The JSE this week issued what its regulation head Andre Visser says are “quite radical proposals” to stem the exodus from, and woo new companies to, the country’s largest stock exchange.
It’s not an insignificant concern: there are now 304 companies listed on the JSE, compared with 601 in 2001. Which means far fewer options locally in which to invest your pension.
Many firms scarpered, quibbling it had become “too expensive” to stay listed, or that ticking the boxes took too long.
Visser says this is precisely what the JSE tried to fix. “Two years ago, we started our ‘cutting red tape’ project, and these proposals are part of that. We want the JSE to remain a viable option for companies to raise capital, and we want it to remain competitive. It will give investors more choice,” he says.
In May, the JSE published its proposals and asked for comment. The 28-page “response paper” released this week showed that the proposals largely received a thumbs-up, so the JSE will now implement them.
Some proposals will raise eyebrows. For a start, one is for the market to be segmented into large companies (say, the largest 100), and another layer of “mid-cap” companies which wouldn’t have to comply with as many rules.
Visser explains: “The top 100 companies attract most of the institutional investor funds, but those guys at the bottom half of the main board battle to see the value of the listing when they cannot raise capital, but want to remain listed. We want to make the regulatory environment easier for those guys.”
Doesn’t this mean compromising the JSE’s governance rules? If you allow companies to cut corners or disclose less information, doesn’t this set the stage for further scandals, like Steinhoff?
“No — we’re still requiring [just] as much transparency and disclosure,” says Visser, “but we’ll give some regulatory relief for smaller companies.”
For example, the JSE is considering relaxing the requirement for mid-tier companies to put deals to a shareholder vote. At present, shareholders must be given a vote if a deal is valued at more than 30% of a company’s value; for mid-tier firms, the JSE could push this up to, say, 40%.
In the end, 94% of people who responded to the JSE supported “market segmentation”.
Controversially, the JSE reforms include allowing companies to list with dual-class shares — a proposal supported by 73% of commentators.
The reality is that much of the exodus from the JSE has more to do with what’s happening in the Union Buildings than in Maude Street
However, dual-class shares infringe the principle that every share should carry the same vote. In these structures, a small group of insiders typically control the “high-voting” shares, which insulates them from awkward shareholder votes or hostile takeovers.
Some critics hate the idea. As one told the JSE: “Enabling dual-class share structures would be a significant step backwards in shareholder rights, and again create room for abusive practices.”
Nonetheless, the JSE will proceed with this plan, subject to “governance safeguards” — such as a sunset clause to ensure the structure is phased out after a few years, and ensuring equal voting rights on the appointment of auditors and directors.
Another proposal — supported by 66% of commentators — was to create a “technology board” to allow start-ups to list which might otherwise not meet the JSE’s requirement that they’d need to have a track record of profitability.
But critics doubt there’ll be enough interest. As one put it: “Does SA really have a flourishing tech sector, outside the listed space? It does not seem that way.”
Aeon Investment Management chief investment officer Asief Mohamed tells the FM he doesn’t believe the proposals amount to a “material diminishment of governance”.
He supports most of the proposals — including the plan to segment the market and simplify listing rules.
Mohamed, however, doesn’t like dual-class shares. He says they “should only be used for strategic business reasons”, but have often been used to push through votes on executive pay.
So will these reforms lure companies back to the JSE?
That’s entirely uncertain. The reality is that much of the exodus from the JSE has more to do with what’s happening in the Union Buildings than in Maude Street. The brittle local economy means there’s little appetite to list publicly, while a simultaneous influx of private equity firms with an embarrassment of cash has provided another option to feed capital-hungry businesses.
Fatima Vawda, founder of 27four Investment Managers, tells the FM it’s not as if the JSE isn’t doing enough.
“The appetite for companies to come to the JSE is simply much lower. But that’s partly because there is so much more capital in the private equity space. The JSE is innovating and trying different things — private placements, building relationships with other exchanges — but delistings are largely due to the weakness of the SA economy and political instability,” she says.
However, Rory Ord, head of private markets at 27four, says this trend is cyclical. “When listed markets are running hard, there’s more interest in the JSE, so that cycle will turn.
“Nobody, not even private equity firms, wants the JSE to decline. Everyone wants the full spectrum of capital markets to work properly, but there are times when it works better than others,” he says.
Visser agrees, but says the JSE has no control over the wider economic environment. “What we do have control over is the listings environment. So, while we are a proxy for what’s happening in the economy, we want to make sure that when things change, we’ve got all these options on the table for investors and companies.”
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