The FTSE Group is looking at tightening entry requirements for its UK indices as investors voice concerns that it is too easy for companies with low free floats and hazy corporate governance standards to list on the prestigious FTSE 100.

The consultation, launched Tuesday, was prompted by a flurry of Russian firms seeking to join the blue-chip index by upgrading to a premimium London listing and proposes increasing the minimum free float for UK incorporated companies.

Steelmaker Evraz and gold firm Polyus are both in the process of setting up UK holding companies which would allow them to sidestep FTSE's requirement that non-UK incorporated companies must have a free float of 50 percent.

This is something that we have been considering for a while, however it has added impetus right now given the trend for, mainly Russian, resources companies seeking a UK incorporation, Chris Woods, head of index governance and policy at FTSE Group, told Reuters.

A greater free float improves a stock's liquidity and ensures a more diverse shareholder base, a particular point of contention with Russian firms whose ownership tends to be concentrated among two or three powerful individuals.

The concern is that if the free float is particularly small, the ability of minority shareholders to assert their rights is going to be minimal, said George Dallas, head of corporate governance at asset manager F&C. In our view, this is not consistent with what premium listing is about.

The Association of British Insurers, whose members own 20 percent of the UK stock market, is worried firms enter the FTSE 100 too easily, and is exploring ways to put would-be entrants under closer scrutiny, an insurance industry source said.

There's a groundswell of concern about whether the rules effectively work in a way that best represents the interests of ultimate savers and investors in the equity markets, the source said, adding that the current regime could force index-tracking funds to buy stocks they would otherwise have avoided.

The industry is looking in particular at whether free float requirements for FTSE entry should be raised to prevent newly-quoted companies joining the index at inflated prices, due to lack of available shares, exposing investors to early losses.

The ABI declined to comment.

KEEPING THE CROOKS OUT

Under current rules, companies can be included in the FTSE UK Index Series if at least 15 percent of their shares are free to be traded, although firms with a market capitalisation of more than $5 billion (3 billion pound) can have a free float as low as 5 percent.

FTSE, owned by The Financial Times and London Stock Exchange , said it had received requests to up this to 25 percent.

The UK Listing Authority (UKLA) already requires firms seeking a premium listing to have a 25 percent free float, but has at times waved this rule -- usually for large firms where it does not consider liquidity would be dented -- meaning companies with lower free floats have made it in to the FTSE.

The question for the consultation is: are FTSE clients happy to follow the UKLA's line, or should FTSE indices require a higher standard of eligibility than that determined purely by being given a premium listing? said Woods.

Those potentially affected include miners Fresnillo Plc and ENRC , Essar Energy and Ukrainian iron ore producer Ferrexpo , FTSE said.

If a change is made following the consultation, which runs until November 25 and invites responses from market participants such as corporate brokers and pension funds, these companies will be given time to increase their free float.

Following a damaging boardroom battle at Kazakh miner ENRC, the question of corporate governance has also come to the fore.

Insurers are considering whether overseas firms' compliance with UK corporate governance standards should be more closely monitored, the industry source said.

FTSE's consultation includes possibly setting up a new index series which requires minimum governance criteria.

FTSE is considering the creation of a new set of UK indices, running alongside the current series, which would impose a higher standard of corporate governance, it said.

The UK's corporate governance code, which applies to all companies with a premium listing, operates on a 'comply or explain basis' rather than being legally binding.

It is a developing area. Obviously the more you get a wide set of cultures coming to London, it becomes a harder job to get everybody to comply in the same way. You are trying to apply the rules of a gentleman's club code to people who have never dealt with anything other than laws, said Philip Wright, Chairman of the non executive director program at PwC.

It is a balancing act between having a good standards and keeping the crooks out without being overly bureaucratic and making it too hard to come here. There is no perfect answer.

(Additional reporting by Myles Neligan and Sinead Cruise; Editing by Erica Billingham and David Cowell)