JSE has no role to play in regulating commercial negotiations
The JSE published its new debt listings requirements on July 30, the culmination of a lengthy consultative process that started with a request for submissions from interested stakeholders, followed by four rounds of public comments and a number of workshops.
These produced robust debate. At the JSE’s request, I chaired the first workshop. I also issued two opinions to the JSE on some of the stakeholder submissions. The process was fair, inclusive and not limited by time constraints.
The new debt listings requirements that resulted broadly force companies to disclose as much as is practically possible and adhere to the King IV code guidelines on corporate governance, and have generally been welcomed. It was stated in a recent editorial in Business Day (“JSE can’t please everyone, but new teeth could be sharper”, September 1) that “On the whole, the new debt listings requirements will go a long way to holding companies with debt instruments closer to the standards that have made the JSE’s equity market one of the world’s best regulated.”
However, during the aforesaid process, and again after the publication of the new requirements, a few debt lenders expressed concern that there is a market imbalance in favour of debt borrowers. These lenders believe that due to this, investors remain unable to negotiate terms and conditions of loan documentation properly with borrowers, and are required to pay for legal advice when the borrower defaults or intends amending the terms of the loan agreement.
It is not the purpose of this article to pronounce on the correctness or otherwise of this contention. It is to submit that if there is an imbalance, the solution does not reside in any provisions that may be included in the debt listings requirements. This in turn raises the question: what is the role of the JSE as a regulator in the equity and debt markets, particularly in the context of the debt listings requirements?
Section 11(1) of the Financial Markets Act, as amended, provides as follows: “An exchange must, to the extent applicable to the exchange in question, make listing requirements which prescribes (a) the manner in which securities may be listed or removed from the list or in which the trading in listed securities may be suspended; (b) the requirement with which issuers of listed securities and of securities which are intended to be listed, as well as such issuers’ agents, must comply; (c) the standards of conduct that issuers of listed securities and their directors, officers and agents must meet; (d) the standards of disclosure and corporate governance that issuers of listed securities must meet.”
It is significant that no provision is made for the listing requirements to empower an exchange to pronounce on the commercial merits of the issuer or securities proposed to be issued, or on matters that more properly fall within the sphere of negotiations between an issuer and an investor. The general principles of the JSE’s listing requirements, as set out in the introduction, state in paragraph (vii) that they must ensure investor confidence is promoted in standards of disclosure and corporate governance, in the conduct of issuers’ affairs and in the market as a whole.
This should in itself dispose of the request made by the concerned debt lenders. This notwithstanding, an ancillary question should be addressed, namely whether the JSE should have the power in its listing requirements to regulate matters regarding the commercial merits of an issuer or its securities, or matters that more properly fall within the negotiation arena.
I believe the answer to this question is an emphatic no. As I have consistently contended, the philosophy of securities regulation that overwhelmingly forms the basis of regulation worldwide is in effect regulation by disclosure. This topic has been the subject of debate over many decades. It was one of the important issues that was addressed by president Franklin Delano Roosevelt in his New Deal legislation. It was specifically stated that no state bureaucrat or any other regulator should be given the power to determine the commercial merits of any application for the listing or the conclusion of any transactions.
This approach has also been adopted by other regulators, and in SA section 119(1) of the Companies Act provides that the Takeover Regulation Panel must “regulate any affected transaction or offer in accordance with this Part, Part C and the takeover regulations, but without regard to the commercial advantages or disadvantages of any transaction or proposed transaction”. It is highly relevant that the primary statutory regulator of takeover transactions in SA is instructed to disregard commercial merits while upholding the integrity of the marketplace and protecting investors.
Requiring that the contracts pursuant to which bonds are issued must contain an obligation on the issuer to fund the legal fees of the investors would amount to the imposition of a monetary obligation on debt borrowers in favour of debt lenders.
Apart from the deficiencies that may arise with the formulation of the mandate and its duration, and the basis on which the legal adviser should charge, all of which make for problems of enforceability, the imposition of an obligation to fund a fee is an entirely commercial matter. This should form the basis of commercial negotiations between the prospective issuers and investors at the time the bonds are proposed to be issued. It has as little to do with the JSE as the interest rate that will be payable in terms of the bonds.
• Katz chairs ENSafrica.
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