Risky Business

The near-col­lapse of the glob­al finan­cial sys­tem has brought home to investors the urgent need to under­stand the true pic­ture of risks fac­ing their invest­ments. The cri­sis has prompt­ed deep think­ing about whether the cur­rent reg­u­la­tions for finan­cial mar­kets are rig­or­ous enough to ensure that investors have the infor­ma­tion that they need to assess risk, and to pro­tect the pub­lic inter­est in secu­ri­ties mar­kets being effi­cient, order­ly and fair. 

Few sec­tors of the econ­o­my are as risky as the oil and min­ing indus­tries, which often make sig­nif­i­cant invest­ments in nat­ur­al resource-rich coun­tries where the rule of law can be over­rid­den by cor­rupt gov­ern­ment offi­cials. So investors in oil and min­ing have to be sure that they have all of the infor­ma­tion they need in order to prop­er­ly assess these risks. They also need to be sure that the reg­u­la­to­ry regime and the reg­u­la­tors of secu­ri­ties mar­kets are strong enough to address the risk that oil and min­ing com­pa­nies may be sub­ject to inter­fer­ence from cor­rupt for­eign offi­cials. In recent years, min­ing com­pa­nies from the for­mer Soviet Union, a region both rich in nat­ur­al resources and noto­ri­ous for high lev­els of cor­rup­tion, have gained list­ings on the main mar­ket of the London Stock Exchange. 

The first of these com­pa­nies was Kazakhmys plc, a cop­per min­ing com­pa­ny oper­at­ing pre­dom­i­nant­ly in the Central Asian nation of Kazakhstan. Kazakhmys is a mem­ber of the pres­ti­gious FTSE 100 share index, mean­ing that insti­tu­tion­al investors such as pen­sion funds which hold the sav­ings of ordi­nary cit­i­zens are exposed to its per­for­mance. A com­pa­ny intend­ing to list must issue a prospec­tus for poten­tial investors. Listing reg­u­la­tions state that this prospec­tus must pro­vide infor­ma­tion that is “nec­es­sary to enable investors to make an informed assess­ment of the assets and lia­bil­i­ties, finan­cial posi­tion, prof­its and loss­es and prospects of the issuer.”1 Since investors rely on the prospec­tus to assess the risks of invest­ing in a com­pa­ny, it is cru­cial that the infor­ma­tion in this doc­u­ment is as com­pre­hen­sive and impar­tial as possible.

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