Row erupts over Rothmans' status: Removal from index ahead of new Stock Exchange rules under fire

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The Independent Online
THE STOCK Exchange's decision to drop the restructured Rothmans International from the FT-SE 100 index has started a furious row.

Last Thursday the exchange announced that it would exclude from the FT-SE Actuaries Share Indices both New Rothmans and Vendome, the tobacco and luxury goods groups into which Rothmans International will be split from 22 October.

The news has angered many in the City, who expected New Rothmans to be treated as an FT-SE 100 share until the exchange had drawn up definitive rules on the index status of cross-border groups such as Rothmans-Vendome.

At the worst, they anticipated that its market valuation would be halved to reflect its twinned structure, putting it within the FT-250 if not the FT-SE 100.

The decision, which knocked 40p off Rothmans' share price, surprised both the company and Rothschilds, its financial advisers.

Jan du Plessis, group finance director of Rothmans International, said: 'We are clearly disappointed about the decision and cannot pretend to understand it.'

Rothschilds, which advised on the demerger, is equally unhappy. 'We were disappointed and mystified by the decision to exclude the new Rothmans,' said Richard Davy, the director in charge.

The problem arises because Rothmans and Vendome will have dual British and foreign holding structures to reflect their UK and overseas interests. The indices are supposed to include only British companies.

An exchange spokesman defended its decision to exclude the group even though it had yet to draw up definitive rules.

He said the FT-SE Actuaries Share Indices Steering Committee had taken the view that inclusion would represent the greater departure from previous practice.

'We don't take these decisions lightly, but in running the indices we are trying to treat companies fairly and objectively,' he added.

The committee is believed to have considered a new definition that would have excluded the new Rothmans from the index. But it postponed its decision pending probable Budget changes to the rules on foreign income dividends that may affect its approach.

Both Rothmans International and Rothschilds said they were aware the rules might be amended but argued that they did not expect exclusion while the issue was still unresolved.

Rothmans' restructuring, at an estimated cost of about pounds 371m, may in any case have been a partly wasted exercise. Its new 'twinned' structure is designed to avoid accumulating a huge advance corporation tax surplus.

At present British groups that receive foreign income dividends from overseas subsidiaries pay ACT on their total cash payout to shareholders. They can offset this against their overall tax liabilities but may not have sufficient. If they cannot use such ACT within a year or so, they must write it down.

So the Government plans to allow foreign income dividends to be channelled directly to overseas shareholders without attracting ACT, which should help groups with global trading activities to avoid building up unrelieved ACT surpluses. The proposal is still under discussion - it has been attacked for being too complex and causing problems for pension funds - but is likely to go through.