Pay­ing the price

Are pas­sive spon­sors ‘bread upon the wa­ters’?

Finweek English Edition - - Creating Wealth - MICHAEL COUL­SON

OVER RE­CENT YEARS in­vestors have be­come ac­cus­tomed to yet an­other en­try in the grow­ing list of ad­vis­ers, au­di­tors and what-have-you at the foot of fi­nan­cial an­nounce­ments: “spon­sor” for com­pa­nies listed on the JSE main boards and “des­ig­nated ad­viser” (DA) for those on the AltX. Just what are th­ese crea­tures and what do they do?

They were in­tro­duced as a JSE list­ing re­quire­ment with a view to im­prov­ing cor­po­rate gov­er­nance: in par­tic­u­lar, the qual­ity and ad­e­quacy of re­port­ing. Their func­tions are broadly sim­i­lar, though as Ar­cay Moela Spon­sor CEO Kevin de Vil­liers ex­plains, once a com­pany is listed a spon­sor’s role is largely pas­sive, whereas a DA re­mains much more closely in­volved.

The JSE reg­u­la­tions pro­vide that spon­sors/DAs will nor­mally be cor­po­rate bro­kers, banks and other pro­fes­sional ad­vis­ers which have un­der­gone a qual­i­fy­ing process, in­clud­ing a writ­ten exam, paid a fee and been put on the JSE’s reg­is­ter of ap­proved spon­sors, which is re­viewed an­nu­ally. All spon­sor­ing firms must have at least three qual­i­fy­ing ex­ec­u­tives. Cur­rently, there are just un­der 30 reg­is­tered spon­sors, in­clud­ing le­gal firms, ac­coun­tants, stock­bro­kers, mer­chant and other banks and cor­po­rate ad­vis­ers.

Spon­sors/DAs help with list­ing doc­u­men­ta­tion and there­after pro­vide con­tin­u­ing ad­vice on ap­ply­ing the let­ter and spirit of the list­ing re­quire­ments. Among other things they have to ap­prove profit fore­casts or es­ti­mates and any an­nounce­ment that re­quires a work­ing cap­i­tal state­ment.

De Vil­liers reck­ons that, es­pe­cially for DAs, the du­ties are sim­i­lar to those of direc­tors and they need the same in­for­ma­tion. He stresses the role is no sinecure: not only does the JSE sanc­tion per­ceived dere­lic­tions of duty, and can re­move a prac­ti­tioner’s li­cence, an even big­ger penalty is rep­u­ta­tional dam­age.

How much does a DA cost an AltX com­pany? That’s rather a “how long is a piece of string” ques­tion, but De Vil­liers guessti­mates a range of R10 000 to R30 000/month, de­pend­ing on size. He says at this level a DA prob­a­bly loses money but ac­cepts it as bread upon the wa­ters, as the con­tact im­proves the qual­ity of the cor­po­rate ad­vice it can of­fer and may also stim­u­late fee-earn­ing deal flow.

For main board list­ings the fees may be around half as much for com­pa­nies of com­pa­ra­ble size but there’s prob­a­bly only a quar­ter of the work – so be­ing a spon­sor is prof­itable. Main board com­pa­nies tend to have greater sec­re­tar­ial and cor­po­rate af­fairs re­sources so can per­form in­ter­nally some func­tions with which an AltX com­pany may need ex­ter­nal as­sis­tance.

Do com­pa­nies find the ser­vice use­ful? Asher Bo­hbot, CEO of main board listed EOH, for one has no doubts. “They’re not use­ful – they’re es­sen­tial. Since we listed 10 years ago, the reg­u­la­tions have be­come so com­plex and are up­dated so of­ten that it’s just not prac­ti­cal for the JSE to ex­plain them to all listed com­pa­nies. Spon­sors are an in­dis­pens­able in­ter­face be­tween com­pa­nies and the JSE.”

For so use­ful a ser­vice, the price seems worth pay­ing.

They are es­sen­tial. Asher Bo­hbot

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