TIME FOR JSE TO TAKE STOCK

The clash at the bourse’s AGM flagged the fact that while the exchange can’t reject listings for subjective reasons, its rules may need an overhaul

It was pretty clear, before the JSE’S AGM kicked off last week at the exchange’s headquarters on Maude Street in Sandton, that Sygnia CEO Magda Wierzycka was spoiling for a fight. It ended up as a notable confrontation, not least of all because all the protagonists were women — Wierzycka squaring off against JSE CEO Nicky Newtonking and JSE chair Nku Nyembezi-heita.

Wierzycka had prepared two pages of detailed questions, which largely painted Africa’s biggest stock exchange as a whimsical and bumbling oaf, applying one set of rules one minute, another the next.

Those questions were exactly what the average man on the street would want to ask Newton-king. For example, how did the JSE not pick up problems with Steinhoff before it listed in Frankfurt in 2015? How did it not see that the listing price of the Gupta-owned Oakbay Resources had been manipulated in 2014? And why was it willing to list two insolvent companies, Sagarmatha and Ayo, recently?

“There are weaknesses in the manner in which the JSE looks at companies it lists. The JSE is one of the pillars of the SA economy and one of the companies that always represents SA on the international stage. We can’t afford to have issues like Steinhoff and Resilient,” said Wierzycka.

This is true. But context is also critical. In recent weeks, the JSE failed to give the green light to Wierzycka’s plan to list a cryptocurrency fund. (Officially, Newton-king’s view is that discussions on such a fund are “still continuing”.)

For Wierzycka, it evidently rankled that the JSE could take that decision on the one hand to “protect investors”, then list companies such as Oakbay and Ayo on the other.

It’s a valid question. And it’s apt to raise it, given the numbing corporate malfeasance uncovered recently at Steinhoff, KPMG, Mckinsey, Hogan Lovells and Nkonki.

Newton-king’s response was, as you’d expect, that you can’t stop investors making their own decisions: “We don’t take a view on valuations — we don’t take a view on whether someone should or should not buy a particular share — we want relevant information out there, and we let investors make up their own minds.”

Caveat emptor, in other words — the principle of markets all over the world. But in this country, right now, the issue is a bit more layered.

Take Wierzycka’s example of Ayo, which listed in December at an implied value of R14.1bn, even though it only scraped a R29.6m profit. Now, it’s true that many tech companies don’t turn a profit for ages — it took Twitter 12 years to do so — so that’s no necessary disqualifier.

But in Ayo’s case, its NAV before listing was just 15c/share. Then the Public Investment Corp (PIC), which invests the pensions of civil servants, ploughed R4.3bn into Ayo at R43/share. Since then, the company’s stock has fallen 39% to R26 — which means the PIC’S stake has fallen a considerable R1.69bn in value.

“That’s a loss to every public servant working for government,” said Wierzycka.

As much as investors ought to swot up on what they’re putting their money into, those civil servants had little say over the PIC’S decision.

It’s equally complicated when it comes to property group Resilient. In recent months, several analysts have accused the company’s top brass of using undisclosed related-party traders to boost the share price.

At the AGM, Wierzycka launched a blistering critique, slating the JSE for including Resilient in its indices, which meant passive investors who bought exchange traded funds (ETFS) were exposed to it. “Steinhoff was a welldisguised fraud . . . but in the case of Resilient, it took me two days to realise this was a Ponzi scheme,” she said.

(Resilient denies any wrongdoing and an internal inquiry by former auditor-general Shauket Fakie found

“no evidence” to support claims that insiders were manipulating the stock. The JSE is still investigating.)

It’s a fair bet that most ETF investors, who believe they’re investing in a relatively “safe” product, won’t have scrutinised Resilient’s financials. But with more than R80bn in ETFS in SA, the discussion over what constitutes “informed investing” has taken on a new dimension.

Despite that, Newton-king is right that the JSE can’t be involved in policing stock values. After all, Naspers, at R3,180/share, seems ludicrously expensive on a p:e of 95 — yet 88% of analysts rate it a “buy”.

Given the numerous scandals that have gnawed away at the JSE of late, the exchange would do well to reconsider whether its rules are robust enough to prevent cases that appear to lead to perverse outcomes. Could it, for example, demand a more broad-based buy-in for a new listing rather than simply expect one from a single institution, such as the PIC? Should the rules be more demanding on companies that would be insolvent, were it not for capital that will come from the listing?

It’s a fine balance, as you don’t want to dismantle the risk-reward balance of market economics. Poor investment choices should be punished.

But still, the JSE ought to consider whether the realpolitik of SA’S market means its rules are creating the best outcome — especially as the regulator, the Financial Sector Conduct Authority, is so weak.

Wierzycka’s questions were exactly what the average man on the street would want to ask Newton-king