EDITORIAL: The JSE's rule changes are dramatic — and problematic
The past few years have been tumultuous for the Johannesburg Stock Exchange, as they have been for the country as a whole. In order to address a range of problems and shortcomings, the exchange has made a number of very dramatic proposals. The proposals are, broadly speaking, welcome and interesting. They are also in places, seminal in their scope, and could consequently be controversial. They are simply proposals at this point, but their broad scope and the inevitable danger of unforeseen consequences means they deserve through scrutiny.
The proposals don’t mention specific instances, but it doesn’t take much imagination to discern the specific examples they are designed to address; Steinhoff, EOH, Capitec, and Sagarmatha spring most obviously to mind.
Some of the most far-reaching proposals concern the difference between primary and secondary listings, and that issue came to the fore particularly with Steinhoff which relocated to Germany.
One of the biggest problems for the JSE is that once a company moves its primary listing, as it stands at the moment, the local exchange loses much of its regulatory authority. In the Steinhoff case, the difference between the approach of the Frankfurt Stock Exchange and the JSE came suddenly into play when the company failed to release its results within the designated time. The JSE would normally immediately suspend the share in these circumstances, but the Frankfurt Exchange, as a rule, does not, partly because the German exchange includes many more distressed companies.
Until now, the decision about where a company should be listed was really left more or less to shareholders, so a primary listing could be changed simply through a majority shareholder vote. The JSE is proposing that it should effectively be able to block listings to certain, as yet unnamed, exchanges. The key issue is that the JSE wants to have a memorandum of understanding in place with the exchange in question when the secondary listing will be on the JSE.
At the moment, the JSE can deem a secondary listing to be a primary listing if the volume and value of securities traded on the JSE exceed 50% of all securities traded. The problem is that doing so could create all kinds of conflicts, so the JSE is proposing effectively a third category, called “enhanced secondary listings” for these companies. It may also include the right to veto the listing proposal entirely where most of the trade takes place locally.
The second set of problems relates to the crunching decline in the share price of EOH, which arose not particularly around the company’s business performance, but because some company insiders had bought large quantities of shares on a leveraged basis. When the company’s share price started declining, these insiders became forced sellers, and the decline turned into a rout. The proposed solution is more disclosure both to the exchange and also in the company’s annual report concerning the level of leveraged purchases.
In the case of the proposed Sagarmatha listing (which was eventually pulled on legal grounds), the problem was that the company was effectively trying to list its way out of bankruptcy. Exchanges don't necessarily want to prevent companies from listing if they are not currently profitable. There are plenty of examples of companies with excellent prospects that were not profitable when they listed. But neither does the JSE want companies on the exchange which put shareholders unnecessarily at risk. It’s a delicate balance, the JSE’s solution is to propose increasing the cash buffer the company needs to have available if it's not profitable at listing time and to exclude from this amount cash raised in the listing process.
There are also two important ethical changes. The JSE is proposing a non-binding vote on the companies on the company’s corporate governance policy. This would work roughly in the same way the current non-binding vote on executive remuneration has worked in the past or perhaps has not worked, depending on your point of view. The JSE would require engagement by the issuer if 25% or more of the governance report is voted down by shareholders. The same sort of proposals is suggested concerning racial and gender diversity on boards.
There are many other changes too, but the bigger question here is how much does regulation actually work, particularly in a country where rulemaking is everywhere but where monitoring and enforcement are nowhere? The regulations themselves are welcome, but given SA’s history, you have to ask whether there is sufficient capacity to enforce the rules fairly and effectively.