Oakbay listing provided window into Gupta businesses
The suspension of Oakbay Resources from the JSE tells us something important about the nature of public capital markets and the disciplining effect they have on companies. Until the Gupta e-mail leaks, the listed entity in their empire was the only genuine insight we had into their activities. And that insight has long raised serious questions.
The company owns the Shiva Uranium mine, which has been losing money since the Guptas acquired it in 2010. We know it has been losing money because Oakbay Resources had to publish audited financial figures.
For the same reason, we know the Industrial Development Corporation (IDC) lent the business R250m that it then converted, in large part, into shares in the company that had been priced at an astounding R10 a share. That valued the company at some R8bn, even though its only asset was Shiva, which it had bought for R375m four years earlier.
Thanks to the Gupta e-mail leaks, we now know they had lent a Singaporean entity money and instructed it to buy shares in Oakbay Resources at R10 a share just before the listing in order to influence the debt-toequity conversion price for the IDC loan. The IDC got taken to the cleaners, given a paltry 3.75% stake in the company in exchange for its loan.
The share price mysteriously stayed high, quadrupling overnight in mid-2015. It stayed consistently above the IDC’s entry price, allowing the stateowned entity to report a profit on the position. This while the company was losing money and had no believable prospects of making any.
In April, the JSE launched an investigation into some trades of the shares and handed data over to the Financial Services Board’s directorate of market abuse. I suspect the IDC has rights that are triggered if the share price falls. It already holds most of the assets of the company as security against the remaining loans it has made.
The listing hit trouble when its auditor, KPMG, and its sponsor, Sasfin, resigned from the account in April 2016, citing reputational risk. After a struggle, Oakbay Resources convinced auditors SizweNtsalubaGobodo and sponsors River Group to take their place.
That didn’t go so well. The new auditors filed an irregularity report to the Independent Regulatory Board for Auditors, a legal requirement when an auditor comes across an unlawful act or omission in financial statements. They also forced the company to write down the paper value of the uranium asset by some R1bn.
With that, River Group also gave up as sponsors. Clear that the game was up, the company asked that its listing be suspended last week. I suspect this isn’t over: the IDC probably has covenants that will be triggered by the suspension.
This story was made possible because the company was subject to the public information reporting that JSE-listed businesses have to comply with. The rest of the Gupta empire has no such requirement and so we don’t have systematic access to information about it.
The example exposes another lie the Guptas have been trying to foster: the idea that established business is just as guilty of wrongdoing as they are. Under the guidance of UK-based public relations company Bell Pottinger, a campaign was launched to cast established business as “white monopoly capital” determined to frustrate black businesses. Somehow the Guptas, who arrived from India in the 1990s, managed to present themselves as victims.
But JSE-listed businesses are the most transparent. We get to see all of their financial reports, which are signed off by highly regulated auditors. Hundreds of investment analysts pore over the figures, study the companies, and form opinions on what they are worth. Other stakeholders including tax authorities, nongovernmental organisations, employees, regulators, unions and journalists get to examine them too. In short, public listing rules are the best antifraud device global capitalism has yet developed. They are not perfect, but are a damn sight more effective than anything else.
Listed companies don’t make the rules, but they have to comply with them. That includes rules governing transformation. The JSE has now added to companies’ reporting requirements, compelling them to disclose their policies and performance in transforming the racial profile of their businesses every year. These too will become part of the disclosures available to the public for scrutiny.
Our companies are also a function of our political history and the system they operate in. There are good and bad aspects of that system and it is up to us to shape it in favour of the good rather than the bad. But the one part that works is the scrutiny of companies that is achieved by public capital markets. It means that once the rules are decided, we can know whether companies are complying with them. Ultimately, that scrutiny has ensured that the Guptas are frozen out of the system.