The buck stops here: JSE gets tough on listing rules
In the wake of Steinhoff, Ayo and other threats to investor faith, the exchange is getting more picky
Perhaps it is because SA’s financial services industry almost shuts down in December that so much can go wrong.
Last December saw three major events that shook investor faith in the JSE. Most prominent was Steinhoff’s revelations of serious accounting misconduct, triggering a collapse in its share price. The second was the share price tailspin of IT company EOH. Third was the listing of Ayo Technology Solutions. Those all took place within weeks, and each provided investors with a rude shock. Now the JSE wants to amend its listing rules to make recurrences less likely.
As we now know well, Steinhoff’s complex global structure seemingly allowed it to skirt around regulators and apparently its own board. It used its multiple jurisdictions to create entities that could help massage the financial reporting. Because Steinhoff had only a secondary listing on the JSE, the JSE had far less of an oversight role than it has over primary listings.
EOH revealed another problem, though it was frankly one we have known about since 2009 when similar problems hit a raft of other companies. EOH’s share price went into a tailspin because some of its directors and associates had used their shares to take out substantial loans. When the share price began to underperform amid the political uncertainty of the time, that collateral depreciated in value.
Those directors were unable to post new collateral, so lenders began flogging the shares, causing significant price pressure and triggering the downward spiral. In two days the share price fell 34%. Investors had no idea the directors had leveraged themselves to the hilt and put up their shares as security.
Ayo Technology Solutions taught a completely different lesson: that a company with no real assets could be used to extract a massive amount of money from the Public Investment Corporation (PIC), using the JSE’s listing process as a cover to do it.
Ayo had been created by Iqbal Survé, the proprietor of Independent Media, who convinced the PIC to buy in at a sky-high valuation. That allowed Survé to book a massive paper profit for the value of his interests, no doubt helping to pacify concerned funders of his other assets.
Since the listing, trading volume has been tiny and the share price is down over 40%. What made Ayo much more prominent, however, was when Survé attempted a repeat performance with the listing of Sagarmatha Technologies four months later, with a similarly incomprehensible contribution of equity from the PIC. That purported listing was killed off after the JSE found a technicality in that the company was not compliant with the Companies Act, having not submitted financial statements to the Companies & Intellectual Property Commission.
A fourth event occurred in January that has also contributed to the JSE’s rethinking of listing rules. That was the short attack by Viceroy Research on Capitec, which caused its share price to suffer a temporary decline.
The JSE published a consultation paper two weeks ago with several suggested changes to the rules governing its listed companies. It proposes increasing the minimum capital a company should have from R500m, or R15m in pre-tax profit. It wants to increase the liquidity of shares by including shares held by employees and associates of directors, as well as shares tied up in lock-up provisions, from being counted among the minimum 20% free float requirement. It wants to increase the period provided for notice of an upcoming listing from five days to 10, presumably a step that makes it easier to identify future Sagarmatha Technologies.
Inspired by Steinhoff, it wants to train audit committee members and company secretaries on their responsibilities. It wants companies to list all the legislation governing their establishment and the industries they work in, and then wants directors to take responsibility for confirming a company’s compliance with them. It wants to give shareholders the right to an advisory vote on companies’ corporate governance reports, so shareholders can at least signal unhappiness.
Inspired by EOH, it is considering compelling companies to announce if their directors encumber their shares through collateral or guarantee arrangements with lenders, and extending the dealing rules to cover senior management as well as directors.
It wants to be more selective in the secondary listings it accepts, including the right to approve the primary listing exchange. It wants to compel disclosure of more diversity indicators and for companies to have a policy on board diversity.
Inspired by Viceroy, it is also enthusiastic about requiring disclosure of short positions that hedge funds and other investors may hold in companies. The JSE also intends to start publishing monthly reports on the instances of suspicious trades it has referred to the Financial Sector Conduct Authority for investigation.
There is a lot of detail that will have to be developed around each of these changes to make them effective, but on the whole they do clearly amount to an improvement in the stringency of oversight the JSE is able to apply on the companies it lists.
It will never be able to remove all the risks, but more reliable disclosures will better position investors to assess those risks against the potential rewards. And that will be one step down the road to repairing SA’s reputation for the reliability of its financial institutions.