JSE’s proposal for Naspers and Prosus could undermine confidence
The bourse wants to change its approach despite months of consultations before the Prosus listing
Recently, the JSE requested comments with regard to a consultation on proposed changes to the treatment of Naspers and Prosus in the FTSE/JSE Capi index. People arguing for the change say it is to protect investors — both institutional and private — who should never be overexposed to one company or sector. But far from protecting investors, this new proposal has the potential to harm them.
Before listing Prosus, extensive consultations took place over eight months to determine the optimal manner in which the secondary, inward listing of Prosus on the JSE could be executed, in the interests of all stakeholders and investors, with the objective of unlocking value for investors.
After the deliberations, the JSE correctly set forward the indexation treatment of Naspers and Prosus in July 2019, treating both companies as separate entities. The decision was made and implemented and investors took action based on that decision. Nothing has changed between then and now that would warrant a new review just two months after being implemented.
Naspers and Prosus remain unique and separate companies with distinct characteristics from a public investor standpoint and they attract diverging investor bases. This is already evident from the first two months of trading since the listing of Prosus on September 11. To treat them as a single entity would be, by the JSE’s own admission, unprecedented and inconsistent with international best practice.
Macroeconomic and SA
Despite its international asset base, Naspers, being an SA-domiciled and SA-listed entity, is inevitably exposed to macroeconomic events in SA and therefore first and foremost has a following of local investors and international investors focused on emerging markets. Prosus, being domiciled and having its primary listing on Euronext Amsterdam in the Netherlands, attracts a much more global technology focused investor following, many of whom invest only in developed markets.
This divergence in investors and trading patterns between Naspers and Prosus is also driven by the different index inclusions of Prosus shares and Naspers shares. Prosus is already a member of a number of developed markets indices and is expected to join the remaining major European indices in the upcoming 12 months. This will mean that Prosus will be tracked by the majority of active and passive funds focusing on Europe, the majority of whom do not have a mandate to invest in SA.
The call for capping by some is wholly inconsistent with the purpose and outcome of the JSE consultations. Certainty is a key tenet of index rules and, given that many shareholders have taken positions based on the existing rules and on the basis that the publicly communicated treatment of Prosus and Naspers in the FTSE/JSE indices will persist, a change so soon after the rules implementation is likely to have material adverse effects on those stakeholders.
It is unquestionable that the change is likely to benefit a few investors to the detriment of many. The ability to be overweight in either Naspers or Prosus has had material financial benefits historically and generated significant returns for our shareholders. Based on broker target prices as at November 18, the expectation is for this to continue.
Consequently, amending the weighting positions in respect of Naspers and Prosus places investors that are not restricted to the index benchmark in a preferential position compared with those whose mandate is to construct a portfolio that adheres to the benchmark. All investors should be considered in managing the indices, and decisions regarding them should be made in the best interest of all investors and market participants.
From a more macro standpoint, this change has the potential to have broader and potentially long-lasting negative effects. Introducing these new rules could create an unwelcome view of indexation in SA in that policy certainty is not guaranteed and is hence unpredictable. The ramifications of this view can be viewed only as negative for SA and our financial markets.
While the subjects of this proposal are Naspers and Prosus, this is about much more than these two companies. This is about the perceived credibility on the part of the international community of the SA equity markets.
The proposed amendment to the rules, including the proposed capping methodology, is likely to compel investors to adjust their weightings. Consequently, such an outcome could materially negate foreign direct investment in SA, the financial and economic implications of which cannot be quantified and should be avoided having regard to the interests of the public, investors and the imperative to progress and position SA policy for attracting foreign direct investment in the interests of the nation.
Finally and importantly, the rule in its current construct is not restrictive for shareholders. It should also be noted that the concentration concerns that investors may have pertaining to the level of their overall exposure to both Naspers and Prosus can be avoided by simply reducing their overall exposure to any one stock, which can be achieved without the disruption to market stability and policy certainty that would be caused by the proposal.
We respectfully disagree with the propose changes and urge the JSE to uphold the decision that it correctly made on this same topic in July 2019.
• Sgourdos is group CFO of Naspers and an executive director of Prosus Group.