THE VISIBLE HAND
JSE toughens up, but Oakbay proved skelms still at work
Share price skulduggery didn’t begin or end with the Guptas’ ill-fated and dangerously illiquid listed vehicle
The JSE has published a set of proposals to change its listing requirements to address some of the turmoil over the past year or so. The proposals are varied and interesting, dramatic in places, controversial in others. Whatever you think of them, it’s good to see the JSE stepping up to the plate and putting some interesting ideas on the table.
Without saying so in as many words, the proposals aim to address some of the specific problems that have arisen over the past few years, and let’s face it, they have been many and varied. Steinhoff, EOH, Sagarmatha, Ayo, Capitec, Resilient, to name just a few, have all been caught in storms; some innocently, some not so much.
But the situation of one company is not being addressed in the changes, and that is the Guptas’ vehicle Oakbay. The underlying issue was share price manipulation, which is a constant concern for the JSE, but it’s also, as I’m learning, a very slippery fish. What happened with Oakbay illustrates the difficulties involved for the JSE in combating share price manipulation.
It's actually not a very complicated story. The Gupta family went to the Industrial Development Corporation (IDC) in 2010 and applied for an R250m loan to buy a uranium mine. One presumes they did so because they were expecting SA to embark on a nuclear build programme, which would leave them in the pound seats.
Why the IDC would lend a bunch of foreigners who had no experience in uranium mining such a thumping pile of cash remains an open question, but one presumes they were leaned on by the Guptas’ proxies in government.
The nuclear deal didn’t materialise, and the R250m IDC loan began to balloon since Oakbay was losing money. By 2014 the debt to the IDC had doubled. Something needed to be done.
The Guptas, we subsequently learnt from the Gupta e-mails, came up with a plan: they would list the then loss-making mine and repay the IDC with shares. Consequently, everything depended on the value at which the company hit the exchange.
This is where the story gets a bit complicated. What we know fairly clearly is that one of the Gupta associates lent or gave a company in Singapore about $1m to buy Oakbay shares in the run-up to the listing.
Oakbay then amended the contract it had with the IDC to force the company to take shares, and not cash, on listing. As it happens, in the pre-listing process, the share was bid in the bookbuild at R10 a share, which valued the company at R8bn. This was almost double the company’s own expert valuation of R4.6bn, which was itself on the rich side since it was a loss-making venture and since the purchase price was R250m.
Who comes up with this stuff, you have to ask. The company then repaid its debt to the IDC by giving them a piddling 3.6% of the shares. When Oakbay lost its sponsor and was delisted from the JSE, the IDC lost even that.
There is a court case underway, but since there is no pile of cash lying about, the prospects of the IDC getting anything seems slim.
Back to the issue of regulations. Obviously, there is really not much the JSE can do about price manipulation in the pre-listing book-build process. But with Oakbay, it’s a bit more complicated, because the share price skulduggery clearly didn’t end there.
In May 2015, on the basis of the purchase of a mere 600 shares, the price went from R10 to R40. Of course, it was all nonsense and quickly deflated. But it does leave a list of questions.
One issue has to do not so much with share price manipulation but about companies whose shares trade in very low volumes, although the two issues are obviously linked.
I remember asking senior members of the JSE about the trade at the time, and why it wasn’t investigated. The problem, they said, is that the JSE needs a solid legal basis to investigate price manipulation.
In the normal course of events, if someone wants to overbid a share, it is not really the JSE’s responsibility to encourage you to be sensible. Price discovery is after all the function of the exchange, so it should happen as freely as possible. Finding a legal basis to unwind a trade is often very difficult to discern. You can check who the bidder was, but if someone wants to defraud shareholders, he or she is hardly going to trade in his or her own name.
But there is another option. Why not toss companies off the exchange if their shares don’t trade? Oakbay went months on end without a single trade, and the low volume of trade was what made it possible to manipulate the share price.
The JSE’s general manager of issuer regulation, Andre Visser, made the valid point that the problem with delisting is that it often leaves minority shareholders in the dwang.
Once the company is delisted, minority shareholders’ only recourse is to the company itself. Until then, the company falls under the regulatory jurisdiction of the JSE and they have a route to get at least something back on their investment.
But I have to say, I’m not completely convinced. It just seems to me that allowing companies on the exchange that don’t trade defeats the whole object of being listed, it adds to the JSE’s regulatory burden and opens the door to malfeasance.