The JSE risks its reputation if it does not smarten up

Much has been written about my questioning of the JSE at the recent annual general meeting regarding the listing of companies where the valuations bear no semblance to their operational and financial realities and where, as a consequence, investors, taxpayers and members of the Government Employees Pension Fund have been financially prejudiced.

What has been useful from that interaction is the fact that we now know that the JSE has no discretion over what it lists, provided the listing requirements are met, and that it has no responsibility towards any investors, retail or institutional, beyond ensuring that when a company lists its “prelisting statement”, or marketing document, carries sufficient risk disclosures.

In that light, as investors and asset managers we need to take a lot more responsibility for what we invest in and how we analyse such investments.

Preferably we need the JSE to amend its listing requirements to provide more protection in cases where listings are questionable.

However, my questions went much deeper than dodgy listings. I questioned the JSE regarding its monitoring of share-price manipulation on the JSE, which seems rampant. I used the example of the Resilient Group of companies, but could have used a number of other examples where trades are manipulated to boost shortterm performance.

The JSE assured me that it has very sophisticated monitoring processes and software and is on top of all such manipulations.

In fact, the JSE was aware of the Resilient Group activity well ahead of the reports, which surfaced in January.

I think that might have been a badly thought through statement given my next set of questions, as well as the very poor track record in SA for enforcement of any sanctions for share-price manipulation.

My third set of questions had to do with the inclusion of shares in the flagship FTSE-JSE market indices.

For instance, Resilient Group was included in indices such as the top 40 index, the Swix, the capped all-share index and, most significantly, the SA listedproperty index.

These indices are a product of the JSE that it sells to passive investors to track.

Passive investors have in turn drawn comfort from the fact that the JSE would not include something it did not scrutinise from top to bottom before including it in its product suite.

Well … not really. It now appears that the inclusion is based on a rigid set of rules and — guess what — no discretion is applied to that either.

The obvious question of course is why — if as it claims the JSE knew about the Resilient Group share-price manipulation — it was included in the indices in the first place.

Investors could at least have been warned.

I can’t help feeling that as a passive investor I have been sold a car with a faulty engine, and the car manufacturer both knew about it and refuses to take responsibility.

If the rules are indeed that rigid then they need to be changed to give the JSE more discretion. Otherwise the indices are open to complete abuse, as we have seen in the case of Resilient.

The JSE is one of the pillars of our economy. It is a company that represents us and markets us on the global stage. We cannot afford to have a key institution run in a manner where there is even a perception that standards are slipping and investing is risky.

Not if we want to attract foreign investors, who we so badly need.

On the surface it appears that the JSE has a lot of internal review work to do. If it does not do so, it risks being seen as a second-rate exchange.