towards disclosing conflicts of interest rather than prohibiting them. It may now be the time to reconsider that. The risks are becoming too great for public markets. Part of the problem, according to institutional investors, is that the establishment in 2010 of a new listings system for the London stock market has not worked out as hoped. Two years ago, the old system of primary and secondary listings - rough translation: UK companies and foreign companies - was ditched for a set-up that better reflected London's global status. The Financial Services Authority (FSA), which acts as the UK Listing Authority (UKLA), brought in premium and standard listings, with the latter expected to cater for companies with a shorter track record and usually less robust governance. That did not necessarily mean you would not want to invest in them, but that they were a different animal. Meanwhile getting a premium listing, supposed to signal the highest standards of disclosure and governance, is a necessary step towards inclusion in the FTSE indices (and so all that sought-after buying by those tracker funds). However, investors complain that instead of acting as the destination for higher-risk issuers who wanted "flexible" standards, the standard segment just serves as a home to listed investment vehicles and a handful of foreign companies seeking just a limited presence in London. "The premium segment should mean premium," says Karina Litvack, head of governance and sustainable investment at F&C, a major institutional investor. But as the system changed, the worry is that primary companies were moved onto the premium segment without filtering. "[Now] all these new issuers come along and say, "we all want to be premium" and there's no reason say no, when lots of other companies have automatically been "grandfathered" into the premium segment. So that's really at the root of the problem. Of course, a premium listing does not mean you will always win inclusion in the FSTE indices. But F&C says the system must also recognise that the London Stock Exchange, a commercial entity with commercial pressures, owns the indices. "Our view is that the tendency to further new listings at the expense of quality listings it that sometimes you let in companies that bring disrepute to the market," says Litvack. F&C's suggestion is to bring an element of judgment to the whole process rather than relying on a purely rules-based approach. It is not proscriptive about who should assume this role, be in the regulator or the commercial entity, so long as it has degree of independence. "Everyone is dodging behind this agreement that there has to be an objective set of rules," says Litvack. The reality is the objective set of rules don't work. People find ways around them. However the FSA does not appear keen to shoulder this burden. Certainly, for every person on the buy side of the market shouting for the regulator to exercise some judgment, there will be someone on the sell side balking at the idea of the watchdog performing such a function. Still, there is an acknowledgement that something needs to change. As Chris Woods, managing director for governance and policy at FTSE Group, comments: "I think we can say that the current listing regime can be enhanced, as evidenced by the fact that the UKLA is now consulting on that very topic." What the FSA - in its guise of the UKLA - is planning to do, is to tighten up rules around obtaining a London listing, with details set to be announced on Tuesday. The regulator will make a policy statement confirming rules which were outlined in January, and will also consult on broader moves. Investors expect the measures unveiled to speak directly to the problems highlighted by Bumi and what has been dubbed the "Rothschild model" of creating a shell to invest in emerging markets assets. The way the financier created Bumi was to set up a shell company, Vallar, which would target lucrative mining assets. These came via the powerful Bakrie political dynasty, who in return took a 47pc stake in the London company. Under the incoming rules, the reverse takeover process behind all this looks to become trickier to execute if a company wants to keep its London listing. The watchdog is also eyeing the role of sponsors, advisors who prepare a company for a listing (Bumi's was JP Morgan Cazenove), which investors see as ultimately shifting more responsibility onto the banks over what they are bringing to market. The FTSE Group, too, has acted. At the end of last year it tightened entry requirements for companies in its indices, requiring that they have a minimum free float of 25pc. That move was to ensure minority shareholders have more of a voice. FTSE's Woods notes, however, that that would not preclude Bumi, which has a 44pc free float, from entry. And he stressed that the role of the UK FTSE indices is to reflect the market, rather than shape it. It's there to act as a mirror to the market. It's certainly not there to act as something that would lead the market," he says. It's not our job, certainly in the index series, to make value judgments about companies. It is a balancing act, he suggests. On the one hand, FTSE knows there are "legitimate concerns," often around governance, to which it has responded with the free float changes. On the other hand, he argues, the point of indexation is so that people can "buy the market, not the market but for "dot dot dot."" Hindsight is a wonderful thing, he also notes. Vallar, the shell company from which Bumi sprang, outperformed the all-share index for the year to June 2011. Caveat emptor, indeed.